<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-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MEDIQ INCORPORATED
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 7352 51-0219413
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
<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 (Name, Address, Including Zip Code, and Telephone
Number, Number, Including Area Code, of Agent for Service)
Including Area Code, of Registrant's
Principal Executive Offices)
</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 any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
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 filed to register additional securities for an offering
pursuant to Rule 462(c) 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. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OFFERING AGGREGATE AMOUNT OF
OF SECURITIES TO BE AMOUNT TO BE PRICE PER OFFERING REGISTRATION
REGISTERED REGISTERED UNIT (1) PRICE (1) FEE
<S> <C> <C> <C> <C>
Warrants to purchase shares of Common Stock 140,885 $5.32 $750,000 $221
Common Stock, par value $.01 per share (2) 91,209 $.01 $913 $1
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rules 457(g) and (i) of the Securities Act, based on the
book value of the Warrants registered hereunder and the amount payable on
exercise of such Warrants.
(2) The shares of Common Stock are issuable upon exercise of the Warrants
registered hereunder. This Registration Statement also covers such shares as
may be issuable pursuant to anti-dilution adjustments.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT 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>
SUBJECT TO COMPLETION, DATED JULY 13, 1998
PRELIMINARY PROSPECTUS
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>
[LOGO]
MEDIQ Incorporated
140,885 Warrants to Purchase
91,209 Shares of Common Stock
-------------
This Prospectus relates to 140,885 warrants (the "Warrants") of MEDIQ
Incorporated, a Delaware corporation ("Holdings"). The Warrants were originally
issued and sold on May 29, 1998 (the "Issue Date") to Credit Suisse First Boston
Corporation, NationsBanc Montgomery Securities LLC and Banque Nationale de Paris
(the "Initial Purchasers") pursuant to a private placement (the "Unit Offering")
by Holdings of 140,885 Units (the "Units"), each Unit consisting of one 13%
Senior Discount Debenture due 2009 of Holdings (a "Debenture" and, collectively,
the "Debentures") with a principal amount at maturity of $1,000 and one Warrant
to purchase .6474 shares of the Common Stock, par value $.01 per share (the
"Common Stock"), of Holdings at an exercise price of $.01 per share (the
"Exercise Price"). Concurrently with the Unit Offering, MEDIQ/PRN Life Support
Services, Inc., a Delaware corporation and a wholly-owned subsidary of Holdings
("MEDIQ/PRN"), issued and sold $190,000,000 aggregate principal amount of 11%
Senior Subordinated Notes due 2008 (the "Notes") to the Initial Purchasers
pursuant to a private placement (the "Note Offering" and, together with the Unit
Offering, the "Offerings"). The Initial Purchasers placed the Units and the
Notes with qualified institutional buyers pursuant to Rule 144A under the
Securities Act of 1933, as amended (the "Act").
The Warrants are exercisable at any time on or after May 30, 1999, and will
expire on June 1, 2009. The number of Warrant Shares (as defined) issuable upon
exercise of the Warrants and the Exercise Price are subject to adjustment in
certain events, including: (i) the payment by Holdings of certain dividends (or
other distributions) on the Common Stock of Holdings including dividends or
distributions payable in shares of such Common Stock or other shares of
Holdings' capital stock, (ii) subdivisions, combinations and certain
reclassifications of the Common Stock, (iii) the issuance to all holders of
Common Stock of rights, options or warrants entitling them to subscribe for
shares of Common Stock, or of securities convertible into or exchangeable or
exercisable for shares of Common Stock, for a consideration per share which is
less than the Current Market Value (as defined) per share of the Common Stock,
(iv) the issuance of shares of Common Stock for a consideration per share which
is less than the Current Market Value per share of the Common Stock, and (v) the
distribution to all holders of the Common Stock of any of Holdings' assets, debt
securities or any rights or warrants to purchase securities (excluding those
rights and warrants referred to in the foregoing clause (iii) and cash dividends
and other cash distributions from current or retained earnings other than any
Extraordinary Cash Dividend (as defined)). No adjustment to the number of
Warrant Shares issuable upon the exercise of the Warrants and the Exercise Price
will be required in certain events including: (i) the issuance of shares of
Common Stock in bona fide public offerings that are underwritten or in which a
placement agent is retained by Holdings, (ii) the issuance of options or shares
of Common Stock in the amounts and on the terms contemplated under "Certain
Relationships and Related Transactions--Additional Purchases of Common Stock"
and (iii) the issuance of shares of Common Stock in connection with acquisitions
of products and businesses other than to affiliates of Holdings. See
"Description of the Warrants."
The Warrants and Warrant Shares may be offered and sold from time to time by
holders thereof or by their transferees, pledgees, donees or successors
(collectively, the "Selling Holders") pursuant to this Prospectus. The Warrants
and the Warrant Shares may be sold by the Selling Holders from time to time
directly to purchasers or through agents, underwriters or dealers. See "Plan of
Distribution." If required, the names of any such agents, underwriters or
dealers involved in the sale of the Warrants and the Warrant Shares and the
applicable agent's commission, underwriter's discount or dealer's purchase
price, if any, will be set forth in an accompanying supplement to this
Prospectus. All expenses incident to Holdings' performance of or compliance with
its obligations to register the Warrants and the Warrant Shares will be borne by
Holdings, including without limitation: (i) all registration and filing fees of
the Securities and Exchange Commission (the "Commission"), any stock exchange or
the National Association of Securities Dealers, Inc., (ii) all reasonable fees
and expenses incurred in connection with compliance with state securities or
blue sky laws, (iii) all expenses of any Persons (as defined) incurred by or on
behalf of Holdings in preparing or assisting in preparing, printing and
distributing this Prospectus or any other registration statement, prospectus,
any amendments or supplements thereto and other documents relating to the
performance of and compliance with Article 5 of the Warrant Agreement (as
defined), (iv) the fees and disbursements of the Warrant Agent, (v) the fees and
disbursements of counsel for Holdings and the Warrant Agent and (vi) the fees
and disbursements of the independent public accountants of Holdings, including
the expenses of any special audits or comfort letters required by or incident to
such performance and compliance. The Selling Holders and any broker-dealers,
agents or underwriters that participate in the distribution of the Warrants and
the Warrant Shares may be deemed to be "underwriters" within the meaning of the
Securities Act. See "Plan of Distribution" for a description of indemnification
arrangements.
------------------------------
For a discussion of certain factors that should be considered in evaluating
an investment in the Warrants and Warrant Shares, see "Risk Factors" beginning
on page 13.
------------------------
THE WARRANTS AND THE WARRANT SHARES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION OR
REGULATORY AUTHORITY, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------------
The date of this Prospectus is , 1998.
<PAGE>
AVAILABLE INFORMATION
Holdings has filed with the Commission a Registration Statement on Form S-1
(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 Warrants being
offered hereby. This Prospectus does not contain all the information set forth
in the Registration Statement. For further information with respect to Holdings
and the Warrants, 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. Holdings has also agreed that, whether or not it is required to do
so by the rules and regulations of the Commission, it will furnish to the
holders of the Warrants 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.
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 Securities Exchange Act
of 1934, as amended (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
Holdings, the Transactions, the CHI Acquisition or the SpectraCair Acquisition
(as defined) (including the timing, financing, strategies and effects thereof)
are forward-looking statements. Although Holdings believes that the expectations
reflected in such forward-looking statements are reasonable, it 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 Holdings 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 Holdings or persons acting on behalf of Holdings 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, on May 29, 1998 the
Company 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."
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 OFFERINGS
The Warrants were originally issued by Holdings in the Unit Offering,
pursuant to which 140,885 Units were issued and sold. Each Unit consists of a
Debenture and a Warrant. The Debentures and the Warrants will not trade
separately until the commencement of an exchange offer or the effectiveness of a
shelf registration statement for the Debentures or such earlier date after July
28, 1998 as the Initial Purchasers may determine. See "Description of Certain
Indebtedness--Debentures." This Prospectus applies solely to the Warrants and
the Warrant Shares. The registration of the Warrants and the Warrant Shares is
intended to satisfy certain obligations of Holdings under the Warrant Agreement
dated May 29, 1998 (as amended from time to time, the "Warrant Agreement")
between Holdings and United States Trust Company of New York, as Warrant Agent
(the "Warrant Agent"). Holdings will not receive any proceeds from the
registration or subsequent sale of the Warrants or Warrant Shares.
<TABLE>
<S> <C>
Issuer.............................. MEDIQ Incorporated
Warrants Offered.................... 140,885 Warrants which, when exercised, will entitle
the holders thereof to acquire an aggregate of 91,209
shares of Common Stock.
Exercise Price...................... $0.01 per share of Common Stock.
Exercise............................ The Warrants are exercisable beginning on May 30,
1999 and at any time thereafter on or prior to June
1, 2009.
Expiration.......................... June 1, 2009.
Voting Rights....................... Warrant holders will have no voting rights.
Warrant Shares...................... The Warrants entitle the holders thereof to acquire
shares of Common Stock. The shares of Common Stock
(and any other securities) for which the Warrants are
exercisable or which are issued upon exercise of the
Warrants are collectively referred to herein as
"Warrant Shares."
</TABLE>
RISK FACTORS
Prospective investors in the Warrants or Warrant Shares should carefully
consider the matters set forth herein under "Risk Factors."
9
<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.
10
<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.
11
<PAGE>
(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."
12
<PAGE>
RISK FACTORS
PROSPECTIVE PURCHASERS OF THE WARRANTS AND WARRANT SHARES 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 WARRANTS AND
WARRANT SHARES.
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 Certain Indebtedness--Notes" and "Description of Certain
Indebtedness--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; (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 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 Debentures do not require cash interest payments until 2003, at
such time the 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. 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
13
<PAGE>
assets could be sold quickly enough, or for sufficient amounts, to enable the
Company to meet its obligations.
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. 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. In addition, in the event of a Change of Control, Holdings and
MEDIQ/PRN will be required, subject to certain conditions, to offer to purchase
all outstanding Debentures and Notes at a price equal to 101% of Accreted Value
or principal amount, respectively, plus accrued interest, if any. There can be
no assurance that the Company would be able to raise sufficient funds to meet
this obligation. A default under either of the Indentures would also constitute
an event of default under the New Credit Facility. See "Description of Certain
Indebtedness--Notes," "Description of Certain Indebtedness--Debentures" and
"Description of Certain Indebtedness--New Credit Facility."
HOLDING COMPANY STRUCTURE
Holdings is a holding company whose only material asset is the capital stock
of MEDIQ/PRN. 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 Debentures, the Exchangeable Debentures and
certain other administrative obligations), and depends on distributions from
MEDIQ/ PRN to meet its obligations. 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 required to (i) refinance the
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 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,
and the failure to do so could have a material adverse effect on the value of
the Warrants and Warrant Shares.
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<PAGE>
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. If MEDIQ/PRN becomes
insolvent or is liquidated, or if payment under the New Credit Facility or in
respect of any other secured senior indebtedness is accelerated, the lenders
under the New Credit Facility (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) and will have a prior claim with respect to the assets
securing such indebtedness. See "Description of Certain Indebtedness-- New
Credit Facility."
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
15
<PAGE>
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 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 to be 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.
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<PAGE>
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."
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.
17
<PAGE>
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.
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. Any such actions with respect to the
capital structure of Holdings could materially affect the value of the Warrants
and the Warrant Shares. See "Ownership of Capital Stock."
ABSENCE OF PUBLIC MARKET FOR THE WARRANTS AND THE WARRANT SHARES
The Warrants are eligible for trading in The PORTAL Market. Holdings does
not intend to apply for listing or quotation of the Warrants or the Common Stock
underlying the Warrants on any securities exchange or stock market. There can be
no assurance regarding the future development of a market for the Warrants or
Warrant Shares, the ability of the holders of the Warrants or Warrant Shares to
sell such securities, or the price at which such holders may be able to sell
such securities. If such a market were to develop, the Warrants and Warrant
Shares could trade at prices that may be higher or lower than the price paid by
selling holders. Future trading prices of the Warrants and the Warrant Shares
will depend on many factors, including, among other things, prevailing interest
rates, the operating results of the Company and the market for similar
securities. The Initial Purchasers have advised the Issuers that they intend to
make a market in the Warrants, 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
18
<PAGE>
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
Warrants and the Warrant Shares or that an active market for the Warrants and
the Warrant Shares will develop.
RISKS ASSOCIATED WITH THE WARRANTS
The Warrants are not exercisable until after the first anniversary of the
closing of the Offerings. Holdings will be required pursuant to the Warrant
Agreement to cause the Warrants and the Common Stock underlying the Warrants to
be registered with the Commission pursuant to an effective shelf registration
statement. The Commission has broad discretion to determine whether any
registration statement will be declared effective. Failure to have any such
registration statement declared effective may have a material adverse effect on
the value of the Warrants and the liquidity and value of the underlying Common
Stock. See "Description of the Warrants." An investment in the Warrants is
highly speculative, and there can be no assurance as to when or if the Warrants
will have any significant value.
Furthermore, the Debenture Indenture contains numerous restrictive covenants
with which Holdings is required to comply. If Holdings fails to comply with such
covenants, resulting in an event of default, the Debentures and substantially
all of Holdings' other long-term debt could be accelerated, which could have a
material adverse effect on the value of the Warrants and the value of underlying
Common Stock.
ABSENCE OF DIVIDENDS
Holdings does not have any plans to pay any dividends on any of its capital
stock, including its Common Stock, in the foreseeable future. Holdings currently
intends to retain all earnings for reinvestment in its business and repayment of
indebtedness. The New Credit Facility and the Indentures restrict the payment of
dividends by Holdings. Such restrictions could materially and adversely affect
Holdings' ability to pay dividends on the Warrant Shares and therefore the value
of the Warrants and the Warrant Shares.
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<PAGE>
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 have 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."
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<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."
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<PAGE>
USE OF PROCEEDS
Holdings will not receive any proceeds from the registration or subsequent
sale of the Warrants or the Warrant Shares. 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."
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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 in connection with the 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.
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<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
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.
24
<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
25
<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
26
<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
27
<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
28
<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>
29
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH 31, 1998
----------------------------------------------------------
HOLDINGS PRO FORMA CONSOLIDATING PRO FORMA/
HISTORICAL ADJUSTMENTS ADJUSTMENTS CONSOLIDATING
----------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Other............................ $ -- $ -- $ (138)(iii) $ (138)
Costs and Expenses:
General and administrative....... -- -- (138)(iii) (138)
Management fees--MEDIQ........... (279) -- -- (279)
----------- ------------- ------ -------------
Operating Income................... 279 -- -- 279
Other (Charges) Credits:
Interest expense................. (496) (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.
30
<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>
31
<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%.
32
<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
33
<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
34
<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.
35
<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.
36
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
(iv) Reflects the presently anticipated issuance of securities
of Holdings to the BRS Entities, the Co-Investors, the
Rotko Entities and the Management Stockholders, as well as
shares of Series A Preferred Stock issued to holders of
Holdings Shares in the Merger (including the Rotko Entities
and the Management Stockholders), as follows:
<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.
37
<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.
38
<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>
39
<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.
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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
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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
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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
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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.
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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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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 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
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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 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
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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.
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
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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. 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
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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."
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
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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
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-
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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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<PAGE>
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
59
<PAGE>
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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<PAGE>
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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<PAGE>
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
62
<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.
63
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF HOLDINGS
The following table sets forth certain information with respect to the
directors and executive officers of Holdings. Directors of Holdings hold their
offices for a term of one year or until their successors are elected and
qualified; executive officers of Holdings serve at the discretion of the Board
of Directors of Holdings. 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
Jay M. Kaplan....................... 49 Senior Vice President - Finance and Chief Financial Officer
Michael J. Rotko.................... 59 Director
Bruce C. Bruckmann.................. 44 Director
Stephen C. Sherrill................. 44 Director
Robert T. Thompson.................. 43 Director
L. John Wilkerson................... 54 Director
</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.
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.
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
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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 committees 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
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
70
<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.
71
<PAGE>
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.
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
72
<PAGE>
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>
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 the 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
73
<PAGE>
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 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
74
<PAGE>
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.
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.
75
<PAGE>
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 indentures governing the
Debentures, the Exchangeable Debentures or the Notes, 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.
DEBENTURES
On May 29, 1998, Holdings issued 140,885 Units, each consisting of one
Debenture with a principal amount at maturity of $1,000 and one Warrant to
purchase .6474 shares of Common Stock, pursuant to the Unit Offering for gross
proceeds of approximately $75.0 million. The Debentures were issued pursuant to
an indenture dated as of May 15, 1998 (the "Debenture Indenture") between
Holdings and United States Trust Company of New York, as Trustee ("USTC"). The
Warrants were issued pursuant to the Warrant Agreement. The net proceeds of the
Unit Offering, together with the net proceeds of the Note Offering and certain
other funds, were used to pay the net cash portion of the Merger Consideration,
effect the Refinancing and pay related fees and expenses. See "The
Transactions."
The Debentures, limited to $140.9 million aggregate principal amount at
maturity, mature on June 1, 2009. No cash interest will accrue on the Debentures
prior to June 1, 2003. Thereafter, the Debentures will accrue cash interest at a
rate of 13% per annum, and cash interest will be payable semiannually commencing
December 1, 2003. The Debentures bear original issue discount ("OID"), and the
holders of the 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. The Debentures are general unsecured obligations of Holdings, and
rank pari passu in right of payment with all existing and future Senior
Indebtedness (as defined in the Debenture Indenture) of Holdings and senior in
right of payment to all existing and future subordinated indebtedness of
Holdings. The Debentures are 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).
The Debentures are not 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 in the Debenture Indenture) of the
Debentures at a redemption price (expressed as a percentage of Accreted Value)
of 113%, plus accrued and unpaid interest, with the net proceeds of one or more
Public Equity Offerings (as defined in the Debenture Indenture) following which
there is a Public Market (as defined in the Debenture Indenture) 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 Debentures
may be redeemed at the option of Holdings, in whole or in part, at the following
redemption prices (expressed as percentages of principal amount at maturity),
plus accrued and unpaid interest, if redeemed during the 12 months beginning
June 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ------------------------------------------------------------------ -----------
<S> <C>
2003.............................................................. 106.500%
2004.............................................................. 104.333
2005.............................................................. 102.167
2006 and thereafter............................................... 100.000
</TABLE>
Upon a Change of Control (as defined in the Debenture Indenture), each
holder of Debentures may require Holdings to repurchase all or any portion of
such holder's Debentures at a purchase price equal to 101% of the Accreted Value
thereof plus accrued and unpaid interest.
The Debenture Indenture contains certain covenants that, among other things,
limit (i) the incurrence of additional debt by Holdings and certain of its
subsidiaries, (ii) the payment of dividends on capital stock
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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, including capital stock of subsidiaries, and
(vi) certain consolidations, mergers and transfers of assets. The Debenture
Indenture also prohibits 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.
Pursuant to a registration rights agreement dated May 29, 1998 (the
"Registration Rights Agreement") among Holdings, MEDIQ/PRN and the Initial
Purchasers, Holdings agreed to (a) file with the Commission, within 45 days
after the Issue Date, a registration statement (the "Exchange Offer Registration
Statement") with respect to an offer to exchange the Debentures for new
debentures of Holdings with terms substantially identical to the Debentures (the
"New Debentures"), except that the New Debentures generally will not contain
terms with respect to restrictions on the resale or transfer thereof, and (b)
use its best efforts to cause such Exchange Offer Registration Statement to
become effective under the Securities Act by , 1998. Upon the
effectiveness of the Exchange Offer Registration Statement, Holdings will offer
the New Debentures in exchange for surrender of the Debentures. Under certain
circumstances, Holdings may be required under the Registration Rights Agreement
to file a shelf registration statement to cover resales of the Debentures or the
New Debentures, as the case may be. The Debentures and Warrants will not trade
separately until the commencement of such exchange offer or the effectiveness of
such shelf registration statement, or such earlier date after July 28, 1998 as
the Initial Purchasers may determine. Upon the failure by Holdings to comply
with certain of its obligations under the Registration Rights Agreement,
additional interest will be payable on the Debentures.
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
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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.
NEW CREDIT FACILITY
In order to finance a portion of the cash consideration paid pursuant to the
Merger, MEDIQ/PRN'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 is defined under the New Credit
Facility) and pro forma senior debt to consolidated EBITDA (as such term is
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 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
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year. The New Credit Facility contains provisions under which commitment fees
and margins on interest rates under the facilities will be adjusted in
increments based on performance goals.
The Term Loans will amortize on a quarterly basis and be payable in
installments under a schedule contained in the New Credit Facility. 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 contained in the New Credit Facility.
The TermLoans, 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
is 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.
NOTES
On May 29, 1998, MEDIQ/PRN issued $190.0 million aggregate principal amount
of Notes pursuant to the Note Offering. The Notes were issued pursuant to an
indenture dated as of May 15, 1998 (the "Note Indenture") among MEDIQ/PRN, the
Subsidiary Guarantors (as defined in the Note Indenture) and USTC, as Trustee.
The net proceeds of the Note Offering, together with the net proceeds of the
Unit Offering and certain other funds, were used to pay the net cash portion of
the Merger Consideration, effect the Refinancing and pay related fees and
expenses. See "The Transactions."
The Notes mature on June 1, 2008. Interest on the Notes accrues and is
payable at a rate of 11% per annum and is payable semiannually commencing
December 1, 1998. The Notes are general unsecured obligations of MEDIQ/PRN, and
are subordinated in right of payment to all existing and future Senior
Indebtedness (as defined in the Note Indenture) of MEDIQ/PRN, including
MEDIQ/PRN's obligations under the New Credit Facility; the Notes rank pari passu
to all future senior subordinated indebtedness of MEDIQ/PRN. The Notes are fully
and unconditionally guaranteed on a senior subordinated basis by the Subsidiary
Guarantors. Each Subsidiary Guaranty (as defined in the Note Indenture) is
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.
The Notes are not 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 a redemption price
(expressed as a percentage of principal amount) of 111%, plus accrued and unpaid
interest, with the net proceeds of one or more Public Equity Offerings (as
defined in the Note Indenture) following which there is a Public Market (as
defined in the Note Indenture) 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 Notes may be redeemed at the option of MEDIQ/PRN, in whole or
in part, at the following redemption prices (expressed as percentages of
principal amount), plus accrued and unpaid interest, if redeemed during the 12
months beginning June 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ------------------------------------------------------------------ -----------
<S> <C>
2003.............................................................. 105.500%
2004.............................................................. 103.667
2005.............................................................. 101.834
2006 and thereafter............................................... 100.000
</TABLE>
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Upon a Change of Control (as defined in the Note Indenture), each holder of
Notes may require MEDIQ/PRN to repurchase all or any portion of such holder's
Notes at a purchase price equal to 101% of the principal amount thereof plus
accrued and unpaid interest The Note Indenture 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.
Pursuant to the Registration Rights Agreement, MEDIQ/PRN agreed to (a) file
with the Commission, within 45 days after the Issue Date, the Exchange Offer
Registration Statement with respect to an offer to exchange the Notes for new
notes of MEDIQ/PRN with terms substantially identical to the Notes (the "New
Notes"), except that the New Notes generally will not contain terms with respect
to restrictions on the resale or transfer thereof, and (b) use its best efforts
to cause the Exchange Offer Registration Statement to become effective under the
Securities Act by , 1998. Upon the effectiveness of the Exchange
Offer Registration Statement, MEDIQ/PRN will offer the New Notes in exchange for
surrender of the Notes. Under certain circumstances, MEDIQ/PRN may be required
under the Registration Rights Agreement to file a shelf registration statement
to cover resales of the Notes or the New Notes, as the case may be. Upon the
failure by MEDIQ/PRN to comply with certain of its obligations under the
Registration Rights Agreement, additional interest will be payable on the Notes.
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DESCRIPTION OF THE WARRANTS
The Warrants were issued pursuant to the Warrant Agreement. The following
summary of certain provisions of the Warrant Agreement does not purport to be
complete and is qualified in its entirety by reference to all of the provisions
of the Warrant Agreement, including the definitions therein of certain terms.
Capitalized terms in this "Description of the Warrants" not defined in this
Prospectus have the meanings ascribed to them in the Warrant Agreement.
GENERAL
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. See "--Adjustments" below. 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 the Common 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.
The Warrants will not trade separately from the Debentures until the Separation
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 of the Warrant
Agent maintained for that purpose. 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.
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.
CERTAIN TERMS
EXERCISE
In order to exercise all or any of the Warrants, the holder thereof is
required to surrender to the Warrant Agent the related Warrant Certificate and
pay in full the Exercise Price for each share of Common Stock or other
securities issuable upon exercise of such Warrants. The Exercise Price may be
paid (i) in cash or by certified or official bank check or by wire transfer to
an account designated by
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Holdings for such purpose or (ii) without the payment of cash, by reducing the
number of shares of Common Stock that would be obtainable upon the exercise of a
Warrant and payment of the Exercise Price in cash so as to yield a number of
shares of Common Stock upon the exercise of such Warrant equal to the product of
(a) the number of shares of Common Stock for which such Warrant is exercisable
as of the date of exercise (if the Exercise Price were being paid in cash) and
(b) the Cashless Exercise Ratio (the "Cashless Exercise"). The "Cashless
Exercise Ratio" shall equal a fraction, the numerator of which is the excess of
the Current Market Value per share of Common Stock on the Exercise Date over the
Exercise Price per share as of the Exercise Date and the denominator of which is
the Current Market Value per share of the Common Stock on the Exercise Date.
Upon surrender of a Warrant Certificate representing more than one Warrant in
connection with the holder's option to elect a Cashless Exercise, the number of
shares of Common Stock deliverable upon a Cashless Exercise shall be equal to
the number of shares of Common Stock issuable upon the exercise of Warrants that
the holder specifies are to be exercised pursuant to a Cashless Exercise
multiplied by the Cashless Exercise Ratio. All provisions of the Warrant
Agreement shall be applicable with respect to a surrender of a Warrant
Certificate pursuant to a Cashless Exercise for less than the full number of
Warrants represented thereby.
NO RIGHTS AS STOCKHOLDERS
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.
MERGERS, CONSOLIDATIONS, ETC.
In the event that Holdings consolidates with, merges with or into, or sells
all or substantially all of its assets to, another Person, each Warrant
thereafter shall entitle the holder thereof to receive upon exercise thereof,
per share of Common Stock for which such Warrant is exercisable, the number of
shares of common stock or other securities or property which the holder of a
share of Common Stock is entitled to receive upon completion of such
consolidation, merger or sale of assets. However, if (i) Holdings consolidates
with, merges with or into, or sells all or substantially all of its assets to,
another Person and, in connection therewith, the consideration payable to the
holders of Common Stock in exchange for their shares is payable solely in cash
or (ii) there is a dissolution, liquidation or winding-up of Holdings, then the
holders of the Warrants will be entitled to receive distributions on an equal
basis with the holders of Common Stock or other securities issuable upon
exercise of the Warrants, as if the Warrants had been exercised immediately
prior to such event, less the Exercise Price. Upon receipt of such payment, if
any, the Warrants will expire and the rights of the holders thereof will cease.
In the case of any such merger, consolidation or sale of assets, the surviving
or acquiring person and, in the event of any dissolution, liquidation or
winding-up of Holdings, Holdings must deposit promptly with the Warrant Agent
the funds, if any, required to pay the holders of the Warrants. After such funds
and the surrendered Warrant Certificates are received, the Warrant Agent is
required to deliver a check in such amount as is appropriate (or, in the case of
consideration other than cash, such other consideration as is appropriate) to
such Persons as it may be directed in writing by the holders surrendering such
Warrants. The Warrants were issued by Holdings as the Surviving Corporation in
the Merger, and nothing set forth in this paragraph is applicable to the Merger.
ADJUSTMENTS
The number of Warrant Shares issuable upon the exercise of the Warrants and
the Exercise Price will be subject to adjustment in certain events including:
(i) the payment by Holdings of certain dividends (or other distributions) on the
Common Stock of Holdings including dividends or distributions payable in shares
of such Common Stock or other shares of Holdings' capital stock, (ii)
subdivisions, combinations
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and certain reclassifications of the Common Stock, (iii) the issuance to all
holders of Common Stock of rights, options or warrants entitling them to
subscribe for shares of Common Stock, or of securities convertible into or
exchangeable or exercisable for shares of Common Stock, for a consideration per
share which is less than the Current Market Value per share of the Common Stock,
(iv) the issuance of shares of Common Stock for a consideration per share which
is less than the Current Market Value per share of the Common Stock, and (v) the
distribution to all holders of the Common Stock of any of Holdings' assets, debt
securities or any rights or warrants to purchase securities (excluding those
rights and warrants referred to in the foregoing clause (iii) and cash dividends
and other cash distributions from current or retained earnings other than any
Extraordinary Cash Dividend). No adjustment to the number of Warrant Shares
issuable upon the exercise of the Warrants and the Exercise Price will be
required in certain events including: (i) the issuance of shares of Common Stock
in bona fide public offerings that are underwritten or in which a placement
agent is retained by the Company, (ii) the issuance of options or shares of
Common Stock in the amounts and on the terms contemplated under "Certain
Relationships and Related Transactions--Additional Purchases of Common Stock"
and (iii) the issuance of shares of Common Stock in connection with acquisitions
of products and businesses other than to affiliates of the Company.
In the event of a distribution to holders of Common Stock which results in
an adjustment to the number of shares of Common Stock or other consideration for
which a Warrant may be exercised, the holders of the Warrants may, in certain
circumstances, be deemed to have received a distribution subject to United
States Federal income tax as a dividend. See "Certain U.S. Federal Income Tax
Considerations".
No adjustment in the Exercise Price will be required unless such adjustment
would require an increase or decrease of at least one percent in the Exercise
Price; PROVIDED, HOWEVER, that any adjustment which is not made as a result of
this paragraph will be carried forward and taken into account in any subsequent
adjustment.
AMENDMENT
From time to time, Holdings and the Warrant Agent, without the consent of
the holders of the Warrants, may amend or supplement the Warrant Agreement for
certain purposes, including curing defects or inconsistencies or making any
change that does not adversely affect the rights of any holder. Any amendment or
supplement to the Warrant Agreement that has an adverse effect on the interests
of the holders of the Warrants shall require the written consent of the holders
of a majority of the then outstanding Warrants. The consent of each holder of
the Warrants affected shall be required for any amendment pursuant to which the
Exercise Price would be increased or the number of shares of Common Stock
issuable upon exercise of Warrants would be decreased (other than pursuant to
adjustments provided in the Warrant Agreement).
REGISTRATION RIGHTS
REGISTRATION OF WARRANTS
Holdings is required under the Warrant Agreement to use its best efforts to
cause the shelf registration statement under the Securities Act covering the
resale of the Warrants by the holders thereof (the "Warrant Shelf Registration
Statement") to remain effective until the earliest of (i) such time as all of
the Warrants have been sold thereunder, (ii) two years after its effective date
and (iii) such time as the Warrants can be sold without restriction under the
Securities Act.
Each holder of Warrants that sells such Warrants pursuant to the Warrant
Shelf Registration Statement generally will be required to be named as a selling
securityholder in the related prospectus and to deliver a prospectus to the
purchaser, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by certain
provisions of the Warrant Agreement which are applicable to such holder
(including certain indemnification obligations). In addition, each holder of
Warrants will be required to deliver information to be used in connection with
the
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Warrant Shelf Registration Statement in order to have its Warrants included in
the Warrant Shelf Registration Statement.
REGISTRATION OF UNDERLYING COMMON STOCK
Holdings is required under the Warrant Agreement to use its best efforts to
cause the shelf registration statement under the Securities Act covering the
issuance of shares of Common Stock to the holders of the Warrants upon exercise
of the Warrants by the holders thereof (the "Common Shelf Registration
Statement") to remain effective until the earlier of (i) such time as all
Warrants have been exercised and (ii) the Expiration Date.
During any consecutive 365-day period, Holdings shall be entitled to suspend
the availability of each of the Warrant Shelf Registration Statement and the
Common Shelf Registration Statement for up to two 45 consecutive-day periods
(except for the 45 consecutive-day period immediately prior to the Expiration
Date) if the Board of Directors determines in the exercise of its reasonable
judgment that there is a valid business purpose for such suspension and provides
notice that such determination was made to the holders of the Warrants;
PROVIDED, HOWEVER, that in no event shall Holdings be required to disclose the
business purpose for such suspension if Holdings determines in good faith that
such business purpose must remain confidential. There can be no assurance that
Holdings will be able to file, cause to be declared effective, or keep a
registration statement continuously effective until all of the Warrants have
been exercised or have expired.
CERTAIN DEFINITIONS
The Warrant Agreement contains, among others, the following definitions:
"CURRENT MARKET VALUE" per share of Common Stock or any other security at
any date means (i) if the security is not registered under the Exchange Act, (a)
the value of the security, determined in good faith by the Board and certified
in a board resolution, based on the most recently completed arm's-length
transaction between Holdings and a Person other than an Affiliate of Holdings,
the closing of which shall have occurred on such date or within the six-month
period preceding such date, or (b) if no such transaction shall have occurred on
such date or within such six-month period, the value of the security as
determined by an independent financial expert or (ii) if the security is
registered under the Exchange Act, the average of the daily closing bid prices
(or the equivalent in an over-the-counter market) for each Business Day during
the period commencing 15 Business Days before such date and ending on the date
one day prior to such date, or if the security has been registered under the
Exchange Act for less than 15 consecutive Business Days before such date, then
the average of the daily closing bid prices (or such equivalent) for all of the
Business Days before such date for which daily closing bid prices are available;
PROVIDED, HOWEVER, that if the closing bid price is not determinable for at
least ten Business Days in such period, the "Current Market Value" of the
security shall be determined as if the security were not registered under the
Exchange Act.
"ISSUE DATE" means May 29, 1998.
"PERSON" means any individual, corporation, partnership, joint venture,
limited liability company, association, joint-stock company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"SEPARATION DATE" means the date of the commencement of an exchange offer or
the effectiveness of a shelf registration statement for the Debentures or such
earlier date after July 28, 1998, as the Initial Purchasers may determine.
"WARRANT CERTIFICATES" mean the registered certificates (including the
Global Warrants (as defined)) issued by Holdings under the Warrant Agreement
representing the Warrants.
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PLAN OF DISTRIBUTION
The Warrants and the Warrant Shares may be sold from time to time to
purchasers directly by the Selling Holders. Alternatively, the Selling Holders
may from time to time offer the Warrants or the Warrant Shares to or through
underwriters, broker-dealers or agents, who may receive compensation in the form
of underwriting discounts, concessions or commissions from the Selling Holders
or the purchasers of such securities for whom they may act as agents. The
Selling Holders and any underwriters, broker-dealers or agents that participate
in the distribution of Warrants or the Warrant Shares may be deemed to be
"underwriters" within the meaning of the Securities Act and any profit on the
sale of such securities and any discounts, commissions, concessions or other
compensation received by any such underwriter, broker-dealer or agent may be
deemed to be underwriting discounts and commissions under the Securities Act.
The Warrants and the Warrant Shares may be sold from time to time in one or
more transactions at fixed prices, at prevailing market prices at the time of
sale, at varying prices determined at the time of sale or at negotiated prices.
The sale of the Warrants and the Warrant Shares may be effected in transactions
(which may involve crosses or block transactions) (i) on any national securities
exchange or quotation service on which such securities may be listed or quoted
at the time of sale, (ii) in the over-the-counter market, (iii) in transactions
otherwise than on such exchanges or in the over-the-counter market or (iv)
through the writing of options. At the time a particular offering of the
Warrants or the Warrant Shares is made, a supplement to this Prospectus (a
"Prospectus Supplement"), if required, will be distributed which will set forth
the aggregate amount of Warrants or Warrant Shares being offered and the terms
of the offering, including the name or names of any underwriters, broker-dealers
or agents, any discounts, commissions and other terms constituting compensation
from the Selling Holders and any discounts, commissions or concessions allowed
or reallowed or paid to broker-dealers. Each broker-dealer that receives the
Warrants or Warrant Shares for its own account pursuant to this Prospectus must
acknowledge that it will deliver the Prospectus and any Prospectus Supplement in
connection with any sale of such Warrants or Warrant Shares.
To comply with the securities laws of certain jurisdictions, if applicable,
the Warrants and Warrant Shares will be offered or sold in such jurisdictions
only through registered or licensed brokers or dealers. In addition, in certain
jurisdictions the Warrants and Warrant Shares may not be offered or sold unless
they have been registered or qualified for sale in such jurisdictions or an
exemption from registration or qualification is available and is complied with.
The Selling Holders will be subject to applicable provisions of the Exchange
Act and the rules and regulations thereunder, which provisions may limit the
timing of purchases and sales of any of the Warrants or Warrant Shares by the
Selling Holders. The foregoing may affect the marketability of such securities.
Pursuant to the Warrant Agreement, certain expenses of the registration of
the Warrants and Warrant Shares hereunder will be paid by Holdings, including,
without limitation, filing fees of the Commission and expenses of compliance
with state securities or "blue sky" laws; PROVIDED, HOWEVER, that the Selling
Holders will pay all underwriting discounts, selling commissions and transfer
taxes, if any, applicable to any sales pursuant to the Registration Statement.
Holdings has agreed to indemnify the Selling Holders against certain civil
liabilities, including certain liabilities under the Securities Act, and the
Selling Holders will be entitled to contribution in connection with any such
registration and any sales pursuant thereto. Holdings will be indemnified by the
Selling Holders severally against certain civil liabilities, including certain
liabilities under the Securities Act, or will be entitled to contribution in
connection with any such registration and any sales pursuant to the Registration
Statement.
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NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the Warrants and Warrant Shares in Canada is being made
only on a private placement basis exempt from the requirement that Holdings
prepare and file a prospectus with the securities regulatory authorities in each
province where trades of Warrants and Warrant Shares are effected. Accordingly,
any resale of the Warrants and Warrant Shares in Canada must be made in
accordance with applicable securities laws which will vary depending on the
relevant jurisdiction, and which may require resales to be made in accordance
with available statutory exemptions or pursuant to a discretionary exemption
granted by the applicable Canadian securities regulatory authority. Holders are
advised to seek legal advice prior to any resale of the Warrants and Warrant
Shares.
REPRESENTATIONS OF PURCHASERS
Each purchaser of Warrants and Warrant Shares in Canada who receives a
purchase confirmation will be deemed to represent to Holdings and the dealer
from whom such purchase confirmation is received that (i) such purchaser is
entitled under applicable provincial securities laws to purchase such Warrants
and Warrant Shares without the benefit of a prospectus qualified under such
securities laws, (ii) where required by law, that such purchaser is purchasing
as principal and not as agent and (iii) such purchaser has reviewed the text
above under "Resale Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Section 32 of the Regulation under the SECURITIES ACT (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. Federal securities laws. Following a
decision of the U.S. Supreme Court, it is possible that Ontario purchasers will
not be able to rely upon the remedies set out in Section 12(2) of the U.S.
Securities Act where securities are being offered under a U.S. prospectus such
as this document.
ENFORCEMENT OF LEGAL RIGHTS
All of Holdings' directors and officers as well as the experts named herein
may be located outside of Canada and, as a result, it may not be possible for
Canadian purchasers to effect service of process within Canada upon Holdings or
such persons. All or a substantial portion of the assets of Holdings and such
persons may be located outside of Canada and, as a result, it may not be
possible to satisfy a judgment against Holdings or such persons in Canada or to
enforce a judgment obtained in Canadian courts against Holdings or persons
outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of Warrants and Warrant Shares to whom the SECURITIES ACT
(British Columbia) applies is advised that such purchaser is required to file
with the British Columbia Securities Commission a report within ten days of the
sale of any Warrants and Warrant Shares acquired by such purchaser pursuant to
this offering. Such report must be in the form attached to British Columbia
Securities Commission Blanket Order BOR #95/17, a copy of which may be obtained
from Holdings. Only one such report must be filed in respect of Warrants and
Warrant Shares acquired on the same date and under the same prospectus
exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of Warrants and Warrant Shares should consult their own
legal and tax advisors with respect to the tax consequences of an investment in
the Warrants and Warrant Shares in their particular circumstances and with
respect to the eligibility of the Warrants and Warrant Shares for investment by
the purchaser under relevant Canadian legislation.
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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 Warrants or the shares of Common Stock received upon exercise of the
Warrants (the "Warrant Shares") 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
Warrants and Warrant Shares 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 Warrants
and Warrant Shares.
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 Warrants and Warrant Shares 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 Warrants and Warrant Shares.
TAX TREATMENT OF THE WARRANTS
The U.S. Federal income tax consequences of the purchase and the exercise or
sale of the Warrants will depend, to some extent, on whether they are viewed,
for U.S. Federal income tax purposes, as equivalent to common stock. There is no
authority directly dealing with that issue. Because nominal consideration is
required to exercise the Warrants and the exercise of the Warrants is therefore
economically compelled, the Issuers believe that, if presented with the issue,
it is likely that the Service would treat the Warrants as issued and outstanding
shares of common stock of Holdings for U.S. Federal income tax purposes.
An initial holder's adjusted tax basis with respect to Warrants will be an
amount equal to the portion of the issue price of the Unit (comprised of
Warrants and Debentures) allocated to such Warrants. The issue price for a Unit
is equal to the first price at which a substantial amount of the Units were sold
for money. That issue price is then allocated among the Warrants and the
Debentures based on the relative fair market values of each at the time of
issuance. Moreover, Holdings' allocation among the components of the Units is
binding on the holders unless the holder discloses that his, her or its
allocation differs on a statement attached to the holder's U.S. federal income
tax return for the year in which he, she or it acquired the Unit. Holdings
intends to take the position, based on the advice of the Initial Purchasers,
that
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the portion of the issue price of a Unit allocable to a Warrant at the time of
issuance was $5.32 per Warrant. This allocation, however, is not binding on the
Internal Revenue Service ("Service") and, therefore, there can be no assurance
that the Service will respect such allocation.
EXERCISE. A holder may receive Warrant Shares upon a payment in cash of the
Exercise Price (a "Cash Exercise") as described in "Description of the
Warrants--Certain Terms--Exercise." In the case of a Cash Exercise, a holder
will not recognize gain or loss as a result of such holder's receipt of Warrant
Shares (except with respect to cash received in lieu of fractional shares)
regardless of whether the Warrants are treated as stock or as warrants for U.S.
Federal income tax purposes. Upon such a Cash Exercise, a holder's adjusted tax
basis in the Warrant Shares will be an amount equal to the holder's adjusted tax
basis in the Warrants plus the amount paid in cash to Holdings as the exercise
price for the Warrants.
A holder of Warrants that receives cash in lieu of fractional shares of
Holdings' Common Stock upon a Cash Exercise will be treated as having received
such cash in exchange for such fractional shares. Such holder generally will
recognize capital gain or loss on such deemed exchange in an amount equal to the
difference between the amount of cash received and such holder's adjusted tax
basis in the fractional shares.
If the Warrants lapse without exercise, the holder should recognize a loss
in an amount equal to the holder's adjusted tax basis in the Warrants. If the
Warrants are treated as stock of Holdings for U.S. Federal income tax purposes,
it is unclear whether such loss should be an ordinary or a capital loss; if the
Warrants are treated as warrants for U.S. Federal income tax purposes, such loss
should be a capital loss. Any such capital loss will be long-term capital loss
if the holding period for the Warrants exceeds one year.
SALE OR REDEMPTION. In the event that a Warrant is sold or otherwise
disposed of in a taxable transaction (other than a redemption or repurchase of a
Warrant by Holdings), the holder will recognize capital gain or loss in an
amount equal to the difference between the amount realized in the transaction
and the holder's adjusted tax basis in the Warrant. If the Warrant has been held
for more than one year, any capital gain or loss recognized by the holder will
be long-term capital gain or loss. Long-term capital gain recognized by
taxpayers who are individuals, estates or trusts on Warrants held for more than
eighteen months will generally be subject to a 20% maximum rate of tax. In
general, upon redemption or repurchase by Holdings of the Warrants a holder will
recognize capital gain or loss in an amount equal to the difference between the
amount realized in the redemption or repurchase and the holder's adjusted tax
basis in such Warrants. If the Warrants are treated as stock of Holdings for
U.S. Federal income tax purposes, however, then in certain limited
circumstances, upon redemption or repurchase by Holdings of Warrants, a holder
will be required to treat the redemption or repurchase price (without offset by
the holder's adjusted tax basis in the Warrants) as a dividend to the extent of
Holdings' undistributed current and accumulated earnings and profits. In such a
case, a holder will not be entitled to recognize a loss. The limited
circumstances in which a redemption or repurchase will result in dividend income
primarily involve holders whose proportionate interests in Holdings remain the
same or increase after the redemption or repurchase and, in the case of a holder
with a significant percentage equity interest in the Company, whose interest in
Holdings is not materially reduced by the redemption or repurchase.
WARRANT SHARES. If the Warrants are exercised and Warrant Shares are
thereafter sold or disposed of in a taxable transaction (other than pursuant to
a redemption or repurchase by Holdings), holders of Warrant Shares will
recognize capital gain or loss in an amount equal to the difference between the
amount realized in the transaction and the holder's adjusted tax basis in the
Warrant Shares. The gain or loss recognized will be long-term capital gain or
loss if the holding period with respect to the Warrant Shares is more than one
year. Long-term capital gain recognized by taxpayers who are individuals,
estates or trusts on Warrant Shares held for more than eighteen months will
generally be subject to a 20% maximum rate of tax. Where the Warrant Shares are
redeemed or repurchased by Holdings, a holder may recognize dividend income in a
manner similar to that described above with respect to a redemption or
repurchase by Holdings of Warrants that are treated as stock for U.S. Federal
income tax purposes.
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The holding period of Warrant Shares will depend on whether the Warrants are
treated for U.S. Federal income tax purposes as warrants or as stock. If the
Warrants are treated as stock of Holdings, the holding period of the Warrant
Shares will include the holding period of the Warrants. On the other hand, if
the Warrants are treated as warrants, the holding period for the Warrant Shares
will commence on the day after the date the Warrants are exercised.
ADJUSTMENTS. The conversion ratio of the Warrants is subject to adjustment
under certain circumstances. If an adjustment increases the proportionate
interest of a holder of a Warrant in the fully diluted Common Stock (e.g., an
adjustment to reflect a taxable dividend paid to holders of Common Stock),
Section 305 of the Code may treat holders of the Warrants as having received a
constructive dividend distribution.
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 with respect to dividends on the Warrant Shares and the gross
proceeds from dispositions of the Warrants or Warrant Shares. 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
Warrants or Warrant Shares should consult their tax advisors as to their
qualification for exemption from backup withholding and the procedure for
obtaining such exemption.
Holdings will furnish annually to the Service and to record holders of the
Warrants or Warrant Shares (to whom it is required to furnish such information)
information relating to the amount of dividends, as applicable.
NON-U.S. HOLDERS
The following discussion is limited to the U.S. Federal income tax
consequences relevant to a holder of Warrants or Warrant Shares that is not a
U.S. Holder (a "Non-U.S. Holder").
For purposes of the following discussion, gain on the sale, exchange or
other disposition of Warrants or Warrant Shares 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.
DIVIDENDS. Generally, any dividends on Warrant Shares to a Non-U.S. Holder
will be subject to withholding of U.S. Federal income tax at a rate of 30%
unless the dividend is effectively connected with the conduct of a trade or
business within the United States by the Non-U.S. Holder, in which case the
dividend will be subject to U.S. Federal income tax on a net basis at the rates
applicable to U.S. persons generally (and, with respect to corporate holders
under certain circumstances, may also be subject to a 30% branch profits tax).
The rate of withholding may be reduced to the extent provided by a tax treaty to
which the United States is a party if the recipient of the dividends is entitled
to the benefits of the treaty. Non-U.S. Holders seeking a reduction in the rate
of withholding under an income tax treaty and Non-U.S. Holders seeking an
exemption for dividends effectively connected with a trade or business carried
on by such Non-U.S. Holder in the United States will be required to comply with
certain certification and other requirements.
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SALE, EXCHANGE OR REDEMPTION OF WARRANTS OR WARRANT SHARES. Except as
described below and subject to the discussions concerning backup withholding and
"FIRPTA", any gain realized by a Non-U.S. Holder on the sale, exchange,
redemption or other disposition of a Warrant or Warrant Share 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 Warrant or Warrant Share 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).
FIRPTA. Under certain rules added to the Code by the Foreign Investment in
Real Property Tax Act ("FIRPTA"), Holdings would be classified as a U.S. real
property holding corporation ("USRPHC") if the fair market value of its U.S.
real property interests were to exceed 50% of the fair market value of its real
property interests and other assets held for use in its trade or business. A
Non-U.S. Holder of Warrants or Warrant Shares would be subject to U.S. Federal
income tax on gain arising from a sale or other disposition of such Warrants or
Warrant Shares if Holdings is or has been a USRPHC within the preceding five
years or the period of such holder's ownership of such Warrants or Warrant
Shares, if shorter (the "FIRPTA period"). However, if the Common Stock is
regularly traded on an established securities market (within the meaning of the
applicable Treasury Regulations) a Non-U.S. Holder of Warrants or Warrant
Shares, other than certain 5% holders (within the meaning of applicable Treasury
Regulations), would not be subject to FIRPTA tax on any gain arising from a sale
or other disposition of such Warrants or Warrant Shares. If a Non-U.S. Holder is
subject to FIRPTA tax on gain arising from a sale or other disposition of
Warrants or Warrant Shares, a required withholding in respect of such tax will
be imposed at a rate of 10% of the amount realized.
Management believes that Holdings is not, has not been, and does not
presently expect to become a USRPHC.
FEDERAL ESTATE TAX. The Warrants or Warrant Shares owned (or treated as
owned) by an individual who is not a citizen or domiciliary of the United States
at the date of his death will be included in such individual's estate for U.S.
Federal estate tax purposes, unless an applicable estate tax treaty provides
otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING. MEDIQ/PRN and Holdings must
report annually to the Service and to each Non-U.S. Holder any dividend income
that is subject to withholding, or that is exempt from U.S. withholding tax
pursuant to a tax treaty. 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.
Under current law, backup withholding (at a rate of 31%) will not apply to
dividends paid a Non-U.S. Holder at an address outside the United States. Under
recently promulgated Treasury Regulations (the "Final Regulations"), however,
dividend payments will generally be subject to information reporting and backup
withholding unless applicable certification requirements are satisfied. The
Final Regulations generally will be effective with respect to dividend payments
made after December 31, 1999.
The payment of the proceeds from the disposition of the Warrants or Warrant
Shares 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 Warrants or Warrant Shares 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
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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.
In the case of the payment of proceeds from the disposition of Warrants or
Warrant Shares 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 WARRANTS OR WARRANT SHARES. EACH
PURCHASER OF ANY OF THE WARRANTS OR WARRANT SHARES 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 WARRANTS OR WARRANT SHARES.
LEGAL MATTERS
Certain legal matters with respect to the Warrants and the Warrant Shares
will be passed upon for Holdings 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.
93
<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 dealer, salesperson or other 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 Company since such
date.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
---------
<S> <C>
Available Information................................. i
Summary............................................... 1
Risk Factors.......................................... 13
The Transactions...................................... 20
Use of Proceeds....................................... 22
Capitalization........................................ 23
Pro Forma Condensed Consolidated Financial
Statements.......................................... 24
Selected Consolidated Historical
Financial Information............................... 39
Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 41
Business.............................................. 49
Management............................................ 64
Ownership of Capital Stock............................ 69
Description of Capital Stock.......................... 72
Certain Relationships and Related Transactions........ 76
Description of Certain Indebtedness................... 78
Description of the Warrants........................... 83
Plan of Distribution.................................. 87
Notice to Canadian Residents.......................... 88
Certain U.S. Federal Income Tax Considerations........ 89
Legal Matters......................................... 93
Experts............................................... 93
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]
MEDIQ Incorporated
140,885 Warrants to Purchase
91,209 Shares of
Common Stock
PROSPECTUS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following expenses (other than the SEC filing fee) are estimated:
<TABLE>
<S> <C>
SEC Registration Fee................................................................. $ 222
Accounting Fees...................................................................... $ *
Printing and Engraving Expenses...................................................... $ *
Legal Fees and Expenses (other than blue sky)........................................ $ *
Blue Sky Fees and Expenses........................................................... $ *
Transfer Agent and Registrar Fees.................................................... $ *
Miscellaneous Expense................................................................ $ *
---------
Total.......................................................................... $
---------
---------
</TABLE>
- ------------------------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by the Delaware General Corporation Law, the Certificate of
Incorporation of Holdings provides that directors of Holdings shall not be
personally liable to Holdings 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 Holdings 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
Holdings provide for indemnification of Holdings' 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 Holdings pursuant to the foregoing provisions,
Holdings has 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 Holdings are insured against certain
liabilities under Holdings' directors' and officers' liability insurance.
II-1
<PAGE>
The foregoing summary of the Delaware General Corporation Law and of the
Certificate of Incorporation and By-laws of Holdings is qualified in its
entirety by reference to the relevant provisions of the Delaware General
Corporation Law and of Holdings' Certificate of Incorporation and By-laws, which
are filed as exhibits to this Registration Statement.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On May 6, 1998, Holdings commenced an offering of Senior Discount Debentures
due 2009 (the "Old Debentures") to "qualified institutional buyers" (as defined
in Rule 144A under the Securities Act). That offering was consummated on May 29,
1998 with the sale of 140,885 Units (the "Units"), each Unit consisting of one
13% Senior Discount Debenture due 2009 with a principal amount at maturity of
$1,000 and one Warrant (a "Warrant") to purchase .6474 shares of Holdings'
Common Stock. An exchange offer registration statement was filed by Holdings on
July 13, 1998 with respect to a proposed exchange of the Old Debentures for
registered debentures having substantially identical terms (the "New
Debentures"). This Registration Statement is filed to register the Warrants and
the shares of Common Stock issuable upon exercise of the Warrants.
ITEM 16. 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)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>
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* 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
3.2* By-laws of Holdings
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)
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 between 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 4.10 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>
4.11 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
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)
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Dechert Price & Rhoads (included in Exhibit 5.1)
24.1 Power of Attorney (included on signature page)
27.1 Financial Data Schedule
</TABLE>
II-4
<PAGE>
- ------------------------
* 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 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(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
(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 Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the 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 Registrant will, unless in the opinion of its 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.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
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.
SIGNATURE TITLE
- ------------------------------ ---------------------------
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
II-6
<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") on Form S-1 of our reports dated November 25, 1997
for MEDIQ and May 21, 1998 for MEDIQ/PRN Life Support Services, Inc. and
subsidiaries (a wholly owned subsidiary of MEDIQ), 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
<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>
