<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 19, 1998
REGISTRATION NO. 333-58933
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
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 a post-effective amendment filed 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 (2)
<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 (3) 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) Previously paid.
(3) 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>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED OCTOBER 19, 1998
PRELIMINARY PROSPECTUS
[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 "Securities 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. The Selling Holders will receive all of the net proceeds from the
sale of the Warrants and the Warrant Shares and will pay all underwriting
discounts, selling commissions and transfer taxes, if any, applicable to any
such sales. In accordance with the terms of the Warrant Agreement (as defined),
Holdings will pay other expenses incident to any such registration of the
Warrants and the Warrant Shares. 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 October , 1998.
<PAGE>
AVAILABLE INFORMATION
Holdings has filed with the Securities and Exchange Commission (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 and Warrant Shares being offered
hereby. This Prospectus does not contain all the information set forth in the
Registration Statement. For further information with respect to Holdings, the
Warrants and the Warrant Shares, 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. Information regarding the operation of the public
reference facilities of the Commission may be obtained by calling the Commission
at 1-800-SEC-0330. 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 Holdings, 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
(each 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
$196.6 million of revenue and $68.5 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 its approximately
150,000 unit Medical Equipment and Support Surfaces inventory to customers
through 101 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 $156.1 million or 79.4% 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 $11.0 million or 7.1% 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 $30.0
million or 15.3% 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 190
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 $10.5 million or 5.3% of total
revenue during the LTM Period.
2
<PAGE>
Holdings was incorporated under the laws of the State of Delaware in 1977.
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. The Company's national
distribution network has the most expansive geographic coverage in its
industry with 101 office locations in 40 states and the Company's product
line consists of approximately 150,000 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 $246.7
million as of June 30, 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
3
<PAGE>
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 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 14 as
of June 30, 1998.
4
<PAGE>
- 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 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 $196.6
million on a Pro Forma Basis 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.
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.) ("CH Medical") and
certain other parties ("Sellers") related to the
5
<PAGE>
manufacture, sale 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 $2.0 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 $390.8 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 persons selected by Holdings and BRS (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 &
6
<PAGE>
Co. LLC and Galen 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" and, together with the Series A Preferred Stock and the Series
B Preferred Stock, the "Preferred Stock"). Following consummation of the Merger
and the subsequent purchase by the Management Stockholders of certain additional
shares of Common Stock, the BRS Entities and the Co-Investors held approximately
77.2% 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 12.6% of the Common Stock, 2.6% of
the Series A Preferred Stock (not including shares received in the Merger as
Merger Consideration), 1.9% of the Series B Preferred Stock and 3.5% of the
Series C Preferred Stock; the Rotko Entities held approximately 10.2% 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
Existing cash balances........................................... 4.5
-----------
Total sources................................................ $ 617.7
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
USES OF FUNDS:
<S> <C>
Cash portion of Merger Consideration(a).......................... $ 352.1
Equity Rollover.................................................. 38.7
Refinancing(b)................................................... 138.0
CHI Acquisition.................................................. 50.0
Fees and expenses................................................ 38.9
-----------
Total uses................................................... $ 617.7
-----------
-----------
</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 $21.0 million of
revolving loans that were to mature on September 30, 2002. At May 29, 1998,
the weighted average interest rate with respect to all such indebtedness was
approximately 8.4%.
8
<PAGE>
WARRANTS AND WARRANT SHARES
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 became eligible to
trade separately on October , 1998, the date of the commencement of an
exchange offer for the Debentures. 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 nine months ended June 30, 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 nine
months ended June 30, 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 nine months ended June 30,
1997 and 1998 was derived from Company prepared schedules. The balance sheet
data as of June 30, 1998 and the net debt included within the supplemental pro
forma data for the LTM Period reflects the Transactions and the CHI Acquisition.
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 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 results of
operations 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 NINE MONTHS
YEAR ENDED ENDED
YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, JUNE 30, 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 $ 117,674 $ 131,920 $ 196,593
Non-recurring items(c).................... -- (2,200) -- -- -- (34,567) (34,567)
Operating income (loss)................... 24,202 25,446 29,504 32,325 24,508 (19,889) (12,232)
Interest expense.......................... (29,241) (27,307) (19,107) (52,334) (15,205) (14,333) (52,879)
Other (charges) and credits(d)............ 1,381 (4,695) (7,504) (7,250) 768 714 (7,513)
Income (Loss) from continuing operations
before income taxes..................... (3,658) (6,556) 2,893 (27,259) 10,071 (33,508) (72,624)
Income (Loss) from continuing
operations.............................. (3,346) (6,178) (2,241) (20,346) 1,427 (21,764) (44,608)
OTHER DATA:
Rental revenues........................... $ 117,043 $ 114,275 $ 124,316 $ 156,117 $ 94,341 $ 103,700 $ 156,056
Sales revenues............................ 7,036 11,696 19,922 24,620 14,785 20,671 30,032
Other revenues............................ 8,162 10,095 11,722 10,247 8,548 7,549 10,505
EBITDA(e)................................. 54,363 55,603 59,863 69,199 46,604 46,328 66,217
Adjusted EBITDA(f)........................ 54,363 55,603 59,863 72,017 46,604 46,328 68,543
Depreciation and amortization............. 30,161 30,157 30,359 36,874 22,096 31,650 43,882
Capital expenditures(g)................... 13,356 18,913 15,458 17,717 11,589 17,909 22,246
Branches and distributors (at end of
period)................................. 84 84 84 92 84 101 101
Equipment units (at end of period)........ 123,309 120,388 131,897 143,035 129,516 150,050 150,050
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30,
1998
------------------
(IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Working capital............................................................................... $ 46,847
Property, plant and equipment, net............................................................ 112,706
Total assets.................................................................................. 318,734
Total debt (including current portion of long-term debt)...................................... 477,085
Net debt(h)................................................................................... 461,967
Redeemable preferred stock.................................................................... 109,482
Stockholders' deficit......................................................................... (315,401)
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
LTM PERIOD(B)
-----------------
<S> <C>
SUPPLEMENTAL PRO FORMA DATA:
Ratio of Adjusted EBITDA to interest expense (excluding deferred financing fees).................. 1.35x
Ratio of net debt to Adjusted EBITDA.............................................................. 6.74
</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 July 1, 1997 to June 30, 1998 (the "LTM Period").
Data for the LTM Period was derived by subtracting the pro forma results of
operations for the nine months ended June 30, 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 nine months ended June 30, 1998
to such pro forma September 30, 1997 results of operations.
11
<PAGE>
(c) Fiscal 1996 includes restructuring charges of $2.2 million. The nine months
ended June 30, 1998 and the Pro Forma LTM Period includes non-recurring
merger costs aggregating $34.6 million, including compensation expense of
$19.0 million recorded upon the exercise of options by employees, payment of
special transaction bonuses to certain current and former members of
management of approximately $6.0 million and the payment of a transaction
fee of $6.0 million to BRS and the Co-Investors.
(d) 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
nine months ended June 30, 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 $1.8
million and interest income of $1.6 million. The nine months ended June 30,
1998 include approximately $0.7 million of interest income.
(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) 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 $0.1 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 $1.7 million
in such areas as insurance, advertising and telephone costs, travel, meals
and entertainment expenses and taxes other than income taxes.
(g) During the first nine 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 $18.9 million on
capital expenditures in fiscal 1998.
(h) Net debt is total debt (including current portion of long-term debt) net of,
(i) $9.2 million of cash as of June 30, 1998, and (ii) 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
The Company has incurred substantial indebtedness in connection with the
Transactions and the CHI Acquisition. At June 30, 1998, the Company had $477.1
million of consolidated indebtedness and a shareholders' deficit of $315.4
million. See "Capitalization" and "Selected Consolidated Historical Financial
Information." Accordingly, the Company has significant debt service obligations.
On a Pro Forma Basis, the ratio of earnings to fixed charges of the Company
would have been (.32) to 1 for the LTM Period. In addition, the Company is
likely to incur additional indebtedness in the future, subject to certain
limitations contained in the instruments and documents governing its
indebtedness. See "Description of Certain Indebtedness--New Credit Facility,"
"--Notes" and "--Debentures."
The degree to which the Company is leveraged has important consequences for
the Company, including the following: (i) the Company's ability to obtain
additional financing for working capital, capital expenditures, acquisitions,
debt service requirements or other purposes may be impaired; (ii) a substantial
portion of MEDIQ/PRN's cash flow from operations will be required to pay its
interest expense and principal repayment obligations and will not be available
for its general corporate needs (including distributions to Holdings); (iii) the
Company's flexibility to adjust to changing market conditions may be limited,
and its ability to compete against its less highly leveraged competitors may be
reduced; (iv) the Company may be more vulnerable in the event of a downturn in
its business or in the economy generally; and (v) to the extent that MEDIQ/PRN
incurs borrowings under the New Credit Facility, which borrowings will be at
variable rates, it will be vulnerable to increases in interest rates. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The successful implementation of the Company's business strategy is
necessary for the Company to be able to meet its anticipated debt service
requirements. In addition, the Company's ability to meet its debt service
requirements (including its obligations with respect to the Debentures, the
Notes and the New Credit Facility) will depend on the Company's future
performance, which is subject to a number of factors, most of which are outside
the Company's control. There can be no assurance that the Company will generate
sufficient cash flow from operating activities to meet its debt service and
working capital requirements. Although the 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 September
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 assets could be sold quickly enough, or for sufficient
amounts, to enable the Company to meet its obligations.
13
<PAGE>
RESTRICTIVE COVENANTS
The Indentures (as defined) and the New Credit Facility contain, and any
additional financing agreements are likely to contain, certain restrictive
covenants. The restrictions contained in the Indentures and the New Credit
Facility affect, and in some cases will significantly limit or prohibit, among
other things, the ability of the Company to incur indebtedness, make prepayments
of certain indebtedness, pay dividends, make acquisitions and other investments,
engage in transactions with stockholders and affiliates, issue capital stock,
create liens, sell assets and engage in mergers and consolidations. In addition
to the restrictive covenants described above, the New Credit Facility requires
MEDIQ/PRN to maintain a number of financial ratios. The failure of MEDIQ/PRN and
its subsidiaries to maintain such ratios would constitute events of default
under the New Credit Facility, notwithstanding the ability of the Company to
meet its debt service obligations (including its obligations with respect to the
Debentures and the Notes). 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
(as defined in the Debenture Indenture (as defined))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,"
"--Debentures" and "--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
(as defined) and applicable Federal and state law impose restrictions on the
payment of dividends and the making of loans by MEDIQ/ PRN to Holdings. As a
result of the foregoing restrictions, Holdings may be unable to gain access to
the cash flow or assets of MEDIQ/PRN in amounts sufficient to pay cash interest
on the Debentures on and after December 1, 2003, the date on which cash interest
thereon first becomes payable, and principal of the Debentures when due or upon
a change of control or the occurrence of any other event requiring the repayment
of principal. In such event, Holdings may be required to (i) refinance the
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 any failure to do so could have a material adverse effect on the value of
the Warrants and Warrant Shares.
14
<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 and $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 $20.3 million and $44.6 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 recently consummated the CHI
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 acquisitions, 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 June 30, 1998, subject to certain conditions, the terms of the New
Credit Facility provided MEDIQ/PRN with the ability to borrow up to an
additional $125.0 million thereunder. In order to capitalize on future
acquisition opportunities, the Company may need to obtain additional capital and
obtain Federal and/or state regulatory approvals. To raise additional capital,
the Company may elect to
15
<PAGE>
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 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.
16
<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 since consummation of the CHI Acquisition),
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 77.2%
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 or MEDIQ/PRN 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 and Warrant Shares are each new issues of securities for which
there is currently no trading 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 of Warrants
or Warrant Shares depending 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 Holdings that they
intend to make a market in the Warrants and Warrant Shares, subject to the
limits imposed by the Securities Act and the Exchange Act and subject to any
limits imposed during the pendency of any registration statement or shelf
registration statement filed under the Securities Act; however, the Initial
Purchasers are not obligated to do so, and may discontinue such market-making at
any time without notice. Therefore, no assurance can be given as to the
liquidity of any
18
<PAGE>
trading market for the Warrants or the Warrant Shares, or that an active market
for the Warrants or the Warrant Shares will develop. Holdings does not intend to
apply for listing or quotation of the Warrants or Warrant Shares on any
securities exchange or stock market. The Warrants and Warrant Shares are
currently eligible for trading in the Private Offerings, Resales and Trading
through Automated Linkages ("PORTAL") market. Following the Registration
Statement being declared effective by the Commission, the Warrants and the
Warrant Shares will not be eligible for PORTAL trading.
RISKS ASSOCIATED WITH 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.
The Warrants are not exercisable until after the first anniversary of the
closing of the Offerings. Holdings is required under the Warrant Agreement to
use its best efforts to cause the Registration Statement to remain effective for
certain specified periods of time. There can be no assurance that Holdings will
be able to keep the Registration Statement continuously effective until the
expiration of such periods, and any failure to do so could 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."
As of the date of this Prospectus, Holdings has 1,074,821 shares of Common
Stock outstanding. If all outstanding Warrants were exercised, the Company would
have 1,166,030 shares of Common Stock outstanding. Of these shares, the 91,209
shares of Common Stock issuable on exercise of the Warrants will be freely
tradeable in the public market without restriction by persons other than
affiliates of Holdings. The remaining 1,074,821 shares of Common Stock
outstanding were acquired in transactions other than pursuant to an effective
registration statement under the Securities Act and are "restricted stock"
within the meaning of Rule 144 under the Securities Act. Sales of restricted
stock, or the availability of such restricted stock for sale, could adversely
affect the value of the Warrants and the underlying Common Stock.
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 and currently
intends to retain all earnings for reinvestment in its business and repayment of
indebtedness. Holdings' ability to pay any dividends on any of its capital
stock, including its Common Stock, will depend on its receipt of cash dividends
from MEDIQ/PRN. The timing and amount of dividends, if any, will depend, among
other things, on the Company's results of operations, financial condition, cash
requirements and other relevant factors. The New Credit Facility and the
Indentures restrict the payment of dividends by MEDIQ/PRN and 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, (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 $2.0 million of
its capital leases was repaid.
The Merger Consideration was approximately $390.8 million, which amount
included the issuance of approximately $20.0 million of Series A Preferred
Stock. In addition, in connection with the Merger (i) the Rotko Entities
converted a portion of their preferred equity in Holdings into $14.5 million of
common and preferred equity of the Surviving Corporation pursuant to the Rotko
Rollover, (ii) the Management Stockholders purchased $4.2 million of common and
preferred equity of MQ pursuant to the Management Investment and (iii) the BRS
Entities and the Co-Investors purchased $109.5 million of common and preferred
equity pursuant to the Equity Contribution. See "--The Rotko Rollover," "--The
Management Investment" and "--The Equity Contribution."
THE ROTKO ROLLOVER
In connection with the transactions contemplated by the Merger Agreement, MQ
and the Rotko Entities entered into an agreement dated January 14, 1998 (the
"Rollover Agreement") pursuant to which the Rotko Entities agreed to convert
1,000,000 shares (the "Rolled Shares") of Series A preferred stock, par value
$.50 per share, of Holdings ("Holdings Preferred Stock") into certain securities
specified therein instead of receiving Merger Consideration of $13.75 cash and
0.075 of a share of Series A Preferred Stock per Rolled Share. MQ required that
the Rotko Entities enter into the Rollover Agreement in order to reduce the
amount required to finance the Transactions and to facilitate the treatment of
the Merger for accounting purposes as a recapitalization of the Company. Under
the Merger Agreement, at the Effective Time, the Rolled Shares were converted in
the Merger into 1,340,219 shares of Series B Preferred Stock and 109,781 shares
of Common Stock equal to approximately 11% 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, which, subsequent to the consummation of the
Transactions, was divided into two trusts, the Trust U/D of Bernard B. Rotko,
dated November 18, 1983, Michael J. Rotko Share (the "Rotko 1983 Trust-Michael
J. Rotko Share") and the Trust U/D of Bernard B. Rotko, dated November 18, 1983,
Judith M. Shipon Share (the "Rotko 1983 Trust-Judith M. Shipon Share" and,
together with the Rotko 1983 Trust-Michael J. Rotko Share, the "Rotko 1983
Trusts"), (ii) Michael J. Rotko, a Director of Holdings and MEDIQ/PRN and a
trustee of the Rotko 1983 Trust-Michael J. Rotko Share, (iii) Bessie G. Rotko,
the spouse of Bernard B. Rotko and a trustee of the Rotko 1983 Trusts and (iv)
Judith M. Shipon, the daughter of Bernard B. Rotko and a trustee of the Rotko
1983 Trust-Judith M. Shipon Share.
20
<PAGE>
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."
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 and the subsequent purchase by the
Management Stockholders of certain additional shares of Common Stock, the BRS
Entities and the Co-Investors held approximately 77.2% 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 12.6% of the Common Stock, 2.6% of the Series A Preferred Stock
(not including shares received in the Merger as Merger Consideration), 1.9% of
the Series B Preferred Stock and 3.5% of the Series C Preferred Stock; the Rotko
Entities held approximately 10.2% 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. Upon the exercise of the Warrants,
Holdings will receive $.01 per share of Common Stock.
Approximately $617.7 million of funds were used to consummate the Merger and
the CHI Acquisition, effect the Refinancing 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, (v) $38.7 million of
gross proceeds from the Equity Rollover and (vi) $4.5 million of existing cash
balances of the Company. See "The Transactions" and "Description of Certain
Indebtedness."
DIVIDENDS
Holdings did not pay any dividends on its common stock during fiscal 1997 or
1998. Holdings does not have any plans to pay any dividends on any of its
capital stock, including its Common Stock, in the foreseeable future and
currently intends to retain all earnings for reinvestment in its business and
repayment of indebtedness. Holdings' ability to pay any dividends on any of its
capital stock, including its Common Stock, will depend on its receipt of cash
dividends from MEDIQ/PRN. The timing and amount of dividends, if any, will
depend, among other things, on the Company's results of operations, financial
condition, cash requirements and other relevant factors. The New Credit Facility
and the Indentures restrict the payment of dividends by MEDIQ/PRN and Holdings.
See "Description of Certain Indebtedness."
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CAPITALIZATION
The following table sets forth the historical consolidated capitalization of
Holdings as of June 30, 1998. The information set forth below should be read in
conjunction with "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 JUNE 30,
1998
------------------
<S> <C>
(IN THOUSANDS)
Cash and cash equivalents..................................................................... $ 9,203
----------
----------
Long-term debt, including current portion:
New Credit Facility......................................................................... $ 200,000
Capital lease obligations................................................................... 1,907
Notes....................................................................................... 190,000
Debentures.................................................................................. 75,123
Exchangeable Debentures(a).................................................................. 10,055
----------
Total long-term debt.................................................................... 477,085
Mandatorily redeemable preferred stock:
Series A Preferred Stock.................................................................... 79,127
Series C Preferred Stock.................................................................... 30,355
----------
Total mandatorily redeemable preferred stock............................................ 109,482
Stockholders' deficit(b)...................................................................... (315,401)
----------
Total capitalization.................................................................. $ 271,166
----------
----------
</TABLE>
- ------------------------
(a) Approximately $500,000 in principal amount of the Exchangeable Debentures is
currently outstanding. See "Description of Certain
Indebtedness--Exchangeable Debentures."
(b) The stockholders' deficit of Holdings includes $30 of Series B Preferred
Stock, $10 of Common Stock, $40,703 of capital in excess of par and
$(356,144) 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 and the CHI Acquisition were consummated on
September 1, 1997 and May 29, 1998, respectively. Accordingly, the Company's
historical consolidated statements of operations include the results of
operations of SpectraCair and the CH Medical Business from such respective
acquisition dates. The Company's historical balance sheet as of June 30, 1998
includes the assets and liabilities of SpectraCair and the CH Medical Business.
The pro forma condensed consolidated statements of operations for the year
ended September 30, 1997 and for the nine months ended June 30, 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 nine months ended June 30, 1998 give effect to
the Transactions and the CHI Acquisition as if they were consummated on October
1, 1996. 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
consolidated financial statements of CH Medical (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
results of operations 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 and the CHI
Acquisition were 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>
COMPANY
PRO FORMA PRO FORMA
PRO FORMA PRO FORMA FOR ADJUSTMENTS
HISTORICAL ADJUSTMENTS FOR ADJUSTMENTS FOR SPECTRACAIR FOR THE
------------------------ THE SPECTRACAIR THE AND THE CHI
COMPANY SPECTRACAIR ACQUISITION TRANSACTIONS TRANSACTIONS ACQUISITION(E)
--------- ------------- --------------- --------------- ------------ -------------
Revenues:
Rental............................. $ 124,316 $ 9,647 $ -- $ -- $ 133,963 $ 22,154
Sale of parts, disposables and
equipment........................ 19,922 142 -- -- 20,064 4,556
Other.............................. 11,722 -- (1,475)(A) -- 10,247 --
--------- ------ ------- --------------- ------------ -------------
155,960 9,789 (1,475) -- 164,274 26,710
Costs and Expenses:
Cost of sales...................... 16,334 112 -- -- 16,446 1,355
Operating.......................... 46,138 2,638 (1,475)(A) -- 47,301 8,268
Selling............................ 13,353 2,804 -- -- 16,157 3,233
General and administrative......... 20,272 1,545 -- 1,000(C) 22,817 6,208
Depreciation and amortization...... 30,359 2,313 -- -- 32,672 4,202
--------- ------ ------- --------------- ------------ -------------
Operating Income..................... 29,504 377 -- (1,000) 28,881 3,444
Other (charges)
Credits:
Interest expense................... (19,107) (499) -- (28,431)(D) (48,037) (4,297)
Interest income.................... 2,069 -- -- -- 2,069 --
Other--net......................... (9,573) -- 61(A) -- (9,512) 193
--------- ------ ------- --------------- ------------ -------------
Income (Loss) from Continuing
Operations before Income Taxes... 2,893 (122) 61 (29,431) (26,599) (660)
Income Taxes....................... 5,134 -- (24)(B) (11,759)(B) (6,649) (264)
--------- ------ ------- --------------- ------------ -------------
Income (Loss) from Continuing
Operations....................... $ (2,241) $ (122) $ 85 $ (17,672) $ (19,950) $ (396)
--------- ------ ------- --------------- ------------ -------------
--------- ------ ------- --------------- ------------ -------------
<CAPTION>
<S> <C>
CONSOLIDATED
COMPANY
PRO FORMA
FOR
SPECTRACAIR,
THE
TRANSACTIONS
AND CHI
---------------
Revenues:
Rental............................. $ 156,117
Sale of parts, disposables and
equipment........................ 24,620
Other.............................. 10,247
---------------
190,984
Costs and Expenses:
Cost of sales...................... 17,801
Operating.......................... 55,569
Selling............................ 19,390
General and administrative......... 29,025
Depreciation and amortization...... 36,874
---------------
Operating Income..................... 32,325
Other (charges)
Credits:
Interest expense................... (52,334)
Interest income.................... 2,069
Other--net......................... (9,319)
---------------
Income (Loss) from Continuing
Operations before Income Taxes... (27,259)
Income Taxes....................... (6,913)
---------------
Income (Loss) from Continuing
Operations....................... $ (20,346)
---------------
---------------
</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>
NINE MONTHS ENDED JUNE 30, 1997
---------------------------------------------------------------------------------------
PRO FORMA COMPANY
ADJUSTMENTS PRO FORMA PRO FORMA FOR PRO FORMA
HISTORICAL FOR THE ADJUSTMENTS SPECTRACAIR ADJUSTMENTS
-------------------------- SPECTRACAIR FOR THE AND THE FOR THE CHI
COMPANY SPECTRACAIR ACQUISITION TRANSACTIONS TRANSACTIONS ACQUISITION(E)
----------- ------------- ------------- ------------ ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental............................. $ 94,341 $ 8,529 $ -- $ -- $ 102,870 $ 15,947
Sale of parts, disposables and
equipment........................ 14,785 117 -- -- 14,902 2,538
Other.............................. 8,548 -- (1,257)(A) -- 7,291 --
----------- ------ ------------- ------------ ------------- -------
117,674 8,646 (1,257) -- 125,063 18,485
Costs and Expenses:
Cost of sales...................... 12,020 93 -- -- 12,113 806
Operating.......................... 33,491 2,079 (1,257)(A) -- 34,313 6,707
Selling............................ 9,722 2,327 -- -- 12,049 2,180
General and administrative......... 15,837 1,321 -- 750(C) 17,908 4,118
Depreciation and amortization...... 22,096 2,195 -- -- 24,291 3,152
----------- ------ ------------- ------------ ------------- -------
Operating Income..................... 24,508 631 -- (750) 24,389 1,522
Other (charges) Credits:
Interest expense................... (15,205) (421) -- (20,320)(D) (35,946) (3,223)
Interest income.................... 1,567 -- -- -- 1,567 6
Other--net......................... (799) -- (105)(A) -- (904) 573
----------- ------ ------------- ------------ ------------- -------
Income (Loss) from Continuing
Operations before Income Taxes..... 10,071 210 (105) (21,070) (10,894) (1,122)
Income Taxes......................... 8,644 -- 42(B) (8,428)(B) 258 (449)
----------- ------ ------------- ------------ ------------- -------
Income (Loss) from Continuing
Operations......................... $ 1,427 $ 210 $ (147) $ (12,642) $ (11,152) $ (673)
----------- ------ ------------- ------------ ------------- -------
----------- ------ ------------- ------------ ------------- -------
<CAPTION>
CONSOLIDATED
COMPANY
PRO FORMA
FOR
SPECTRACAIR,
THE
TRANSACTIONS
AND CHI
---------------
<S> <C>
Revenues:
Rental............................. $ 118,817
Sale of parts, disposables and
equipment........................ 17,440
Other.............................. 7,291
---------------
143,548
Costs and Expenses:
Cost of sales...................... 12,919
Operating.......................... 41,020
Selling............................ 14,229
General and administrative......... 22,026
Depreciation and amortization...... 27,443
---------------
Operating Income..................... 25,911
Other (charges) Credits:
Interest expense................... (39,169)
Interest income.................... 1,573
Other--net......................... (331)
---------------
Income (Loss) from Continuing
Operations before Income Taxes..... (12,016)
Income Taxes......................... (191)
---------------
Income (Loss) from Continuing
Operations......................... $ (11,825)
---------------
---------------
</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>
NINE MONTHS ENDED JUNE 30, 1998
---------------------------------------------------------
PRO FORMA COMPANY PRO FORMA
ADJUSTMENTS PRO FORMA FOR ADJUSTMENTS
HISTORICAL FOR THE THE FOR THE CHI
COMPANY TRANSACTIONS TRANSACTIONS ACQUISITION(E)
----------- ------------ ------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Rental................................................. $ 103,700 $ -- $ 103,700 $ 15,056
Sales of parts, disposables and equipment.............. 20,671 -- 20,671 2,181
Other.................................................. 7,549 -- 7,549 --
----------- ------------ ------------- -------
131,920 -- 131,920 17,237
Cost and Expenses:
Cost of sales.......................................... 16,725 -- 16,725 392
Operating.............................................. 42,864 -- 42,864 6,189
Selling................................................ 11,469 -- 11,469 1,967
General and administrative............................. 14,534 750(C) 15,284 3,895
Nonrecurring--merger costs............................. 34,567 -- 34,567 --
Depreciation and amortization.......................... 31,650 -- 31,650 2,801
----------- ------------ ------------- -------
Operating Income......................................... (19,889) (750) (20,639) 1,993
Other (charges) Credits:
Interest expense....................................... (14,333) (22,524)(D) (36,857) (2,857)
Interest income........................................ 702 -- 702 13
Other--net............................................. 12 -- 12 252
----------- ------------ ------------- -------
Income (Loss) from Continuing Operations before
Income Taxes........................................... (33,508) (23,274) (56,782) (599)
Income Taxes............................................. (11,744) (9,310)(B) (21,054) (240)
----------- ------------ ------------- -------
Income (Loss) from Continuing Operations................. $ (21,764) $ (13,964) $ (35,728) $ (359)
----------- ------------ ------------- -------
----------- ------------ ------------- -------
<CAPTION>
CONSOLIDATED
COMPANY PRO
FORMA FOR
THE
TRANSACTIONS
AND CHI
---------------
<S> <C>
Revenues:
Rental................................................. $ 118,756
Sales of parts, disposables and equipment.............. 22,852
Other.................................................. 7,549
---------------
149,157
Cost and Expenses:
Cost of sales.......................................... 17,117
Operating.............................................. 49,053
Selling................................................ 13,436
General and administrative............................. 19,179
Nonrecurring--merger costs............................. 34,567
Depreciation and amortization.......................... 34,451
---------------
Operating Income......................................... (18,646)
Other (charges) Credits:
Interest expense....................................... (39,714)
Interest income........................................ 715
Other--net............................................. 264
---------------
Income (Loss) from Continuing Operations before
Income Taxes........................................... (57,381)
Income Taxes............................................. (21,294)
---------------
Income (Loss) from Continuing Operations................. $ (36,087)
---------------
---------------
</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 the Company and SpectraCair
for logistical services, and the elimination of the Company'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 nine months
ended June 30, 1997 and 1998, reflects three quarters of such annual
management fee.
(D) Reflects the increased interest cost related to the Debentures, the New
Credit Facility and the Notes, as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS NINE MONTHS
SEPTEMBER 30, ENDED JUNE 30, ENDED JUNE 30,
1997 1997 1998
------------- --------------- ---------------
<S> <C> <C> <C>
Debentures........................................ $ 10,135 $ 7,520 $ 8,547
New Credit Facility:
Revolving Credit Facility....................... 280 210 210
Acquisition Loans............................... 375 281 281
Term Loans...................................... 12,891 9,668 9,644
Notes............................................. 20,900 15,675 15,675
Amortization of financing fees/debt issue costs
over the period of the related financings....... 2,264 1,698 1,698
Existing borrowings to carry forward (Exchangeable
Debentures and capital leases).................. 1,192 894 802
------------- --------------- ---------------
$ 48,037 $ 35,946 $ 36,857
Historical interest costs:
The Company..................................... (19,107) (15,205) (14,333)
SpectraCair..................................... (499) (421) --
------------- --------------- ---------------
$ 28,431 $ 20,320 $ 22,524
------------- --------------- ---------------
------------- --------------- ---------------
</TABLE>
The Debentures were issued with detachable stock purchase warrants. In
accordance with generally accepted accounting principles, the cash proceeds
from the Debentures were allocated to the Debentures and the Warrants based
on their relative fair value. Accordingly, the Debentures bear interest at
an effective rate of approximately 13.2%. Debt issue costs on the
Debentures are amortized over 11 years.
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>
28
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
A 0.125% change in the interest rate on the above loans would increase or
decrease interest expense and income (loss) from continuing operations for
a nine month period by:
<TABLE>
<CAPTION>
INTEREST LOSS FROM CONTINUING
EXPENSE OPERATIONS
----------- -----------------------
<S> <C> <C>
New Credit Facility............................................... $ 141 $ 85
</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 statement of operations has been based on
the CH Medical Financial Statements for the year ended August 31, 1997 and
the nine months ended May 31, 1997 and eight months ended April 30, 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 2,462 (ii 4,202
----------- ------------- -----------
Operating Income....................................... 1,674 1,770 3,444
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 (2,282) (660)
Income Taxes........................................... 616 (880)(iv) (264)
----------- ------------- -----------
Income (Loss) from Continuing Operations............... $ 1,006 $ (1,402) $ (396)
----------- ------------- -----------
----------- ------------- -----------
</TABLE>
29
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MAY 31, 1997
---------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ------------- -----------
<S> <C> <C> <C>
Revenues:
Rental............................................... $ 15,947 $ -- $ 15,947
Sales of parts, disposables and equipment............ 2,538 -- 2,538
----------- ------------- -----------
18,485 -- 18,485
Costs and Expenses:
Cost of sales........................................ 806 -- 806
Operating............................................ 7,882 (1,175)(i) 6,707
Selling.............................................. 2,561 (381)(i) 2,180
General and administrative........................... 4,840 (722)(i) 4,118
Depreciation and amortization........................ 1,313 1,839 (ii 3,152
----------- ------------- -----------
Operating Income....................................... 1,083 439 1,522
Other (Charges) Credits:
Interest expense..................................... (113) (3,110)( ii) (3,223)
Interest income...................................... 6 -- 6
Other................................................ 573 -- 573
----------- ------------- -----------
Income (Loss) from Continuing Operations before Income
Taxes................................................ 1,549 (2,671) (1,122)
Income Taxes........................................... 647 (1,096)(iv) (449)
----------- ------------- -----------
Income (Loss) from Continuing Operations............... $ 902 $ (1,575) $ (673)
----------- ------------- -----------
----------- ------------- -----------
</TABLE>
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED APRIL 30, 1998
---------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ------------- -----------
<S> <C> <C> <C>
Revenues:
Rental............................................... $ 15,056 $ -- $ 15,056
Sales of parts, disposables and equipment............ 2,181 -- 2,181
----------- ------------- -----------
17,237 -- 17,237
Costs and Expenses:
Cost of sales........................................ 392 -- 392
Operating............................................ 7,449 (1,260)(i) 6,189
Selling.............................................. 2,367 (400)(i) 1,967
General and administrative........................... 4,688 (793)(i) 3,895
Depreciation and amortization........................ 1,184 1,617 (ii 2,801
----------- ------------- -----------
Operating Income....................................... 1,157 836 1,993
Other (Charges) Credits:
Interest expense..................................... (205) (2,652)( ii) (2,857)
Interest income...................................... 13 -- 13
Other................................................ 252 -- 252
----------- ------------- -----------
Income (Loss) from Continuing Operations before
Income Taxes......................................... 1,217 (1,816) (599)
Income Taxes........................................... 463 (703)(iv) (240)
----------- ------------- -----------
Income (Loss) from Continuing Operations............... $ 754 $ (1,113) $ (359)
----------- ------------- -----------
----------- ------------- -----------
</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.
30
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
(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>
NINE MONTHS EIGHT MONTHS
YEAR ENDED ENDED ENDED
AUGUST 31, 1997 MAY 31, 1997 APRIL 30, 1998
--------------- ----------------- -----------------
<S> <C> <C> <C>
Property, plant and
equipment......... $ 2,178 $ 1,634 $ 1,452
Covenant not to
compete........... 100 75 67
Patents............. 500 375 333
Goodwill............ 1,424 1,068 949
------- ------- -------
4,202 3,152 2,801
Historical.......... (1,740) (1,313) (1,184)
------- ------- -------
$ 2,462 $ 1,839 $ 1,617
------- ------- -------
------- ------- -------
</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%.
31
<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 nine months ended June 30, 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 nine months ended June 30, 1997 and
1998 and the balance sheet data as of June 30, 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>
NINE MONTHS
ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
----------------------------------------------------- --------------------
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 $ 117,674 $ 131,920
Non-recurring items(c).................. -- -- -- (2,200) -- -- (34,567)
Operating income (loss)................. 8,614 1,354 24,202 25,446 29,504 24,508 (19,889)
Interest expense........................ (21,043) (21,335) (29,241) (27,307) (19,107) (15,205) (14,333)
Other (charges) and credits(d).......... 1,918 7,381 1,381 (4,695) (7,504) 768 714
Income (Loss) from continuing operations
before income taxes................... (10,511) (12,600) (3,658) (6,556) 2,893 10,071 (33,508)
Income (Loss) from continuing
operations............................ (5,145) (8,254) (3,346) (6,178) (2,241) 1,427 (21,764)
OTHER DATA:
Rental revenues......................... $ 72,829 $ 69,079 $ 117,043 $ 114,275 $ 124,316 $ 94,341 $ 103,700
Sales revenues.......................... 882 1,729 7,036 11,696 19,922 14,785 20,671
Other revenues(e)....................... 16,283 10,690 8,162 10,095 11,722 8,548 7,549
EBITDA(f)............................... 27,565 22,480 54,363 55,603 59,863 46,604 46,328
Depreciation and amortization........... 18,951 21,126 30,161 30,157 30,359 22,096 31,650
Capital expenditures.................... 24,493 13,257 13,356 18,913 15,458 11,589 17,909
Ratio of earnings to fixed charges(g)... .54 .45 .88 .77 1.14 1.61 (1.28)
Branches and distributors (at end of
period)............................... 74 73 84 84 84 84 101
Equipment units (at end of period)...... 71,231 83,101 123,309 120,388 131,897 129,516 150,050
</TABLE>
32
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<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, AS OF
----------------------------------------------------- JUNE 30,
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 $ 46,847
Property, plant and equipment, net.......... 117,748 149,051 132,823 122,706 113,589 112,706
Total assets................................ 308,827 377,795 334,169 308,423 257,522 318,734
Total debt (including current portion of
long-term debt)........................... 220,464 289,261 256,156 242,210 145,834 477,085
Redeemable preferred stock.................. -- -- -- -- -- 109,482
Stockholders' equity (deficiency)........... 44,574 36,280 31,517 17,445 48,603 (315,401 )
</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 1996 includes restructuring charges of $2.2 million. The nine months
ended June 30, 1998 includes non-recurring merger costs aggregating $34.6
million, including compensation expense of $19.0 million recorded upon the
exercise of options by employees, payment of special transaction bonuses to
certain current and former members of management of approximately $6.0
million and the payment of a transaction fee of $6.0 million to BRS and the
Co-Investors.
(d) 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 nine months ended June
30, 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 $1.8 million and interest income of
$1.6 million. The nine months ended June 30, 1998 includes interest income
of approximately $0.7 million.
(e) For fiscal year 1993, other revenues include revenues from subsidiaries sold
in fiscal 1994 of $5.1 million.
(f) 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.
(g) 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. In the nine months ended June 30, 1998, earnings were
inadequate to cover fixed charges by $35.5 million as a result of
non-recurring merger costs.
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and related notes, and the other financial information, included
elsewhere in this Prospectus.
GENERAL
During fiscal 1997, the Company completed its previously announced strategy
of focusing on MEDIQ/ PRN and divesting substantially all other operating
assets. This strategy resulted in the following divestitures:
(i) In October 1996, PCI Services, Inc. ("PCI") was acquired by Cardinal
Health, Inc. ("Cardinal"). In that transaction, the Company received
1,449,000 shares (adjusted for a stock split) of Cardinal stock in exchange
for its 46% ownership interest in PCI. In January 1997, the Company sold
these shares for $88.4 million.
(ii) In November 1996, the Company sold substantially all the assets of
MEDIQ Mobile X-Ray Services, Inc. ("Mobile X-Ray") for (a) $5.3 million in
cash, (b) shares of Integrated Health Services, Inc. ("IHS") common stock
with an initial value of $5.2 million, which were subsequently sold at an
amount which approximated carrying value and (c) the possibility of the
Company receiving additional cash consideration based upon the occurrence of
certain future events. In fiscal 1997, the Company received approximately
$1.1 million in additional cash consideration relating to the Mobile X-Ray
transaction.
(iii) In December 1996, the Company sold all of its shares of NutraMax
for $36.3 million, or $9.00 per share.
(iv) In May 1997, the Company sold the stock of Health Examinetics, Inc.
("Health Examinetics") for $1.7 million.
As part of the Company's strategy to focus on its core business, the Company
sought to acquire two companies in the medical rental equipment business. In
February 1997, the Company entered into an agreement to acquire Universal
Hospital Services, Inc. ("UHS"), a provider of medical rental equipment. UHS and
the Company mutually terminated the agreement in September 1997 due to Federal
Trade Commission ("FTC") antitrust concerns. See "--Results of Operations--Other
Charges/Credits." In September 1997, the Company consummated the SpectraCair
Acquisition for approximately $1.9 million and the assumption of Huntleigh's
portion of SpectraCair's then outstanding debt of $4.4 million.
Since September 30, 1994, the Company's revenues and operating income have
been driven principally by acquisitions in its core rental business and internal
growth in sales of Parts and Disposables and Outsourcing Services, and to a
lesser extent, its core rental business. During this period, the Company
increased revenues from $81.5 million in fiscal 1994 to $156.0 million in fiscal
1997. In addition, as a result of acquisitions and management initiatives, the
Company increased operating income and operating margins from $1.4 million and
$29.5 million and from 2% and 19%, respectively, during the same period. See
"Business--General."
During the last two fiscal years, operating margins have decreased slightly
as a result of the growth experienced by the Company in sales of Parts and
Disposables revenue share activities and Outsourcing Services. These activities
have lower operating margins and have experienced higher growth rates than the
Company's core rental business.
The Company's rental business is seasonal, with demand historically peaking
during periods of increased hospital census, which generally occur in the winter
months during the Company's second fiscal quarter. Demand is generally at its
lowest point during the Company's first quarter. During the past three 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.
34
<PAGE>
RESULTS OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 1998 COMPARED WITH NINE MONTHS ENDED JUNE 30, 1997
REVENUES FROM CONTINUING OPERATIONS. Revenues were $131.9 million for the
nine months ended June 30, 1998, as compared to $117.7 million in the prior year
period, an increase of $14.2 million, or 12%. This revenue growth was
attributable to a 10% increase in rental revenue and a 40% increase in sales
partially offset by a 12% decrease in other revenue. The growth in rental
revenue was achieved primarily through revenues from the rental of therapeutic
support systems as a result of the SpectraCair Acquisition in September 1997 and
the CHI Acquisition in May 1998. Rental revenue also increased as a result of
revenue share arrangements, the most significant of which commenced in January
1997. These increases were partially offset by a 4% 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 beginning in May 1997. Exclusive
of revenues from such customer, revenues from the core rental business were
comparable to the prior year. 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 medical gases 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.
EBITDA. EBITDA was $46.3 million for the nine months ended June 30, 1998
and was comparable with the prior year period. EBITDA margins decreased to 35.1%
in the current period from 39.6% in the comparable prior year period. The margin
decrease was primarily attributable to the growth of sales of parts and
disposables and the Company's revenue share activities which have lower margins
than the Company's core rental business and the increase in selling and
operating expenses.
EBITDA is defined as income from continuing operations before interest,
taxes, depreciation, amortization and non-recurring merger costs. The Company's
definition of EBITDA may not be comparable to similarly titled measures reported
by other companies. EBITDA is presented because it is a widely accepted
financial indicator of a company's ability to service indebtedness in the
medical equipment rental industry. 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.
OPERATING INCOME (LOSS). The operating loss was $19.9 million for the nine
months ended June 30, 1998, as compared to operating income of $24.5 million in
the prior year period. The decrease in operating income was primarily
attributable to the non-recurring merger costs aggregating $34.6 million (which
included compensation expense of $19.0 million recorded upon the exercise of
options by employees, payment of special transaction bonuses to certain current
and former members of management of approximately $6.0 million and the payment
of a transaction fee of $6.0 million to BRS and the Co-Investors) and a $6.0
million depreciation reserve to write-down certain rental equipment product
lines to net realizable value. Exclusive of the non-recurring merger costs and
the depreciation reserve, operating income decreased $4.8 million to $20.7
million as a result of increased depreciation associated with capital
expenditures in the current and prior year. The aforementioned decrease in core
rental revenue and increased selling and operating expenses as the Company
continued to invest in sales and operational personnel to facilitate the growth
of the SpectraCair division, disposable sales and outsourcing activities also
contributed to the decrease in operating income.
INTEREST EXPENSE. Interest expense decreased 6% to $14.3 million for the
nine months ended June 30, 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 former credit
agreement, partially offset
35
<PAGE>
by the substantial increase in debt incurred in connection with the Merger and
the CHI Medical Acquisition.
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 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
36
<PAGE>
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 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
37
<PAGE>
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.
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
38
<PAGE>
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.
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.
39
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities was $1.9 million in the nine months ended
June 30, 1998, as compared to $2.7 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 $26.0 million, and principally consisted of capital expenditures for
equipment and acquisitions. Net cash provided by financing activities was $33.5
million and primarily consisted of proceeds from the issuance of $190.0 million
of Notes, borrowings under the New Credit Facility of $151.5 million, the
issuance of the Preferred Stock of $138.2 million and the issuance of Units for
gross proceeds of $75.0 million, partially offset by the repurchase of the
Company's common and preferred stock of $377.4 million, the repayment of the
Company's former credit facility of $133.9 million and deferred financing fees
of $20.1 million.
MEDIQ/PRN issued the Old 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. As a result of the consummation of the Transactions and
the CHI Acquisition, the Company has substantial consolidated indebtedness. At
June 30, 1998, the Company had $477.1 million of consolidated indebtedness and a
shareholders' deficit of $315.4 million. 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,
subject to certain conditions, the terms of the Revolving Credit Facility and
the Acquisition Facility provide the Company with the ability to borrow up to
$50.0 million for working capital and $75.0 million for future acquisitions,
respectively. However, at June 30, 1998, pursuant to the terms of the New Credit
Facility and/or the Indentures, the availability under the Revolving Credit
Facility and the Acquisition Facility was limited to $25.9 million and $50.0
million, respectively.
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.
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.
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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.
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. The Company does not
believe the adoption of this standard will have a material impact on the
Company's financial statements.
In July 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." This statement, which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities,
is effective for fiscal years beginning after June 15, 1999, 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.
NPC ACQUISITION. On June 26, 1998, MEDIQ/PRN acquired certain assets of
National Patient Care Systems, Inc. ("NPC") for $11.0 million in cash, including
related costs and expenses and contingent consideration of up to $2.8 million
payable over the next two years if certain revenue targets are achieved by NPC.
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 $196.6 million of revenue and $68.5 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 its approximately
150,000 unit Medical Equipment and Support Surfaces inventory to customers
through 101 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 $156.1 million or 79.4% of total revenue during the LTM Period.
In addition to standard rentals, the Company has entered into several
revenue-share arrangements with OEMs pursuant to which the Company rents Medical
Equipment and sells disposable products produced by the OEMs to the Company's
customers. Because the OEMs own the equipment, such
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arrangements permit the Company to generate additional revenues without any
additional capital investment. In fiscal 1997, the Company began to focus its
efforts on increasing revenue sharing revenues as it believes there are
significant growth opportunities in this area. On a Pro Forma Basis, revenue
sharing rental revenues generated $11.0 million or 7.1% 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 $30.0
million or 15.3% 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 190 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 $10.5 million or
5.3% of total revenue during the LTM Period.
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. The Company's national
distribution network has the most expansive geographic coverage in its
industry with 101 office locations in 40 states and the Company's product
line consist of approximately 150,000 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
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of a Company office location. Moreover, because the Company has
substantially completed its domestic branch network, including its gross
investment in rental inventory of $246.7 million as of June 30, 1998, the
Company can focus its capital expenditures on pursuing its growth strategy
and purchasing Medical Equipment and Support Surfaces for which customer
demand is already identified. The Company believes that it is uniquely
positioned to leverage its installed base of rental equipment and
distribution network to increase revenue sharing rentals, sales of Parts
and Disposables and the provision of Outsourcing Services to its existing
customers.
- SOLID CUSTOMER BASE. During fiscal 1997, approximately 70% of the
Company's Medical Equipment rental revenues were from national accounts
and group purchasing organizations. Substantially all of the Company's
national accounts have been doing business with the Company for several
years. The Company believes that such national health care providers will
increasingly require services on a national level, which the Company
expects will increase its sales to national accounts and group purchasing
organizations.
- ADVANCED INFORMATION SYSTEMS. The Company's sophisticated information
system gives it the ability to track the location of each unit of
equipment, as well as the maintenance history and scheduled maintenance
requirements related to such unit. Accordingly, when a customer requests a
certain piece of equipment, the Company can immediately determine whether
or not such equipment is available at the local office which typically
services such customer. In addition, if the requested equipment is
unavailable at the local office, the Company's information system
automatically determines what potential substitutes are locally available
as well as the approximate time of delivery for the next closest piece of
requested equipment. The Company believes that its advanced information
system makes it well positioned to service the needs of the increasingly
larger and more complex health care providers and provides it with a
competitive advantage in servicing the needs of national accounts and
rapidly growing group purchasing organizations.
- DISCIPLINED APPROACH TO CAPITAL SPENDING. The Company generally makes new
Medical Equipment and Support Surfaces purchases only after customer
demand is identified. As such, new equipment purchases generally have
specifically identifiable cash flows associated with them. Prior to
approving any new equipment purchase, the Company requires that the new
equipment meets certain minimum financial criteria, such as return on
investment, and certain operating criteria, such as expected utilization
rates and maintenance costs. The Company estimates that its cost recovery
period for most new equipment purchases is between 12 and 18 months.
Additionally, the Company's Outsourcing Services and revenue sharing
businesses do not require substantial capital investment.
- STABLE BASE OF CASH FLOW. The Company's rental business has historically
provided it with a stable base of cash flows. Moreover, the Company
believes that its core rental business does not have significant exposure
to economic downturns, because cost pressures during such downturns may
lead to increased rentals and fewer purchases of medical equipment by
customers.
- STRONG AND COMMITTED MANAGEMENT TEAM. The Company is led by a seven person
senior management team with over 180 years combined experience in the
health care industry. In connection with the Transactions, Management
reinvested approximately $4.2 million in common and preferred equity of
Holdings.
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GROWTH STRATEGY
In order to take full advantage of its market leadership and national
distribution network, the Company has introduced new services for its customers
and is pursuing strategic acquisition candidates. The following are the primary
elements of the Company's growth strategy:
- GROW CORE RENTAL BUSINESS. The Company expects that certain regulatory and
industry trends will cause an increase in overall demand for equipment
rentals. The Company believes that it will be able to take advantage of
these industry trends and grow its core rental revenues by (i)
capitalizing on its national customer base, which the Company believes is
the largest in the Medical Equipment rental industry, (ii) focusing on
sub-acute and long term health care providers which are facing substantial
pressure to reduce operating costs, (iii) identifying incremental rental
opportunities through its CAMP programs as it increases the number of
hospitals under CAMP contracts, (iv) increasing revenue sharing
opportunities with rental equipment manufacturers and (v) continuing to
market and grow Support Surfaces as a clinically efficient lower cost
alternative to specialty beds.
- LEVERAGE INFRASTRUCTURE TO INCREASE REVENUES IN NON-CAPITAL INTENSIVE
BUSINESSES. Because the Company's national distribution network has the
most expansive geographic coverage and broadest product line in its
industry, the Company believes that it can increase revenues in certain
non-capital intensive businesses by leveraging its infrastructure. In
particular, the Company expects to expand its marketing of Outsourcing
Services, revenue sharing activities and sales of Parts and Disposables to
its existing rental customer base. Moreover, the Company plans to utilize
its established distribution channels to develop these businesses without
incurring significant incremental costs. The Company believes that
leveraging its infrastructure to develop these businesses will produce an
increased return on assets, as these businesses require relatively low
levels of capital investment.
- FOCUS ON DEVELOPING ASSET MANAGEMENT PROGRAMS. The Company believes that
its CAMP programs will continue to grow as a result of an increase in
outsourcing trends related to equipment management and equipment related
services as well as an increase in competitive pressure facing health care
providers. Certain health care providers that have adopted CAMP have been
able to achieve cost savings through a reduction of biomedical and other
hospital staff, a decrease in equipment maintenance expenses and an
increase in asset utilization rates. Additionally, they have been able to
increase equipment utilization and capture increased patient charges as a
result of the superior information gathering capability of CAMP. Hospitals
under CAMP contracts increased from three as of December 31, 1996 to 14 as
of June 30, 1998.
- ENTER INTO STRATEGIC PARTNERSHIPS. The Company has and will continue to
seek new strategic partnerships to increase revenues. In biomedical
repair, the Company plans to increase revenues by partnering with
equipment manufacturers to provide biomedical repair services for their
equipment. In December 1997, the Company entered into an agreement with
Siemens, a leading provider of medical equipment, to jointly provide
biomedical repair services to hospitals and other health care providers.
The Company believes that strategic partnerships such as the Siemens
relationship will provide continued growth opportunities. In 1997, the
Company entered into a contract with NuTech to be the exclusive rental
source of circulatory foot pumps manufactured by NuTech and the exclusive
distributor of related disposables. The Company also entered into a
contract with Siemens to be the exclusive distributor of certain Siemens
accessories and parts in 1996. Principally as result of these efforts,
sales related to strategic partnerships increased in fiscal 1997 to $17.4
million from $2.6 million in fiscal 1996.
- PURSUE STRATEGIC ACQUISITIONS. The Company has historically acquired
complementary Medical Equipment and Support Surfaces rental companies and
integrated them effectively into its existing operations. Upon acquiring
such businesses, the Company has typically been able to realize cost
savings by eliminating corporate overhead, rationalizing branch locations
and reducing personnel.
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Since September 30, 1994, acquisitions in its core rental business coupled
with internal growth have resulted in an increase in the Company's
revenues from $81.5 million in fiscal 1994 to $196.6 million on a Pro
Forma Basis 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.
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
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medical products, CHI is a national sales, rental and service corporation
specializing in patient beds, overlays, mattress replacement systems, pressure
relieving pads and surfaces and other therapeutic support surfaces with
approximately 75 business locations nationwide. CHI has, among other things,
developed technology used in the manufacture of beds and frameless systems for
hospitals, extended care facilities and homes to effectively treat the severe
conditions and complications inherent to patients who are bed confined. CHI
offers a complete line of portable pressure relieving products to provide
hospitals and extended care facilities with an array of bed therapies in a cost
effective manner. The assets acquired under the 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,
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rather than incur the substantial capital related costs associated with owning
or leasing equipment for which they may not be reimbursed during non-use
periods.
MEDICAL EQUIPMENT AND SUPPORT SURFACES RENTALS
The Company operates the largest Medical Equipment rental business in the
United States, serving more than 5,000 hospitals, alternate care and home care
providers, nursing homes and other health care providers nationwide. The Company
offers the broadest selection of Medical Equipment for rent in the country, and
Management believes it is better positioned than any of its rental competitors
to be a "single-source" supplier of Medical Equipment to its customers. The
Company offers its customers a wide selection of rental programs including (i)
daily, weekly or monthly rentals with fixed rate terms, (ii) longer-term rentals
with pricing related to the length of the rental term and (iii) "usage" rentals
on a per use, per hour or per day basis.
NATIONAL SCOPE. The Company rents its inventory to customers through 101
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 190 experienced biomedical technicians and more than 330 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.
DIVERSE PRODUCT OFFERING. The Company's approximately 150,000 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>
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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
anticipates that the recent purchase of specified assets and rights of CH
Medical related to the manufacture, sale and rental of specialty patient beds
and Support Surfaces 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
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
49
<PAGE>
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 190 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 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 12 asset management programs covering 14
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 190 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
50
<PAGE>
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.
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 66
promotional sales representatives as of June 30, 1998. SpectraCair's sales and
marketing efforts are conducted through a separate 58 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.
51
<PAGE>
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 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
52
<PAGE>
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 June 30, 1998 the Company had approximately 1,258 employees, 496 of
which are salaried, 762 of which are hourly and 124 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 101 office locations in major
metropolitan areas nationwide. Eighty-eight of such sites contain office and
warehouse space and are leased by the Company. The remaining 13 office locations
are operated by 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"),
53
<PAGE>
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.
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, the CH
Medical Business 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 the CH Medical Business 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
54
<PAGE>
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 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. In
July 1998, the Company reached a settlement with MHM which called for MHM to pay
the Company $3.0 million in cash in full satisfaction of all amounts due the
Company. The Company received the cash in July 1998 and will recognize the
settlement in other income in the fourth quarter of fiscal 1998.
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.
In May 1998, InnoServ Technologies, Inc. ("InnoServ") entered into a merger
agreement with GE Medical Systems, Inc. ("GEMS") by which GEMS agreed to acquire
InnoServ for approximately $16.0 million. No date has been scheduled for
closing. Pursuant to the terms of the Company's November 1997 stock purchase
agreement with InnoServ, under a change of control the Company is entitled to
receive a portion of the sales proceeds. However, the calculation of the amount
due to the Company is currently in dispute. Accordingly, the matter is in
arbitration pursuant to the terms of the stock purchase agreement. The Company
fully reserved its investment in InnoServ in fiscal 1997. The Company will
recognize a gain equal to the cash proceeds when they are received.
In July 1998, MEDIQ Mobile X-Ray Services, Inc., a subsidiary of MEDIQ/PRN
whose assets were sold in November 1996, was notified that it is the subject of
an investigation by the Department of Justice and the Office of the Inspector
General of the Department of Health and Human Services. The Company has not yet
been informed of the nature or scope of the investigation.
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.
55
<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--Holders
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 and as a Director of Holdings and MEDIQ/PRN
since October 1995 and December 1994, respectively. 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 has been a Director of Holdings since the consummation of
the Transactions. Mr. 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 has been a Director of Holdings since the consummation
of the Transactions. Mr. 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., Acapulco Restaurants, Inc., B&G Foods, Inc. and
HealthPlus Corporation.
ROBERT T. THOMPSON has been a Director of Holdings since the consummation of
the Transactions. Mr. 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.
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<PAGE>
L. JOHN WILKERSON has been a Director of Holdings since the consummation of
the Transactions. Mr. Wilkerson has been a General Partner in Galen Associates,
a risk capital partnership since 1990 ("Galen Associates"). Since 1980, Mr.
Wilkerson has also held various positions with The Wilkerson Group, a dedicated
health care products consulting practice, including his current position as a
consultant to the Wilkerson Group. Mr. Wilkerson serves as a director of British
Biotechnology PLC 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 is 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 do 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. The members of the
Compensation Committee are Messrs. Bruckmann, Thompson and Wilkerson. 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 members of the Audit Committee are Messrs. Rotko,
Sherrill and Thompson.
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 Holdings and its
subsidiaries, including MEDIQ/PRN, during fiscal 1997 (each such person being
referred to as a "Named Executive Officer").
57
<PAGE>
SUMMARY COMPENSATION TABLE
<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.................................................... 1997 187,500 94,000 25,000
Senior Vice President - Finance and Chief Financial Officer of 1996 177,000 70,000 85,000
Holdings and Senior Vice President and Chief Financial Officer 1995 165,000 74,000 --
of MEDIQ/PRN
</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 prior to the consummation of the Transactions based on
the cash portion of the Merger Consideration.
<TABLE>
<CAPTION>
CASH CONSIDERATION
OPTIONS OPTIONS 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 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
58
<PAGE>
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.
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
59
<PAGE>
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.
The following table shows the estimated annual pension benefits payable upon
retirement to participants of the Pension Plan for various salary levels and
years of service.
<TABLE>
<CAPTION>
ESTIMATED ANNUAL BENEFITS
PAYABLE AT AGE 65 FOR VARIOUS
AVERAGE ANNUAL YEARS OF PLAN MEMBERSHIP
COMPENSATION DURING ------------------------------------------
PLAN MEMBERSHIP 10 20 30 40
- --------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
$500,000..................................... $ 19,132 $ 37,342 $ 55,482 $ 64,722
400,000..................................... 19,132 37,342 55,482 64,722
300,000..................................... 19,132 37,342 55,482 64,722
200,000..................................... 19,132 37,342 55,482 64,722
100,000..................................... 12,132 23,342 34,482 40,222
</TABLE>
During fiscal 1997, the maximum amount of annual compensation which may be
included for Pension Plan purposes was $150,000. The figures shown above apply
under the Pension Plan as of September 30, 1997. Estimated annual benefits are
determined in part by the average Social Security wage base during the 35 years
ending in the year of Social Security normal retirement age. The benefit amounts
listed are not subject to any deduction for Social Security or other offset
amounts. As a result of limitations imposed under Federal income tax law, the
maximum annual benefit payable under the Pension Plan for the fiscal year ending
September 30, 1997 is $120,000, although the amount will be actuarially adjusted
in accordance with Federal income tax regulations if payments commence prior to
or following the date that unreduced Social Security benefits become payable. As
of September 30, 1997, Messrs. Carroll, Sandler and Kaplan had nine, nine and 24
years of service 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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Carroll, Holdings' President and Chief Executive Officer, Michael J.
Rotko, Sheldon M. Bonovitz and H. Scott Miller served on the Compensation
Committee of the Board of Directors during fiscal 1998 prior to the consummation
of the Transactions. Messrs. Bruckmann, Thompson and Wilkerson have served on
the Compensation Committee since July 1998. Mr. Carroll, however, did not
participate on the Compensation Committee as to any matter relating to his
compensation.
60
<PAGE>
OWNERSHIP OF CAPITAL STOCK
The following table sets forth certain information with respect to (i) the
beneficial ownership of the Common Stock and each series of Preferred Stock of
Holdings by each person or entity who owns five percent or more thereof and (ii)
the beneficial ownership of each class of equity securities of Holdings by each
director of Holdings who is a stockholder, the Chief Executive Officer of
Holdings and the other executive officers named in the "Summary Compensation
Table" above who are stockholders and all directors and executive officers of
Holdings as a group. Unless otherwise specified, all shares are directly held.
<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)............ 465,259/43.3% 3,155,841/40.3% 899,057/30.0% 1,625,015/54.2%
Two Greenwich Plaza
Suite 100
Greenwich, CT 06830
Health Care Capital Partners, L.P. (3)................ 199,013/18.5% 1,349,896/17.3% 384,567/12.9% 695,092/23.2%
c/o Ferrer Freeman Thompson & Co. LLC
The Mill
70 Glenville Street
Greenwich, CT 06831
Galen Partners III, L.P.(4)........................... 132,675/12.4% 899,930/11.5% 256,378/8.5% 463,395/15.4%
610 Fifth Avenue
Rockefeller Center
New York, New York 10020
Michael J. Rotko(5)................................... 54,891/5.1% 389,108/5.0% 475,017/15.9% --
Bessie G. Rotko(6).................................... -- 486,506/6.2% 1,340,219/44.7% --
Rotko 1983 Trust...................................... -- 243,253/3.1% 475,017/15.9% --
--Michael J. Rotko Share(7)
Rotko 1983 Trust...................................... -- 243,253/3.1% 475,017/15.9% --
--Judith M. Shipon Share(8)
Judith M. Shipon(9)................................... 54,891/5.1% 243,253/3.1% 475,017/15.9% --
Thomas E. Carroll..................................... 56,888/5.3% 94,816/1.2% 19,724* 35,650*/1.2%
Jay M. Kaplan......................................... 10,077* 29,724* 5,149* 9,306*
Bruce C. Bruckmann(10)................................ 497,531/46.3% 3,374,739/43.1% 961,418/32.0% 1,737,731/57.9%
Stephen C. Sherrill(10)............................... 497,531/46.3% 3,374,739/43.1% 961,418/32.0% 1,737,731/57.9%
Robert T. Thompson(11)................................ 199,013/18.5% 1,349,896/17.3% 384,567/12.9% 695,092/23.2%
L. John Wilkerson(12)................................. 132,675/12.4% 899,930/11.5% 256,378/8.5% 463,395/15.4%
All directors and executive officers as a group
(7 persons)......................................... 951,075/88.5% 6,138,213/78.5% 2,102,253/70.1% 2,941,174/98.0%
</TABLE>
- ------------------------
* Less than one percent of total outstanding Common Stock, Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock.
(1) Includes 74,821 shares of Common Stock purchased by the Management
Stockholders following consummation of the Transactions. In addition,
Holdings expects to grant options to acquire Common Stock to certain
employees. The shares of Common Stock issuable upon the exercise of such
options would equal, in the aggregate, up to an additional 5.0% 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) 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) Includes 7,947 shares of Common Stock, 53,907 shares of Series A Preferred
Stock, 15,357 shares of Series B Preferred Stock and 27,758 shares of Series
C Preferred Stock held by Health Care Executive Partners, L.P. ("HCEP").
Health Care Capital Partners, L.P. ("HCCP" and, together with HCEP, the "FFT
Entities") disclaims beneficial ownership of such shares. The FFT
61
<PAGE>
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 voting 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) Includes 11,660.08 shares of Common Stock, 79,089.9 shares of Series A
Preferred Stock, 22,531.65 shares of Series B Preferred Stock and 40,725.24
shares of Series C Preferred Stock held by Galen Partners International III,
L.P. ("Galen International") and 527.47 shares of Common Stock, 3,577.85
shares of Series A Preferred Stock, 1,019.28 shares of Series B Preferred
Stock and 1,842.32 shares of Series C Preferred Stock held by Galen Employee
Fund III, L.P. ("Galen Employee Fund"). Galen Partners III, L.P. ("Galen
Partners" and, together with Galen International and Galen Employee Fund,
the "Galen Entities") disclaims beneficial ownership of such shares. L. John
Wilkerson is a general partner of the general partner of each of Galen
Partners and Galen International. Mr. Wilkerson disclaims beneficial
ownership of the shares held by Galen Partners and Galen International,
except to the extent of his proportionate partnership interest therein.
(5) Includes 243,253 shares of Series A Preferred Stock and 475,017 shares of
Series B Preferred Stock held by the Rotko 1983 Trust--Michael J. Rotko
Share, of which Mr. Rotko is a co-trustee.
(6) Includes 243,253 shares of Series A Preferred Stock and 475,017 shares of
Series B Preferred Stock held by the Rotko 1983 Trust-Michael J. Rotko
Share, of which Ms. Rotko is a co-trustee, and 243,253 shares of Series A
Preferred Stock and 475,017 shares of Series B Preferred Stock held by the
Rotko 1983 Trust--Judith M. Shipon Share, of which Ms. Rotko is a
co-trustee.
(7) Michael J. Rotko, Bessie G. Rotko and PNC Bank Corp. share voting and
dispositive power as co-trustees of the Rotko 1983 Trust--Michael J. Rotko
Share.
(8) Judith M. Shipon, Bessie G. Rotko and PNC Bank Corp. share voting and
dispositive power as co-trustees of the Rotko 1983 Trust--Judith M. Shipon
Share.
(9) Includes 243,253 shares of Series A Preferred Stock and 475,017 shares of
Series B Preferred Stock held by the Rotko 1983 Trust--Judith M. Shipon
Share, of which Ms. Shipon is a co-trustee.
(10) Includes shares which are owned by BRS and certain other entities and
individuals affiliated with BRS. Although Messrs. Bruckmann and Sherrill may
be deemed to share beneficial ownership of such shares, such individuals
disclaim beneficial ownership thereof. See Note 2 above.
(11) Consists of shares which are owned by the FFT Entities. Although Mr.
Thompson may be deemed to share beneficial ownership of such shares, such
individual disclaims beneficial ownership thereof. See Note 3 above.
(12) Consists of shares which are owned by the Galen Entities. Although Mr.
Wilkerson may be deemed to share beneficial ownership of such shares, such
individual disclaims beneficial ownership thereof, except to the extent of
his proportionate partnership interest therein. See Note 4 above.
62
<PAGE>
HOLDERS AGREEMENT
Upon consummation of the Transactions, MQ, Holdings, the BRS Entities, the
Co-Investors, the Rotko Entities and the Managment Stockholders entered into a
Securities Purchase and Holders Agreement (the "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 Holders Agreement.
Pursuant to the Holders 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 Trusts, for so long as the Rotko Entities
collectively own 5% of the Common Stock on a fully diluted basis; (b) one person
designated by the FFT Entities for so long as they (and their respective
affiliates) own at least 5% of the Common Stock on a fully diluted basis; (c)
one person designated by the Galen Entities for so long as they (and their
respective affiliates) own at least 5% of the Common Stock on a fully diluted
basis; (d) the Chief Executive Officer of Holdings; and (e) such number of
persons as the BRS Entities may determine; provided that if the number of
directors designated by BRS is greater than three, such additional directors
shall be independent of the Company and shall have been approved by the FFT
Entities and the Galen Entities.
The Holders Agreement contains provisions which, with certain exceptions,
restrict the parties thereto from transferring any equity securities of Holdings
except pursuant to the terms of the Holders Agreement. Subject to certain
exceptions, in the event that certain holders of Common Stock and Preferred
Stock propose to sell at least 2% of such securities then outstanding, the
parties to the Holders Agreement have the right to require the proposed
transferee to purchase, on the same terms and conditions as given to the
proposed transferor, a pro rata portion of like securities held by such parties
to the Holders Agreement. 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, Holdings must first offer to each of the other parties to the
Holders Agreement who hold in excess of 5% of Common Stock of Holdings (or, in
the case of the Rotko Entities, such entities in the aggregate) and each
Management Stockholder who was a Management Stockholder as of the date of
consummation of the Transactions and who 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 prior to the consummation of a public offering with respect to such
class or series of securities, holders of a majority of shares of Common Stock
held by the parties to the Holders Agreement 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) or holders of a
majority of the then outstanding shares of any class or series of the Preferred
Stock held by the parties to the Holders Agreement approve the sale of all of
such class or series of stock, the parties to the Holders Agreement 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
Holders Agreement provides that, subject to certain exceptions, if Holdings
shall redeem shares of Series A Preferred Stock or Series C Preferred Stock, BRS
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 BRS Entities, the
Co-Investors, the Rotko Entities and the Management Stockholders have been
granted the right to participate, or "piggyback," in certain registrations of
Series A Preferred Stock and Series B Preferred Stock by Holdings.
The Holders Agreement contains 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.
63
<PAGE>
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
Holdings is authorized to issue up to 30,000,000 shares of Common Stock. As
of the date of this Prospectus, 1,074,821 shares of Common Stock were
outstanding and there were approximately 45 holders of the 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 Holders 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.
64
<PAGE>
OPTIONAL REDEMPTION. Holdings may, at its option, redeem at any time or
from time to time, from any source of funds legally available therefor, in whole
or in part, any or all of the shares of Series A Preferred Stock, at the
redemption prices set forth below, plus an amount equal to full cumulative
dividends (whether or not earned or declared) accrued and unpaid thereon,
including Additional Dividends, to the redemption date. The redemption prices
for optional redemptions are as follows:
<TABLE>
<CAPTION>
REDEMPTION PRICE
REDEMPTION DATE PER SHARE
- ---------------------------------------------------------------------------- -----------------
<S> <C>
On or before December 31, 1999.............................................. $ 11.00
On or after January 1, 2000
but before January 1, 2002................................................ $ 10.50
On or after January 1, 2002................................................. $ 10.00
</TABLE>
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. Except as provided in the Holders Agreement, 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
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Preferred Stock at a rate equal to $1.325 per share per annum. All dividends are
cumulative and compounding, whether or not earned or declared, accrue on a daily
basis from the date of issuance of Series B Preferred Stock and are payable
semi-annually in arrears. Dividends with respect to the Series B Preferred Stock
can only be paid by Holdings to the extent funds are legally available therefor
under the DGCL. The New Credit Facility and the Indentures do, and any future
credit agreements or indentures to which MEDIQ/PRN or Holdings becomes a party
may, restrict the ability of Holdings to pay cash dividends.
LIQUIDATION PREFERENCE. Upon any voluntary or involuntary liquidation,
dissolution or winding up of Holdings, the holders of all shares of Series B
Preferred Stock then outstanding will be entitled to be paid out of the assets
of Holdings available for distribution to its stockholders an amount in cash
equal to $10.00 per share, plus an amount equal to full cumulative dividends
(whether or not earned or declared) accrued 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. Except as provided in the Holders Agreement, 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.
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.
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LIQUIDATION PREFERENCE. Upon any voluntary or involuntary liquidation,
dissolution or winding up of Holdings, the holders of all shares of Series C
Preferred Stock then outstanding will be entitled to be paid out of the assets
of Holdings available for distribution to its stockholders an amount in cash
equal to $10.00 per share, plus an amount equal to full cumulative dividends
(whether or not earned or declared) accrued and unpaid thereon, including
additional dividends, to the date of final distribution, after distributions are
made on the Series A Preferred Stock and the Series B Preferred Stock (the
"Series C Liquidation Preference"). After payment in full in accordance with the
preceding sentence, the holders of the Series C Preferred Stock shall not be
entitled to any further participation in any distribution in the event of
liquidation, dissolution or winding up of the affairs of Holdings with respect
to the shares of Series C Preferred Stock.
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. Except as provided in the Holders Agreement, 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.
OTHER PREFERRED STOCK
In addition to the Preferred Stock, Holdings' Certificate of Incorporation
authorizes the issuance of 20,000,000 shares of preferred stock, par value $.01
per share. Such shares of preferred stock may be issued by the Board of
Directors of Holdings from time to time in one or more series with such
preferences, terms and rights as the Board of Directors may determine without
further action by the stockholders of Holdings. Accordingly, the Board of
Directors has the power to fix the dividend rate and to establish the
provisions, if any, relating to dividends, voting rights, redemption rates,
sinking funds, liquidation preferences and conversion rights for any series of
preferred stock issued in the future. The issuance of such preferred stock may
have the effect of delaying, deferring or preventing a change in control of
Holdings without further action by the stockholders.
ANTI-TAKEOVER STATUTE
Section 203 of the DGCL prohibits certain transactions between a Delaware
corporation whose voting stock is publicly traded or held of record by more than
2,000 stockholders and an interested stockholder (which term is defined therein
as a person who, together with any affiliates and/or associates of such person,
beneficially owns, directly or indirectly, 15% or more of the outstanding voting
shares of a Delaware corporation). This provision prohibits certain business
combinations (defined broadly to include mergers, consolidations, sales or other
dispositions of assets having an aggregate value in excess of 10% of the
consolidated assets of the corporation, and certain transactions that would
increase the interested
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stockholder's proportionate share ownership in the corporation) between an
interested stockholder and a corporation for a period of three years after the
date the interested stockholder became an interested stockholder unless (i) the
business combination is approved by the corporation's Board of Directors prior
to the date the interested stockholder became an interested stockholder, (ii)
the interested stockholder acquired at least 85% of the voting stock of the
corporation in the transaction in which it becomes an interested stockholder or
(iii) the business combination is approved by a majority of the Board of
Directors and by the affirmative vote of 66 2/3% of the votes entitled to be
cast by disinterested stockholders at an annual or special meeting. Although
Holdings is not subject to the provisions of Section 203 of the DGCL as of the
date of this Prospectus, the Certificate of Incorporation and By-laws of
Holdings do not exclude Holdings from the restrictions imposed under Section 203
of the DGCL and Holdings may become subject to Section 203 of the DGCL in the
future.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate of Incorporation of Holdings provides that the directors of
Holdings shall be entitled to the benefits of all limitations on the liability
of directors generally that are now or hereafter become available under the DGCL
and that, without limiting the generality of the foregoing, no director shall be
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 DGCL, relating to prohibited
dividends or distributions or the repurchase or redemption of stock, or (iv) for
any transaction from which the director derived an improper personal benefit.
The By-laws of Holdings provide that Holdings shall indemnify any person who
was or is party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (a "proceeding"), by reason of the fact that such person is or
was a director or officer of Holdings or a constituent corporation absorbed in a
consolidation or merger, or is or was serving at the request of Holdings or a
constituent corporation absorbed in a consolidation or merger, as a director or
officer of another corporation, partnership, joint venture, trust or other
enterprise, or is or was a director or officer of Holdings serving at its
request as an administrator, trustee or other fiduciary of one or more of the
employee benefit plans of Holdings or other enterprise, against expenses
(including attorneys' fees), liability and loss actually and reasonably incurred
or suffered by such person in connection with such proceeding, whether or not
the indemnified liability arises or arose from any threatened, pending or
completed proceeding by or in the right of Holdings, except to the extent that
such indemnification is prohibited by applicable law. The By-laws of Holdings
further provide that expenses incurred by a director or officer of Holdings in
defending a proceeding shall be paid by Holdings in advance of the final
disposition of such proceeding subject to the provisions of any applicable
statute.
The foregoing summary of the Certificate of Incorporation and By-laws of
Holdings is qualified in its entirety by reference to the relevant provisions of
Holdings' Certificate of Incorporation and By-laws, which are filed as exhibits
to the Registration Statement.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATIONSHIPS AND TRANSACTIONS WITH 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 Trusts 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. In July
1998, the Company reached a settlement with MHM which called for MHM to pay the
Company $3.0 million in cash in full satisfaction of all amounts due the
Company. The Company received the cash in July 1998. 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.
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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 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
Effective September 3, 1998 the Management Stockholders purchased shares of
Common Stock, representing approximately 6.1% 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. Such Common Stock so acquired by an employee of the Company is
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 5.0% 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 were 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 on June 1 and December
1 of each year 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 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 21, 1998 (the
"Registration Rights Agreement") among Holdings, MEDIQ/PRN, the Subsidiary
Guarantors 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 October
26, 1998. The Exchange Offer Registration Statement became effective under the
Securities Act on October , 1998, and Holdings commenced its offer to
exchange the New Debentures for surrender of the Debentures on such date. Under
certain circumstances, Holdings may be required under the Registration Rights
Agreement to file a shelf registration statement to cover resales of the
Debentures. 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
Exchangeable Debentures by the Company following the Merger. Accordingly,
Holdings received approximately $5.6 million in cash in respect of the NutraMax
note in July 1998.
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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 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.
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The Term Loans will amortize on a quarterly basis commencing September 30,
1999 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.
At June 30, 1998, pursuant to the terms of the New Credit Facility and/or
the Indentures, the availability under the Revolving Credit Facility and the
Acquisition Facility was limited to $25.9 million and $50.0 million,
respectively.
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" and, together with the
Debenture Indenture, the "Indentures") 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 on June 1 and
December 1 of each year 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, jointly and
severally, on an unsecured 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
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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>
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 October 26, 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. 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
was determined in connection with the offering and pricing of the Units. 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 became eligible to trade separately from the Debentures on 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
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paid (i) in cash or by certified or official bank check or by wire transfer to
an account designated by 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
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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 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 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
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
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Warrants will be required to deliver information to be used in connection with
the Registration Statement in order to have its Warrants included in the
Registration Statement.
REGISTRATION OF UNDERLYING COMMON STOCK
Holdings is required under the Warrant Agreement to use its best efforts to
cause the 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 the 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 keep the 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. On
October , 1998, an exchange offer for the Debentures was commenced.
"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 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, Holdings believes that, if presented with the issue, it
is likely that the Internal Revenue Service (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
82
<PAGE>
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
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
one year 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 one year 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.
83
<PAGE>
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.
84
<PAGE>
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
85
<PAGE>
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.
Certain partners of that firm are limited partners of BRS and/or stockholders of
Holdings.
EXPERTS
The consolidated financial statements of MEDIQ Incorporated and subsidiaries
and the related financial statement schedule 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.
The consolidated financial statements of CH Medical, Inc. and subsidiaries
as of August 31, 1997 and 1996, and for each of the three years in the period
ended August 31, 1997, included in this Prospectus have been audited by BDO
Seidman, LLP, independent certified public accountants, as stated in their
report appearing herein, and are included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
86
<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--Nine and Three Months Ended June 30, 1998 and
1997..................................................................................................... F-25
Unaudited Condensed Consolidated Balance Sheets--June 30, 1998 and
September 30, 1997....................................................................................... F-26
Unaudited Condensed Consolidated Statements of Cash Flows--Nine Months Ended June 30, 1998 and 1997........ F-27
Notes to Unaudited Condensed Consolidated Financial Statements............................................. F-28
CH MEDICAL, INC. AND SUBSIDIARIES
Report of Independent Certified Public Accountants......................................................... F-36
Consolidated Statements of Net Assets--August 31, 1997 and 1996............................................ F-37
Consolidated Statements of Income--Three Years Ended August 31, 1997....................................... F-38
Consolidated Statements of Cash Flows--Three Years Ended August 31, 1997................................... F-39
Summary of Accounting Policies............................................................................. F-40
Notes to Consolidated Financial Statements................................................................. F-42
Unaudited Consolidated Statements of Net Assets--February 28, 1998......................................... F-45
Unaudited Consolidated Statements of Income--Six Months Ended February 28, 1998 and 1997................... F-46
Unaudited Consolidated Statements of Cash Flows--Six Months Ended February 28, 1998 and 1997............... F-47
Unaudited Summary of Accounting Policies................................................................... F-48
Unaudited Notes to Consolidated Financial Statements....................................................... F-50
</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 NINE MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ----------------------
1998 1997 1998 1997
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue:
Rental........................................................................ $ 33,706 $ 31,148 $ 103,700 $ 94,341
Sales......................................................................... 6,692 5,327 20,671 14,785
Other......................................................................... 2,543 3,150 7,549 8,548
---------- --------- ---------- ----------
42,941 39,625 131,920 117,674
Costs and Expenses:
Cost of sales................................................................. 5,455 4,261 16,725 12,020
Operating..................................................................... 14,415 11,263 42,864 33,491
Selling....................................................................... 3,912 3,152 11,469 9,722
General and administrative.................................................... 5,186 5,803 14,534 15,837
Non-recurring merger costs.................................................... 34,204 -- 34,567 --
Depreciation and amortization................................................. 15,064 7,365 31,650 22,096
---------- --------- ---------- ----------
78,236 31,844 151,809 93,166
---------- --------- ---------- ----------
Operating Income (Loss)......................................................... (35,295) 7,781 (19,889) 24,508
Other (Charges) Credits:
Interest expense.............................................................. (7,098) (3,283) (14,333) (15,205)
Equity participation--repurchase of MEDIQ/PRN warrants........................ -- -- -- (11,047)
Gain on sale and market appreciation of Cardinal Health stock................. -- -- -- 9,213
Gain on NutraMax note receivable.............................................. -- 565 -- 1,760
Other--net.................................................................... 235 (302) 714 842
---------- --------- ---------- ----------
Income (Loss) from Continuing Operations before Income Taxes and Extraordinary
Item.......................................................................... (42,158) 4,761 (33,508) 10,071
Income Tax Expense (Benefit).................................................... (15,632) (2,200) (11,744) 8,644
---------- --------- ---------- ----------
Income (Loss) before Discontinued Operations and Extraordinary Item............. (26,526) 2,561 (21,764) 1,427
Discontinued Operations (net of taxes).......................................... -- (1,092) -- 36,083
Extraordinary Item--Early Retirement of Debt (net of taxes)..................... (4,098) (76) (4,098) (7,002)
---------- --------- ---------- ----------
Net Income (Loss)............................................................... (30,624) 1,393 (25,862) 30,508
Dividends Preferred Stock....................................................... (1,600) -- (1,600) --
---------- --------- ---------- ----------
Net Income (Loss) Available for Common Shareholders............................. $(32,224) $ 1,393 $(27,462) $ 30,508
---------- --------- ---------- ----------
---------- --------- ---------- ----------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
F-25
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1998 1997
------------ ----------------
<S> <C> <C>
(Unaudited) (See Note)
ASSETS
Current Assets:
Cash............................................................................ $ 9,203 $ 3,639
Accounts receivable--net........................................................ 52,315 39,686
Inventories..................................................................... 18,316 13,047
Deferred income taxes........................................................... 3,202 6,967
Income taxes receivable......................................................... -- 4,917
Other current assets............................................................ 1,077 1,495
------------ --------
Total Current Assets.......................................................... 84,113 69,751
Property, plant and equipment--net................................................ 112,706 113,589
Goodwill--net..................................................................... 89,570 57,056
Deferred financing fees........................................................... 20,095 7,344
Other Assets...................................................................... 12,250 9,812
------------ --------
Total assets...................................................................... $ 318,734 $ 257,552
------------ --------
------------ --------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Accounts payable................................................................ $ 16,260 $ 8,793
Accrued expenses................................................................ 19,395 23,578
Current portion of long-term debt............................................... 1,611 7,648
------------ --------
Total Current Liabilities..................................................... 37,266 40,019
Senior debt....................................................................... 275,419 128,131
Subordinated debt................................................................. 200,055 10,055
Deferred income taxes and other liabilities....................................... 11,913 30,744
Mandatorily redeemable preferred stock:
Series A preferred stock........................................................ 79,127 --
Series C preferred stock........................................................ 30,355 --
Stockholders' Equity (Deficiency)................................................. (315,401) 48,603
------------ --------
Total Liabilities and Stockholders' Equity (Deficiency)........................... $ 318,734 $ 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>
NINE MONTHS ENDED
JUNE 30,
-----------------------
<S> <C> <C>
1998 1997
---------- -----------
Cash Flows from Operating Activities:
Net income (loss)........................................................................ $ (25,862) $ 30,508
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Income from discontinued operations.................................................... -- (36,083)
Gain on sale of Cardinal shares........................................................ -- (9,213)
Equity participation--repurchase of MEDIQ/PRN warrants................................. -- 11,047
Other--net............................................................................. 23,943 1,046
---------- -----------
Net cash used in operating activities.................................................... (1,919) (2,695)
Cash Flows from Investing Activities:
Acquisitions........................................................................... (11,032) --
Proceeds from sale of discontinued operations.......................................... -- 124,995
Purchase of equipment.................................................................. (17,909) (11,589)
Collections on note receivable......................................................... 2,250 --
Repurchase of MEDIQ/PRN warrant........................................................ -- (12,500)
Other.................................................................................. 654 (2,448)
---------- -----------
Net cash provided by (used in) investing activities.................................... (26,037) 98,458
Cash Flows from Financing Activities:
Repurchase of common and preferred stock............................................... (377,416) --
Issuance of subordinated notes......................................................... 190,000 --
Borrowings............................................................................. 151,499 214,000
Debt repayments........................................................................ (133,872) (302,228)
Issuance of Series A preferred stock................................................... 78,235 --
Issuance of units...................................................................... 75,000 --
Issuance of Series B preferred stock................................................... 30,000 --
Issuance of Series C preferred stock................................................... 30,000 --
Issuance of common stock............................................................... 10,000 --
Deferred financing fees................................................................ (20,056) (8,874)
Exercise of stock options.............................................................. 130 272
---------- -----------
Net cash provided by (used in) financing activities.................................... 33,520 (96,830)
---------- -----------
Increase (decrease) in cash.............................................................. 5,564 (1,067)
Cash:
Beginning balance...................................................................... 3,639 3,219
---------- -----------
Ending balance......................................................................... $ 9,203 $ 2,152
---------- -----------
---------- -----------
Supplemental disclosure of cash flow information:
Interest paid.......................................................................... $ 11,005 $ 16,760
---------- -----------
---------- -----------
Income taxes paid (refunded)........................................................... $ (2,788) $ 5,056
---------- -----------
---------- -----------
Supplemental disclosure of non-cash investing and financing activities:
Acquisition of CH Medical, Inc. with term loans........................................ $ (48,501) --
---------- -----------
---------- -----------
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 June 30, 1998 and the
condensed consolidated statements of operations and cash flows for the nine
months ended June 30, 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 June 30, 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 June 30, 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--THE MERGER
On May 29, 1998, pursuant to the terms of an Agreement and Plan of Merger
dated January 14, 1998 and amended April 27, 1998 (the "Merger Agreement")
between MEDIQ Incorporated (the "Company") and MQ Acquisition Corporation
("MQ"), MQ was merged into the Company (the "Merger") with the Company
continuing as the surviving corporation (the "Surviving Corporation"). MQ was a
Delaware corporation organized by Bruckmann, Rosser, Sherrill & Co., L.P.
("BRS") and certain other investors solely to effect the Merger. In the Merger,
holders of the Company's outstanding common stock, par value $1.00 per share,
and preferred stock, par value $.50 per share, immediately prior to the Merger
received, 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 and
0.075 of a share of a newly created Series A 13% Cumulative Compounding
Preferred Stock, par value $.01 per share (the "Series A Preferred Stock"), of
the Surviving Corporation. The Series A Preferred Stock has a liquidation
preference of $10.00 per share.
The aggregate consideration paid in connection with the Merger was
approximately $390.7 million, which amount includes $20.0 million of Series A
Preferred Stock. In addition, in connection with the Merger (i) certain
controlling stockholders of the Company (the "Rotko Entities") converted a
portion of their preferred equity (the "Rolled Shares") in the Company into
1,340,219 shares of Series B 13.25% Cumulative Compounding Perpetual Preferred
Stock, par value $.01 per share ("Series B Preferred Stock") and 109,781 shares
of Common Stock, par value $.01 per share ("Common Stock"), of the Surviving
Corporation, (ii) Thomas E. Carroll, Jay M. Kaplan and certain other persons
selected by the Company and BRS (the "Management Stockholders") invested
approximately $4.2 million in common and preferred equity of the Company, and
(iii) BRS, certain entities and individuals affiliated with BRS (together with
BRS, the "BRS Entities") and certain funds affiliated with Ferrer Freeman
Thompson &
F-28
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE C--THE MERGER (CONTINUED)
Co. LLC and Galen Partners III, L.P. (the "Co-Investors") purchased $109.5
million of common and preferred equity of MQ (the "Equity Contribution"). The
transaction has been accounted for as a recapitalization.
In connection with the Merger, (i) the Company contributed certain of its
assets and liabilities (including the capital stock of all of the subsidiaries
of the Company other than MEDIQ/PRN Life Support Services, Inc. ("MEDIQ/PRN") to
MEDIQ/PRN (the "Reorganization"), (ii) MEDIQ/PRN entered into a new Senior
Secured Credit Facility (the "New Credit Facility") with a syndicate of banks
("Senior Lenders"), (iii) all indebtedness of the Company except approximately
$10.1 million of the Company's 7.5% exchangeable subordinated debentures due
2003 (the "Exchangeable Debentures") and $2.0 million of MEDIQ/PRN's capital
leases were repaid (the "Refinancing"), (iv) the Company sold 140,885 units
("Units"), consisting of one 13% Senior Discount Debenture due 2009 with a
principal amount at maturity of $1,000 ("Debentures") and one warrant to
purchase .6474 of a share of Common Stock ("Warrants"), for gross proceeds
aggregating $75.0 million in a Rule 144A private offering, and (v) MEDIQ/PRN
sold $190.0 million aggregate principal amount of 11% Senior Subordinated Notes
due 2008 (the "Notes") in the same Rule 144A private offering.
The authorized capital stock of the Surviving Corporation consists of (i)
Common Stock, (ii) Series A Preferred Stock, (iii) Series B Preferred Stock, and
(iv) Series C 13.5% Cumulative Compounding Preferred Stock, par value $.01 per
share ("Series C Preferred Stock"). The BRS Entities and Co-Investors hold
829,219 shares of the Common Stock, 5,624,565 shares of the Series A Preferred
Stock, 1,602,363 shares of the Series B Preferred Stock and 2,896,218 shares of
the Series C Preferred Stock; the Management Stockholders hold 61,000 shares of
the Common Stock, 201,551 shares of the Series A Preferred Stock, 57,417 shares
of the Series B Preferred Stock and 103,781 shares of the Series C Preferred
Stock; the Rotko Entities hold 109,781 shares of the Common Stock, 632,360
shares of the Series A Preferred Stock and 1,340,219 shares of the Series B
Preferred Stock; and the stockholders of the Company prior to the Merger (other
than the Rotko Entities) hold 1,365,030 shares of the Series A Preferred Stock.
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, to recover 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 D--LONG-TERM DEBT
In order to finance a portion of the cash consideration paid pursuant to the
Merger, the Company entered into a $325.0 million New Credit Facility that
replaced its former credit facility.
The New Credit Facility consists of three facilities: (i) an eight-year
senior secured $200.0 million term loan facility (the "Term Loan Facility");
(ii) a six-year revolving credit facility not to exceed $50.0 million (the
"Revolving Credit Facility") and (iii) a six-year senior secured acquisition
facility not to exceed $75.0 million (the "Acquisition Facility"). Loans made
under the Term Loan Facility are referred to as "Term
F-29
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE D--LONG-TERM DEBT (CONTINUED)
Loans," advances made under the Revolving Credit Facility are referred to as
"Revolving Loans" and loans made under the Acquisition Facility are referred to
as "Acquisition Loans."
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 Banque
Nationale de Paris, 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 Acquisition Loans, a
margin equal to 2.25%.
In addition, MEDIQ/PRN is required to pay commitment fees to the Senior
Lenders of 0.5% per year of the undrawn portion of the commitments in respect of
the facilities (subject to adjustment as set forth below). 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 certain
performance goals.
The Term Loans amortize on a quarterly basis commencing September 30, 1999.
Principal amounts outstanding under the Revolving Credit Facility are due and
payable in full at maturity. Principal amounts outstanding under the Acquisition
Facility on November 30, 1999 will amortize on a quarterly basis. The Term
Loans, Revolving Loans and Acquisition Loans are subject to mandatory
prepayments and reductions in the event of certain extraordinary transactions or
issuances of debt and equity by MEDIQ/PRN or any Facility Guarantor (as defined
in the Credit Agreement). Such loans are required to be prepaid with 75% of the
Excess Cash Flow (as defined in the Credit Agreement) 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.
At June 30, 1998, pursuant to the terms of the New Credit Facility and/or
the Indentures for the Subordinated Notes and the Discount Debentures
("Indentures"), the availability under the Revolving Credit Facility and the
Acquisition Facility was limited to $25.9 million and $50.0 million,
respectively.
In July 1998, the Company terminated its existing interest rate hedging
contracts at a cost of approximately $600,000 which will be reflected as
interest expense in the Company's fourth quarter. In addition, the Company
entered into new interest rate hedging contracts. On a notional amount of $100.0
million, the Company fixed its LIBOR rate at 5.35% until July 2003 as long as
the three month LIBOR rate does not exceed 6.25%. The Company must pay the
actual LIBOR rate when LIBOR exceeds 6.25%. In order to mitigate its interest
rate exposure for LIBOR rates above 6.25%, the Company obtained zero-cost
collars with notional amounts aggregating $100.0 million with ceiling rates of
7.00% and a weighted-average floor rate of 5.03%.
The New Credit Facility contains representations and warranties, covenants,
events of default and other provisions customary for credit facilities of this
type. MEDIQ/PRN paid the Senior Lenders certain syndication and administration
fees, reimbursed certain expenses and provided certain indemnities, in each case
which are customary for credit facilities of this type.
The Notes, in the aggregate principal amount of $190.0 million, are
unsecured senior subordinated obligations of MEDIQ/PRN and mature on June 1,
2008. The Notes bear interest at the rate of 11% per year, payable semiannually
to holders of record at the close of business on the May 15 or November 15
F-30
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE D--LONG-TERM DEBT (CONTINUED)
immediately preceding the interest payment date on June 1 and December 1 of each
year, commencing December 1, 1998.
Each Unit consists of a Debenture with a principal amount at maturity of
$1,000 and one Warrant. Each Warrant entitles the holder thereof to purchase
.6474 shares of Common Stock from the Company, as the Surviving Corporation of
the Merger, at an exercise price of $0.01 per share, subject to adjustment. The
Warrants will initially entitle the holders thereof to acquire, in the
aggregate, 91,209 shares of Common Stock. The Warrants have been valued at
$743,000 and are reflected as a component of Stockholders' Equity at June 30,
1998. 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 (as defined in the Indentures) may determine (the "Separation
Date").
The Debentures are unsecured senior obligations of the Company, limited to
$140.9 million aggregate principal amount at maturity, and will mature on June
1, 2009. No cash interest will accrue on the Debentures prior to June 1, 2003.
Cash interest will accrue on the Debentures at the rate of 13% per year from
June 1, 2003, or from the most recent date to which interest has been paid or
provided for, payable on June 1 and December 1 of each year, commencing December
1, 2003 to holders of record at the close of business on the May 15 or November
15 immediately preceding the interest payment date.
The interest rates on the Notes and Debentures are subject to increase in
certain circumstances if the Company does not file a registration statement
providing for a registered exchange offer for the Notes and the Debentures or if
the registration statement is not declared effective on a timely basis or if
certain other conditions are not satisfied. The Company filed such registration
statement providing for a registered exchange offer on July 13, 1998. Such
registration statement has not yet been declared effective by the Securities and
Exchange Commission.
The Warrants may be exercised at any time after the first anniversary of the
Issue Date (as defined in the Indentures); provided, however, that holders of
Warrants will be able to exercise their Warrants only if a shelf registration
statement relating to the Common Stock underlying the Warrants is effective or
the exercise of such Warrants is exempt from the registration requirements of
the Securities Act of 1933, 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 Warrants will not trade separately
from the Debentures until the Separation Date.
On June 5, 1998, pursuant to the change of control provisions of the
indenture for the Company's Exchangeable Debentures, the Company made a tender
offer to repurchase the remaining outstanding balance of approximately $10.1
million. On July 3, 1998, the Company redeemed $9.5 million of the Exchangeable
Debentures pursuant to its tender offer and received 623,595 shares of NutraMax
common stock from escrow. Pursuant to the terms of the Company's stock purchase
agreement with NutraMax, the Company returned the shares to NutraMax and
received a $5.6 million cash payment on its note receivable from NutraMax.
F-31
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE E--ACQUISITIONS
On May 29, 1998, the Company, through its wholly-owned subsidiary MEDIQ/PRN,
purchased specified assets and rights of CH Industries, Inc., certain direct and
indirect subsidiaries of CH Industries, Inc., including CH Medical, Inc. and
subsidiaries ("CH Medical"), and certain other parties (the "CH Medical
Business") for a purchase price of approximately $48.5 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 financed the purchase price and related costs and expenses for the
CH Medical Acquisition with the proceeds from Term Loans under the New Credit
Facility (see Note D). CH Medical 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
services.
The acquisition has been accounted for by the purchase method of accounting
and, accordingly, the purchase price has been allocated to the assets acquired
and liabilities assumed based on the estimated fair values on May 29, 1998. The
excess of the purchase price over the estimated fair values of the net assets
acquired, $28.5 million, has been recorded as goodwill and is being amortized on
a straight line basis over twenty years. The final allocation of the purchase
price is contingent upon studies and valuations which have not yet been
completed. The Company is unable to predict whether any adjustments as a result
of the foregoing will have a material effect on the initial allocation of
purchase price.
On June 26, 1998, the Company, through its wholly-owned subsidiary
MEDIQ/PRN, acquired certain assets of National Patient Care Systems, Inc.
("NPC") for $11.0 million in cash, including related costs and expenses and
contingent consideration of up to $2.8 million payable over the next two years
if certain revenue targets are achieved by NPC. NPC is a provider of air support
therapy rental equipment including frameless and framed integrated bed systems.
The acquisition has been accounted for by the purchase method of accounting
and, accordingly, the purchase price has been allocated to the assets acquired
based on the estimated fair values on June 26, 1998. The excess of the purchase
price over the estimated fair values of the net assets acquired, $6.8 million,
has been recorded as goodwill and is being amortized on a straight-line basis
over twenty years. The final allocation of the purchase price is contingent upon
studies and valuations which have not yet been completed. The Company is unable
to predict whether any adjustments as a result of the foregoing will have a
material effect on the initial allocation of purchase price.
The operations of CH Medical and NPC are included in the Company's Condensed
Consolidated Statement of Operations from their respective effective dates of
acquisition. The following pro forma financial information presents the
consolidated results of operations of the Company as if the acquisitions had
occurred at the beginning of the respective periods. The unaudited pro forma
information is presented for comparative purposes only and does not necessarily
reflect the results of operations of the Company had the acquisitions been made
at the beginning of each fiscal year.
<TABLE>
<CAPTION>
NINE MONTHS ENDED FISCAL YEAR ENDED
JUNE 30, 1998 SEPTEMBER 30, 1997
------------------ ------------------
<S> <C> <C>
Revenues.................................................................. $ 158,012,000 $ 195,552,000
Loss before discontinued operations and extraordinary items............... (26,106,000) (7,817,000)
Net income (loss)......................................................... (30,204,000) 19,087,000
</TABLE>
F-32
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE F--REDEEMABLE PREFERRED STOCK
At June 30, 1998, redeemable preferred stock consists of 15,000,000
authorized shares, of which 10,000,000 shares have been designated as Series A
Preferred Stock and 5,000,000 shares have been designated as Series C Preferred
Stock as follows:
<TABLE>
<S> <C>
Series A, par value $.01 per share, stated value $10.00 per share, 7,823,504
shares issued and outstanding, with a liquidation value of $78.2 million and
accumulated dividends of $.9 million........................................ $79,127,000
Series C, par value $.01 per share, stated value $10.00 per share, 3,000,000
shares issued and outstanding with a liquidation value of $30.0 million and
accumulated dividends of $.4 million........................................ 30,355,000
-----------
$109,482,000
-----------
-----------
</TABLE>
Subject to the legal availability of funds, the Company is required to
redeem its Series A Preferred Stock on December 31, 2011 at a redemption price
equal to $10.00 per share plus all accrued and unpaid dividends. The Company, at
its option, may redeem the Series A Preferred Stock at any time at the
redemption prices set forth below, plus an amount equal to full cumulative
dividends:
<TABLE>
<CAPTION>
REDEMPTION DATE REDEMPTION PRICE 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>
Subject to the legal availability of funds, the Company is required to
redeem its Series C Preferred Stock on December 31, 2012 at a redemption price
equal to $10.00 per share plus all accrued and unpaid dividends. The Company, at
its option, may redeem the Series C Preferred Stock at any time at an amount
equal to $10.00 per share plus all accrued and unpaid dividends after
distributions are made on the Series A Preferred Stock and the Series B
Preferred Stock. Accordingly, these preferred stocks subject to mandatory
redemption have been presented separately outside of permanent stockholders'
equity in the accompanying financial statements.
Except as required by Delaware law, the holders of the Series A Preferred
Stock and Series C Preferred Stock do not have any voting rights. The holders of
the Series A Preferred Stock and Series C Preferred Stock are entitled to
receive dividends from the Company on each share of Series A Preferred Stock and
Series C Preferred Stock at annual rates equal to $1.30 and $1.35 per share,
respectively. All dividends will be cumulative and compounding, whether or not
earned or declared, will accrue on a daily basis and will be payable
semi-annually in arrears. Dividends with respect to the Series A Preferred Stock
can only be paid to the extent funds are legally available therefor under
Delaware law. Dividends with respect to the Series C Preferred Stock can only be
paid to the extent funds are legally available therefor under Delaware law and
all distributions have been made on the Company's Series A and Series B
preferred stocks. The New Credit Facility and Indentures restrict the ability of
the Company to pay cash dividends.
Upon the voluntary or involuntary liquidation, dissolution or winding up of
the Company, the holders of all shares of Series A Preferred Stock and Series C
Preferred Stock then outstanding will be entitled to
F-33
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE F--REDEEMABLE PREFERRED STOCK (CONTINUED)
be paid out of the assets of the Company available for distribution to its
stockholders an amount equal to $10.00 per share plus all accrued and unpaid
dividends.
NOTE G--COMMON STOCK AND SERIES B PREFERRED STOCK
Common Stock--The Company has 30,000,000 authorized shares of common stock,
par value $.01 per share, with 1,000,000 shares issued and outstanding as of
June 30, 1998. The holders of the Common Stock are entitled to one vote per
share on all matters submitted for action by the shareholders. Subject to the
rights of any holders of outstanding preferred stock of the Company, all shares
of Common Stock are entitled to share in dividends as the Board of Directors may
declare from time to time from legally available funds.
Series B Preferred Stock--Except as required by Delaware law, the holders of
the Series B Preferred Stock do not have any voting rights. The holders of the
Series B Preferred Stock are entitled to receive dividends from the Company on
each share of Series B Preferred Stock at an annual rate equal to $1.325 per
share. All dividends will be cumulative and compounding whether or not earned or
declared, will accrue on a daily basis and will be payable semi-annually in
arrears. Dividends with respect to the Series B Preferred Stock can only be paid
to the extent funds are legally available therefor under Delaware law and all
distributions have been made on the Company's Series A Preferred Stock. The New
Credit Facility and Indentures restrict the ability of the Company to pay cash
dividends.
Upon the voluntary or involuntary liquidation, dissolution or winding up of
the Company, the holders of all shares of Series B Preferred Stock then
outstanding will be entitled to be paid out of the assets of the Company
available for distribution to its stockholders an amount equal to $10.00 per
share plus all accrued and unpaid dividends after distributions are made on the
Series A Preferred Stock and before any distribution is made on any Series C
Preferred Stock. The Company is not required to redeem the shares of Series B
Preferred Stock. The Series B Preferred Stock has $.4 million of dividends
accrued as of June 30, 1998.
NOTE H--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 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-34
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE H--NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In February 1998, the FASB 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. The Company does not believe the adoption of this standard will have
a material impact on the Company's financial statements.
In July 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." This statement, which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities,
is effective for fiscal years beginning after June 15, 1999, 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 I--SUBSEQUENT EVENTS
In July 1998, the Company reached a settlement with its former wholly-owned
subsidiary, MHM Services, Inc. ("MHM") which called for MHM to pay the Company
$3.0 million in cash in full satisfaction of all amounts due the Company. The
Company received the cash in July 1998 and will recognize the settlement in
other income in the fourth quarter of fiscal 1998. The total amount due from MHM
was fully reserved during fiscal years 1997 and 1996.
In July 1998, MEDIQ Mobile X-Ray Services, Inc., a subsidiary of the Company
whose assets were sold in November 1996, was notified that it is the subject of
an investigation by the Department of Justice and the Office of the Inspector
General of the Department of Health and Human Services. The Company has not yet
been informed as to the nature or scope of the investigation.
In May 1998, InnoServ Technologies, Inc. ("InnoServ") entered into a merger
agreement with GE Medical Systems, Inc. ("GEMS") by which GEMS agreed to acquire
InnoServ for approximately $16.0 million. No date has been scheduled for
closing. Pursant to the terms of the Company's November 1997 stock purchase
agreement with InnoServ, under a change of control the Company is entiled to
receive a portion of the sales proceeds. However, the calculation of the amount
due to the Company is currently in dispute. Accordingly, the matter is in
arbitration pursuant to the terms of the stock purchase agreement. The Company
fully reserved its investment in InnoServ in fiscal 1997. The Company will
recognize a gain equal to the cash proceeds when they are received.
F-35
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholder and Directors
CH Medical, Inc. and Subsidiaries
We have audited the accompanying consolidated statements of net assets of CH
Medical, Inc. and Subsidiaries (the "Company") as of August 31, 1997 and 1996
and the related consolidated statements of income and cash flows for each of the
three years in the period ended August 31, 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, the consolidated financial statements referred to above
present fairly, in all material respects, the net assets of CH Medical, Inc. and
Subsidiaries at August 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended August 31,
1997 in conformity with generally accepted accounting principles.
/s/ BDO SEIDMAN, LLP
December 12, 1997
Dallas, Texas
F-36
<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-37
<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-38
<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-39
<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-40
<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-41
<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-42
<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-43
<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-44
<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-45
<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-46
<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-47
<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-48
<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-49
<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-50
<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-51
<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
Disclosure Regarding Forward-Looking Statements....... ii
Summary............................................... 1
Risk Factors.......................................... 13
The Transactions...................................... 20
Use of Proceeds....................................... 22
Dividends............................................. 22
Capitalization........................................ 23
Pro Forma Condensed Consolidated Financial
Statements.......................................... 24
Selected Consolidated Historical
Financial Information............................... 32
Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 34
Business.............................................. 42
Management............................................ 56
Ownership of Capital Stock............................ 61
Description of Capital Stock.......................... 64
Certain Relationships and Related Transactions........ 69
Description of Certain Indebtedness................... 71
Description of the Warrants........................... 76
Plan of Distribution.................................. 80
Notice to Canadian Residents.......................... 81
Certain U.S. Federal Income Tax Considerations........ 82
Legal Matters......................................... 86
Experts............................................... 86
Index to Financial Statements......................... F-1
</TABLE>
Until , 1999 (90 days after the date of this Prospectus), all
dealers that effect 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.................................................................... $ 17,500
Printing and Engraving Expenses.................................................... $ 5,000
Legal Fees and Expenses (other than blue sky)...................................... $ 25,000
Transfer Agent and Registrar Fees.................................................. $ 2,000
Miscellaneous Expense.............................................................. $ 278
---------
Total........................................................................ $ 50,000
---------
---------
</TABLE>
- ------------------------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate of Incorporation of Holdings provides that the directors of
Holdings shall be entitled to the benefits of all limitations on the liability
of directors generally that are now or hereafter become available under the DGCL
and that, without limiting the generality of the foregoing, no director shall be
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 DGCL, relating to prohibited
dividends or distributions or the repurchase or redemption of stock, or (iv) for
any transaction from which the director derived an improper personal benefit.
The By-laws of Holdings provide that Holdings shall indemnify any person who was
or is party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (a "proceeding"), by reason of the fact that such person is or was
a director or officer of Holdings or a constituent corporation absorbed in a
consolidation or merger, or is or was serving at the request of Holdings or a
constituent corporation absorbed in a consolidation or merger, as a director or
officer of another corporation, partnership, joint venture, trust or other
enterprise, or is or was a director or officer of Holdings serving at its
request as an administrator, trustee or other fiduciary of one or more of the
employee benefit plans of Holdings or other enterprise, against expenses
(including attorneys' fees), liability and loss actually and reasonably incurred
or suffered by such person in connection with such proceeding, whether or not
the indemnified liability arises or arose from any threatened, pending or
completed proceeding by or in the right of Holdings, except to the extent that
such indemnification is prohibited by applicable law. The By-laws of Holdings
further provide that expenses incurred by a director or officer of Holdings in
defending a proceeding shall be paid by Holdings in advance of the final
disposition of such proceeding subject to the provisions of any applicable
statute. 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.
The foregoing summary of the Certificate of Incorporation and By-laws of
Holdings is qualified in its entirety by reference to the relevant provisions of
Holdings' Certificate of Incorporation and By-laws, which are filed as exhibits
to this Registration Statement.
II-1
<PAGE>
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. The aggregate offering price of the Units was $75,000,129. The
aggregate discount to the initial purchasers of the Units was 3%, or $2,625,004.
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.
On September 3, 1998, Holdings sold 74,821 shares of Common Stock to Thomas
E. Carroll, Jay M. Kaplan and certain other persons for aggregate proceeds of
$748,210. Such sales were made in reliance upon exemptions available under
Section 4(2) of the Securities Act or Regulation D promulgated thereunder. There
were fewer than 35 purchasers in such offering. All but one of such purchasers
were members of management or employees of the Company. Holdings believes that
each purchaser who was not an accredited investor, either alone or with his
purchaser representative(s), had the requisite knowledge and experience in
financial and business matters that rendered such purchaser capable of
evaluating the merits and risks of an investment in Common Stock.
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)*
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>
2.7 Affiliate Letter to Cardinal Health, Inc. from Holdings dated August 16, 1996 (incorporated by reference
to Exhibit 4 to Current Report on Form 8-K filed by Holdings on October 21, 1996, File No. 1-08147)*
2.8 Stock Purchase Agreement dated November 13, 1997 among Holdings, MEDIQ Investment Services, Inc. and
InnoServ Technologies, Inc. (incorporated by reference to Exhibit 2.8 to Annual Report on Form 10-K filed
by Holdings for the fiscal year ended September 30, 1997, File No. 1-08147)*
2.9 Asset Purchase Agreement dated November 6, 1996 among Holdings, MEDIQ Mobile X-Ray Services, Inc. and
Symphony Diagnostic Services No. 1, Inc. (incorporated by reference to Exhibit 2.5 to Annual Report on
Form 10-K filed by Holdings for the fiscal year ended September 30, 1996, File No. 1-08147)*
2.10 Asset Purchase Agreement dated as of April 24, 1998 among MEDIQ/PRN, CH Medical, Inc. and the other
parties named therein (incorporated by reference to Exhibit 2 to Current Report on Form 8-K filed by
Holdings on April 28, 1998, File No. 1-08147)*
3.1 Certificate of Incorporation of Holdings*
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 21, 1998 among Holdings, MEDIQ/PRN, 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, MEDIQ/PRN, 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)*
4.15 Asset Purchase Agreement dated as of June 26, 1998 among MEDIQ/PRN, National Patient Care Systems, Inc.
and the other parties named therein (incorporated by reference to Exhibit 4 to Quarterly Report on Form
10-Q filed by Holdings for the fiscal quarter ended June 30, 1998, File No. 000-15500)*
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 Ratios of Earnings to Fixed Charges*
12.2 Statements of Ratios of Adjusted EBITDA to Interest Expense and Net Debt to Adjusted EBITDA*
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)
23.3 Consent of BDO Seidman, LLP
24.1 Power of Attorney (included on signature page)*
27.1 Financial Data Schedule*
</TABLE>
- ------------------------
* Previously filed.
II-4
<PAGE>
(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 Amendment No. 2 to the 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 19th day of October, 1998.
<TABLE>
<S> <C> <C>
MEDIQ INCORPORATED
By: /s/ THOMAS E. CARROLL
-----------------------------------------
Thomas E. Carroll
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 2 to the Registration Statement has been signed below by the
following persons in the capacities indicated on October 19, 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
- ------------------------------
Bruce C. Bruckmann
* Director
- ------------------------------
Stephen C. Sherrill
* Director
- ------------------------------
Robert T. Thompson
<TABLE>
<S> <C> <C> <C>
*By: /s/ JAY M. KAPLAN
-------------------------
Jay M. Kaplan
Attorney-in-fact
</TABLE>
II-6
<PAGE>
INDEPENDENT AUDITORS' REPORT ON THE SUPPLEMENTAL SCHEDULE
Board of Director and Stockholders
MEDIQ Incorporated
Pennsauken, New Jersey
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule listed in item
16(b) is presented of the purpose of additional analysis and is not a required
part of the basic financial statements. This schedule is the responsibility of
the Company's management. Such schedule has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects when considered in relation
to the basic financial statements taken as a whole.
/s/ DELOITTE & TOUCHE, LLP
November 25, 1997
<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>
[LETTERHEAD OF DECHERT PRICE & RHOADS]
EXHIBIT 5.1
September 28, 1998
MEDIQ Incorporated
One Mediq Plaza
Pennsauken, New Jersey 08110
Re: MEDIQ Incorporated
Warrants to Purchase 91,209 Shares of Common Stock
91,209 Shares of Common Stock, Par Value $.01 Per Share
Dear Sirs:
We have acted as counsel for MEDIQ Incorporated, a Delaware corporation (the
"Issuer"), in connection with the filing by the Issuer of a Registration
Statement on Form S-1, Registration No. 333-58933 (the "Registration
Statement"), with the Securities and Exchange Commission for the purpose of
registering under the Securities Act of 1933, as amended (the "Act"), (i)
140,885 warrants (the "Warrants") to purchase an aggregate of 91,209 shares of
Common Stock, par value $.01 per share (the "Common Stock"), of the Issuer and
(ii) the 91,209 shares of Common Stock issuable upon the exercise of such
Warrants (the "Warrant Shares"). The Warrants were issued pursuant to a Warrant
Agreement dated May 29, 1998 (the "Warrant Agreement") between the Issuer and
United States Trust Company of New York, as warrant agent (the "Warrant Agent"),
filed as Exhibit 4.10 to the Registration Statement.
In connection with the foregoing, we have reviewed such records, documents,
agreements and certificates, and examined such questions of law, as we have
considered necessary or appropriate for the purpose of this opinion. In making
our examination of records, documents, agreements and certificates, we have
assumed the authenticity of the same, the correctness of the information
contained therein, the genuineness of all signatures, the authority of all
persons entering and maintaining records or executing documents, agreements and
certificates (other than persons executing documents, agreements and
certificates on behalf of the Issuer), and the conformity to authentic originals
of all items submitted to us as copies (whether certified, conformed,
photostatic or by other electronic means) of records, documents, agreements or
certificates. In rendering our opinion we have relied as to factual matters upon
certificates of public officials and certificates and representations of
officers of the Issuer.
We have assumed that the Warrant Agreement has been duly authorized,
executed and delivered by the Warrant Agent and that the Warrants have been duly
countersigned by the Warrant Agent. In addition, we have assumed that there will
be no changes in applicable law between the date of this opinion and the date of
issuance and sale of the Warrant Shares.
Based upon the foregoing and having regard for such legal considerations as
we deem relevant, we are of the opinion that (i) the Warrants have been duly
authorized by the Issuer and are legally issued, fully paid and non-assessable,
and (ii) the Warrant Shares have been duly authorized and, when issued and paid
for upon the exercise of the Warrants in accordance with the terms of the
Warrant Agreement, will be legally issued, fully paid and non-assessable.
This opinion is rendered to the Issuer in connection with the filing of the
Registration Statement and for no other purpose. We are members of the Bar of
the State of New York and express no opinion as to the laws of any jurisdiction
other than the laws of the United States of America, the State of New York
<PAGE>
MEDIQ Incorporated
September 28, 1998
Page 2
and, to the extent necessary to render the opinions set forth herein, the
General Corporation Law of the State of Delaware.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the prospectus which is included in the Registration Statement. In
giving the foregoing consent, we do not admit that we come within the category
of persons whose consent is required by the Act or the rules and regulations
promulgated thereunder.
Very truly yours,
/S/ DECHERT PRICE & RHOADS
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement No.
333-58933 of MEDIQ Incorporated of our report dated November 25, 1997, appearing
in the Prospectus, which is a part of such Registration Statement, and of our
report dated November 25, 1997 relating to the financial statement schedule
appearing elsewhere in this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
October 19, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
MEDIQ Incorporated
Pennsauken, New Jersey
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement on Amendment No. 2 to Form S-1 of MEDIQ Incorporated of
our report dated December 12, 1997, relating to the consolidated financial
statements of CH Medical, Inc. and Subsidiaries which is contained in that
Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
<TABLE>
<S> <C>
/s/ BDO SEIDMAN, LLP
</TABLE>
Dallas, Texas
October 19, 1998
