<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 1, 1999
REGISTRATION NO. 333-58933
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
POST-EFFECTIVE AMENDMENT NO. 1
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 (Primary Standard (I.R.S. Employer
of Industrial Identification No.)
Incorporation or Organization) Classification Code Number)
</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
Number, Telephone
Including Area Code, of Registrant's Number, Including Area Code, of Agent for
Principal Executive Offices) Service)
</TABLE>
------------------------
WITH COPIES TO:
BRUCE B. WOOD, ESQ.
DECHERT PRICE & RHOADS
30 ROCKEFELLER PLAZA
NEW YORK, NEW YORK 10112
(212) 698-3500
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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 MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT(1) OFFERING PRICE(1) REGISTRATION 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.
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<PAGE>
PROSPECTUS
[LOGO]
MEDIQ INCORPORATED
140,885 WARRANTS TO PURCHASE
91,209 SHARES OF COMMON STOCK
------------------------
This Prospectus relates to the following securities which 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:
- 140,885 warrants (the "Warrants") of MEDIQ Incorporated, a Delaware
corporation ("Holdings"). Each Warrant, when exercised, entitles the
holder thereof to purchase .6474 shares of the Common Stock, par value
$.01 per share (the "Common Stock"), of Holdings at a price (the "Exercise
Price") of $.01 per share.
- 91,209 shares of Common Stock that may be issued from time to time upon
exercise of the Warrants. The shares of Common Stock (and any other
securities) for which the Warrants are exercisable or which are issued
upon the exercise of the Warrants are collectively referred to herein as
"Warrant Shares."
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 issuable upon exercise of
the Warrants and the Exercise Price are subject to adjustment in dilutive
events. See "Description of the Warrants."
The Selling Holders may sell the Warrants and the Warrant Shares from time
to time directly to purchasers or through agents, underwriters or dealers. If
required, the names of any such agents, underwriters or dealers involved in the
sale of the Warrants or 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. We will pay other expenses
incident to the 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 or the Warrant Shares may be deemed to be
"underwriters" within the meaning of the Securities Act. A description of
indemnification arrangements is provided in the section "Plan of Distribution."
This investment involves risks. See the Risk Factors section beginning on
page 12.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the Warrants or Warrant Shares or
passed upon the adequacy or accuracy of this Prospectus. Any representation to
the contrary is a criminal offense.
------------------------
November , 1999.
<PAGE>
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission (the "Commission")
a Registration Statement on Form S-1 (the "Registration Statement") pursuant to
the Securities Act of 1933, as amended (the "Securities Act"), covering the
Warrants and Warrant Shares being offered. This Prospectus is part of the
Registration Statement but does not contain all the information set forth in the
Registration Statement. For more information about us, the Warrants or the
Warrant Shares, you should read the Registration Statement and related exhibits,
annexes and schedules. 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, you should read the exhibits for a more complete description of the
document or matter involved. You may inspect and copy the Registration Statement
and related exhibits, annexes and schedules at the Commission's Public Reference
Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Information about the
operation of the Public Reference Room 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 us, that file
electronically with the Commission. The address of the Web site is: http:
//www.sec.gov.
We are subject to the informational requirements of the Securities Exchange
Act of 1934, as amended, and in accordance therewith file reports and other
information with the Commission. We have also agreed that, whether or not we are
required to do so by the rules and regulations of the Commission, we will
furnish to the holders of the Warrants and file with the Commission (unless the
Commission will not accept such a filing):
- 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 we
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
- all reports that would be required to be filed with the Commission on
Form 8-K if we were required to file such reports.
<PAGE>
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical facts included in this
Prospectus, including, without limitation, such statements in the sections
"Summary," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," with respect to our business and certain
acquisitions and other transactions we have recently completed (including the
timing, financing, strategies and effects thereof) are forward-looking
statements. Although we believe that our expectations reflected in such
forward-looking statements are reasonable, we can give no assurance that they
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 connection with
the forward-looking statements included in this Prospectus and/or in the section
"Risk Factors." The following additional factors could cause actual results to
differ materially from the results which might be projected, forecast, estimated
or budgeted by us in forward-looking statements:
- heightened competition, including specifically price competition, the
entry of new competitors or the introduction of new products by new and
existing competitors;
- adverse state and Federal legislation and regulation, including changes in
Medicare and Medicaid reimbursement policies;
- the termination of contracts with major customers or renegotiation of
these contracts at less cost-effective rates or with longer payment terms;
- unanticipated price increases in medical equipment or other rented
equipment and supplies;
- higher service, administrative or general expenses occasioned by the need
for additional advertising, marketing, administrative or management
information systems expenditures and
- 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 us
or persons acting on our behalf are expressly qualified in their entirety by the
Cautionary Statements.
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY CONTAINS BASIC INFORMATION ABOUT THIS OFFERING. IT
LIKELY DOES NOT CONTAIN ALL THE INFORMATION THAT IS IMPORTANT TO YOU. FOR A MORE
COMPLETE UNDERSTANDING OF THIS OFFERING, WE ENCOURAGE YOU TO READ THIS ENTIRE
PROSPECTUS AND THE DOCUMENTS WE HAVE REFERRED YOU TO.
UNLESS THE CONTEXT OTHERWISE REQUIRES, (1) THE TERM "HOLDINGS" REFERS TO
MEDIQ INCORPORATED, (2) THE TERM "MEDIQ/PRN "REFERS TO MEDIQ/PRN LIFE SUPPORT
SERVICES, INC., AND (3) THE TERMS "WE," "OUR," "OURS," "US" AND "THE COMPANY"
REFER TO HOLDINGS AND ITS SUBSIDIARIES, INCLUDING MEDIQ/PRN, ON A COMBINED
BASIS. REFERENCES HEREIN TO "FISCAL YEARS" ARE TO OUR FISCAL YEARS, WHICH END ON
SEPTEMBER 30 IN THE CALENDAR YEAR, AND REFERENCES TO THE "LTM PERIOD" ARE TO THE
TWELVE MONTH PERIOD ENDED JUNE 30, 1999. INFORMATION PROVIDED HEREIN ON A "PRO
FORMA BASIS" FOR ANY PERIOD OR AS OF ANY DATE GIVES EFFECT TO CERTAIN
ACQUISITIONS AND OTHER TRANSACTIONS WE HAVE RECENTLY COMPLETED IN THE MANNER
DESCRIBED IN THE SECTION "PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS."
MARKET DATA CONCERNING OUR PRODUCTS AND SERVICES USED IN THIS PROSPECTUS
REFLECT MANAGEMENT ESTIMATES; WHILE SUCH ESTIMATES ARE BELIEVED BY US TO BE
RELIABLE, WE CAN GIVE NO ASSURANCE THAT SUCH DATA IS ACCURATE IN ALL MATERIAL
RESPECTS.
THE COMPANY
We operate the largest critical care, life support and other movable medical
equipment rental business in the United States. Through our extensive
distribution network, we serve more than 5,000 hospitals, alternate care and
home care providers, nursing homes and other health care providers nationwide
and in Puerto Rico and Canada. We rent over 1,100 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. In fiscal
1998, approximately 81% of our rental revenues were generated from 133 contracts
with national health care providers and group purchasing organizations,
including some of the largest hospital chains in the United States. These
contracts numbered 145 at October 1, 1999. In addition, we rent therapeutic
support surfaces, overlays and mattresses ("Support Surfaces"). On a Pro Forma
Basis, we generated $283.0 million of revenue and $79.1 million of Adjusted
EBITDA (as defined) during the LTM Period.
In addition to our core rental business, we sell a variety of disposable
products, accessories and repair parts ("Parts and Disposables"). Also, we
provide 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.
We believe 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 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 and/or minimizing technological obsolescence of equipment.
Additionally, by outsourcing activities such as asset management and repair and
maintenance to third parties, hospitals and other health care providers can
reduce operating costs and increase efficiency.
In fiscal 1998, rental revenues from Medical Equipment and Support Surfaces
accounted for 79% of our revenues, sales from Parts and Disposables, Medical
Equipment and Support Surfaces and medical gases accounted for 15% of our
revenues and other revenues primarily from outsourcing services accounted for 6%
of our revenues.
1
<PAGE>
RENTALS. In our rental business, we rent our approximately 165,000 unit
Medical Equipment and Support Surfaces inventory to customers through 108
locations in major metropolitan areas nationwide and in Puerto Rico and Canada.
Such locations operate 24 hours a day, 365 days a year. Our customers receive a
full range of rental and related services, including equipment delivery,
inspection, maintenance, repair and documentation. In September 1997, we
acquired the remaining 50% interest in MEDIQ PRN/ HNE, LLC ("SpectraCair") that
we did not already own (the "SpectraCair Acquisition") in order to broaden our
equipment rental product lines to include rentals of Support Surfaces. On
May 29, 1998 we purchased certain assets and rights of CH Industries, Inc.
("CHI"), CH Medical, Inc. ("CH Medical"), certain other subsidiaries of CHI and
certain other parties related to the manufacture, sale and rental of specialty
patient beds and Support Surfaces (the "CHI Acquisition"). We completed four
other acquisitions from June 1998 to February 1999 that further strengthened the
Support Surfaces rental business. The HTD Acquisition in June 1999 (see below)
further contributed to rentals of Medical Equipment. On a Pro Forma Basis, our
rental activities generated $177.5 million, or 62.7%, of total revenue during
the LTM Period.
PARTS AND DISPOSABLES. We sell a variety of parts primarily for use with
the types of Medical Equipment and Support Surfaces we rent. The sales of such
parts are a natural complement to our rental business. On June 15, 1999, we
acquired the nonacute care business of HTD Corporation (the "HTD Acquisition").
HTD's nonacute care business principally comprises of sales Parts and
Disposables, and to a lesser extent rentals of Medical Equipment and biomedical
repair services (the "HTD Nonacute Care Business"). We supply over 14,000 Parts
and Disposables products, actively stocking over 7,000 items, through seven
distribution centers strategically located throughout the United States. With
the HTD Acquisition, we have established a dedicated sales and marketing
operation to support the growth in Parts and Disposables. We also sell repair
parts to our customers for the repair of their owned equipment. On a Pro Forma
Basis, our sales of Parts and Disposables generated $77.3 million, or 27.3%, 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, we also offer our
customers the following services (collectively, the "Outsourcing Services"),
none of which require substantial capital investment by us:
- 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 Medical Equipment;
- a biomedical service which provides safety inspections, preventive
maintenance and repairs for most critical care equipment through a team of
226 experienced biomedical technicians;
- a logistics and distribution service to assist equipment manufacturers in
reducing their distribution costs through utilization of our extensive
branch office network;
- a medical gas supply program designed to complement our respiratory
equipment rentals and provide "one-stop" service to health care providers
in a fragmented market and
- a health care consulting and management service designed to assist our
customers in the management of their businesses.
On a Pro Forma Basis, our Outsourcing Services generated $13.9 million or 4.9%
of total revenue during the LTM Period.
Holdings was incorporated under the laws of the State of Delaware in 1977.
Our principal executive offices are located at One MEDIQ Plaza, Pennsauken, New
Jersey 08110 and our telephone number is (856) 662-3200.
2
<PAGE>
COMPETITIVE STRENGTHS
We believe that the following competitive strengths contribute to our
position as a leader in renting Medical Equipment in the United States and serve
as a foundation for our overall growth strategy:
- LEADING MARKET POSITION. We are the largest Medical Equipment rental
company in the United States. Our Medical Equipment rental revenues during
the LTM Period were over twice as large as those of our nearest rental
competitor for their most recent annual period reported. We have achieved
and maintained a market leadership position by making strategic
acquisitions, investing in an extensive distribution network and providing
high-quality customer service and competitive pricing. We believe that our
leading market position provides us with significant advantages in
competing with other rental companies.
- LARGEST RENTAL DISTRIBUTION NETWORK AND BROADEST RENTAL PRODUCT LINE. We
have invested significant amounts to establish an extensive rental
distribution network and the broadest rental product line in our industry.
Our rental distribution network has the most expansive geographic coverage
in our industry with 108 locations in 42 states, the District of Columbia,
Puerto Rico and Canada. Our product line consists of approximately 165,000
units of rental inventory. Accordingly, we can provide Medical Equipment
and Support Surfaces directly to our customers on a rapid and efficient
basis. Because of our branch network and a gross investment in rental
inventory of $265.9 million as of June 30, 1999, we can focus our capital
expenditures on pursuing our growth strategy and purchasing Medical
Equipment and Support Surfaces for which customer demand is already
identified. We believe that we are uniquely positioned to leverage our
installed base of rental equipment and distribution network to increase
strategic partnerships, the provision of Outsourcing Services and to some
extent sales of Parts and Disposables to our existing customers.
- EXTENSIVE VARIETY OF PARTS AND DISPOSABLES. We supply over 14,000 Parts
and Disposables products, actively stocking over 7,000 items, through
seven distribution centers strategically located throughout the United
States. A marketing and customer service operation dedicated to Parts and
Disposables is in place to satisfy customer demand quickly and
efficiently. This capability enables us to position ourselves as a
single-source supplier to our equipment rental customers and others.
- SOLID CUSTOMER BASE. During fiscal 1998, approximately 81% of our rental
revenues were from national accounts and group purchasing organizations.
Substantially all of our national accounts have been doing business with
us for several years. We believe that such national health care providers
will increasingly require services on a national level, which we expect
will increase our sales to national accounts and group purchasing
organizations.
- ADVANCED INFORMATION SYSTEMS. Our sophisticated rental information system
gives us 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, we 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, our rental 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. We
also employ another sophisticated information system to handle Parts and
Disposables. We believe that our advanced rental and other information
systems position us well to service the needs of the increasingly larger
and more complex health care providers and provide us with a competitive
advantage in servicing the needs of national accounts and rapidly growing
group purchasing organizations.
- DISCIPLINED APPROACH TO CAPITAL SPENDING. We generally make 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, we require that the new equipment meets certain
minimum
3
<PAGE>
financial criteria, such as return on investment, and certain operating
criteria, such as expected utilization rates and maintenance costs. We
estimate that our cost recovery period for most new equipment purchases is
between 12 and 18 months. Additionally, our Outsourcing Services and
revenue sharing businesses do not require substantial capital investment.
- STABLE BUSINESS. We believe that our core rental business does not have
significant exposure to economic downturns, because cost pressures during
such downturns may lead to increased rentals as a result of fewer
purchases of medical equipment by customers.
- STRONG AND COMMITTED MANAGEMENT TEAM. We are led by a seven person senior
management team with approximately 170 years combined experience in the
health care industry. Management has invested approximately $4.2 million
in common and preferred equity of Holdings.
GROWTH STRATEGY
In order to take full advantage of our market leadership and distribution
network, we have introduced new services for our customers and have pursued
strategic acquisition candidates. The following are the primary elements of our
growth strategy:
- GROW CORE RENTAL BUSINESS. We expect that certain regulatory and industry
trends will increase overall demand for equipment rentals. We believe that
we will be able to take advantage of these industry trends and grow our
core rental revenues by:
- capitalizing on our customer base, which we believe is the largest in
the Medical Equipment rental industry;
- focusing on sub-acute and long-term health care providers which are
facing substantial pressure to reduce operating costs;
- identifying incremental rental opportunities through our CAMP programs
as we increase the number of hospitals under CAMP contracts;
- increasing strategic partnerships and
- 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 our rental distribution network has the most
expansive geographic coverage and broadest product line in our industry,
we believe that we can increase revenues in certain non-capital intensive
businesses by leveraging our infrastructure. In particular, we expect to
expand our marketing of Outsourcing Services, strategic partnerships and
sales of Parts and Disposables to our existing rental customer base. In
addition, the HTD Acquisition has significantly increased our marketing
capabilities with respect to Parts and Disposabes, giving us a dedicated
distribution network and customer service operation. We believe that
leveraging our 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. We believe that our 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. Since December 31,
1996, hospitals under CAMP contracts increased from three to 23.
4
<PAGE>
ENTER INTO STRATEGIC PARTNERSHIPS. We will continue to seek new strategic
partnerships to increase revenues, and plan to increase revenues by
partnering with equipment manufacturers to provide biomedical repair
services for their equipment.
- PURSUED STRATEGIC ACQUISITIONS. We have acquired businesses complementary
with ours and integrated them effectively into our existing operations.
Upon acquiring such businesses, we have typically been able to realize
cost savings by eliminating corporate overhead, optimizing branch
locations and reducing personnel. Since September 30, 1994, acquisitions
in our core rental business coupled with internal growth have resulted in
an increase in our revenues from $81.5 million in fiscal 1994 to
$283.0 million on a Pro Forma Basis during the LTM Period. We have been
able to successfully complete and integrate these acquisitions by adhering
to an acquisition strategy which primarily focuses on acquisitions that:
- present a relatively low level of integration risk;
- allow us to effectively leverage our extensive distribution network;
- are complementary to our lines of business and
- have identifiable synergies.
ACQUISITIONS AND OTHER TRANSACTIONS
We consummated the SpectraCair Acquisition in fiscal 1997. In fiscal 1998,
we consummated the CHI Acquisition and one other acquisition as well as a
transaction pursuant to which MQ Acquisition Corporation ("MQ") was merged with
and into Holdings (the "Merger") with Holdings continuing as the surviving
corporation. MQ was a Delaware corporation organized by Bruckmann, Rosser,
Sherrill & Co., L.P. ("BRS") solely to effect the Merger and acquire, together
with other investors, a controlling interest in Holdings. In fiscal 1999, we
consummated the HTD Aquisition and three other acquisitions.
The unaudited pro forma condensed consolidated financial statements included
elsewhere in this Prospectus give effect to the CHI Acquisition, the HTD
Acqusition, the Merger and certain related transactions in the manner described
in the section "Pro Forma Condensed Consolidated Financial Statements." See
"Business--Acquisitions and Dispositions."
ACQUISITIONS. In January 1995, we entered into a 50/50 joint venture with a
subsidiary of Huntleigh Technology, Inc. ("Huntleigh") 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. In September 1997,
SpectraCair was merged with and into MEDIQ/PRN following the acquisition and
made into a division called MEDIQ/FST. The SpectraCair Acquisition created
several opportunities to bolster MEDIQ/PRN's competitive presence with respect
to Support Surfaces. Our national agreements provide a wider group of customers
with access to MEDIQ/FST's product lines.
On May 29, 1998, MEDIQ/PRN purchased certain assets and rights of CHI, CH
Medical, certain other subsidiaries of CHI and certain other parties related to
the manufacture, sale and rental of specialty patient beds and Support Surfaces
(the "CH Medical Business") for a cost of approximately $50.0 million in cash,
including related costs and expenses, and the assumption of certain obligations
related to the CH Medical Business. The CHI Acquisition improved our competitive
position in the acute health care sector.
On June 15, 1999, MEDIQ/PRN acquired the nonacute care business of HTD for a
cost of approximately $59.7 million. The HTD Acquisition provides the Company
with a broader customer base, an expanded product line in Parts and Disposables
and added experience and sophistication in this business.
5
<PAGE>
From June 1998 through February 1999, we acquired four other separate
businesses. The aggregate purchase price of these acquisitions was
$43.3 million.
We believe that the previously mentioned acquisitions will:
- generate financial leverage;
- strengthen our market leadership position;
- enable existing customers to reduce their costs by consolidating
vendors;
- enhance the quality and selection of products offered by us;
- expand the presence of our national accounts and
- enhance our operations by providing additional dedicated and
experienced employees.
OTHER TRANSACTIONS. On May 29, 1998, MQ was merged with and into Holdings
with Holdings continuing as the surviving corporation. Prior to or
simultaneously with the consummation of the Merger:
- Holdings reorganized its corporate structure by contributing certain of
its assets and liabilities to MEDIQ/PRN;
- MEDIQ/PRN entered into a new $325.0 million senior secured credit
facility (the "New Credit Facility"); and
- 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 aggregate consideration paid in connection with the Merger was
approximately $390.8 million, which amount included $20.0 million of
newly-issued preferred stock of the surviving corporation. In addition, in
connection with the Merger:
- certain controlling stockholders of Holdings converted a portion of
their preferred equity in Holdings into $14.5 million of common and
preferred equity of the surviving corporation;
- certain members of management and other persons selected by Holdings
and BRS purchased $4.2 million of common and preferred equity of MQ and
- BRS, certain entities and individuals affiliated with BRS (together
with BRS, the "BRS Entities") and certain funds affiliated with Ferrer
Freeman Thompson & Co. LLC and Galen Partners III, L.P. (the
"Co-Investors") purchased $109.5 million of common and preferred equity
of MQ.
As part of the financing for the consideration paid in connection with the
Merger, Holdings issued and sold $140,885,000 aggregate principal amount at
maturity of 13% Senior Discount Debentures due 2009 (the "Debentures") 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 by Holdings (the "Unit
Offering") of 140,885 Units (the "Units"). Each Unit consisted of one Debenture
with a principal amount at maturity of $1,000 and one Warrant. In a concurrent
private placement, MEDIQ/PRN issued and sold $190,000,000 aggregate principal
amount of 11% Senior Subordinated Notes due 2008 (the "Notes") to the Initial
Purchasers. Additionally, MEDIQ/ PRN borrowed $200.0 million in Term Loans
pursuant to the New Credit Facility to finance the CHI Acquisition and a portion
of the Merger.
6
<PAGE>
WARRANTS AND WARRANT SHARES
Holdings originally issued the Warrants in the Unit Offering, pursuant to
which 140,885 Units were issued and sold. Each Unit consisted of a Debenture and
a Warrant. The Debentures and the Warrants became eligible to trade separately
on October 22, 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."
7
<PAGE>
SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following table sets forth summary consolidated historical financial
information of the Company for the three fiscal years ended September 30, 1998
and for the nine months ended June 30, 1998 and 1999 and unaudited summary pro
forma consolidated financial information of the Company for the fiscal year
ended September 30, 1998 and for the LTM Period.
The historical statement of operations data for the three years ended
September 30, 1998 was derived from our audited consolidated financial
statements included elsewhere in this Prospectus. The historical statements of
operations data for the nine months ended June 30, 1998 and 1999 were derived
from our unaudited consolidated financial statements included elsewhere in this
Prospectus which, in our opinion, include all adjustments necessary for a fair
presentation of our financial condition and results of operations for such
periods. The results of operations for interim periods are not necessarily
indicative of a full year's operations. The historical other data for the three
years ended September 30, 1998 and the nine months ended June 30, 1998 and 1999
were derived from schedules prepared by us.
The historical balance sheet data as of June 30, 1999 included within the
supplemental pro forma data for the pro forma LTM Period reflects the
acquisitions and transactions referred to in the section "Acquisitions and Other
Transactions." The historical balance sheet data as of September 30, 1998
reflects the Transactions and the CHI Acquisition. The statement of operations
data and other data for pro forma year ended September 30, 1998 and for the pro
forma LTM Period and supplemental pro forma data give effect to the CHI
Acquisition, the HTD Acquisition, and the Transactions as if they were
consummated on October 1, 1997 to the extent not already included in actual
results contained therein. The unaudited pro forma financial information is
presented for informational purposes only and does not purport to be indicative
of our results of operations that actually would have been achieved had such
acquisitions and transactions been consummated on the date or for the periods
indicated and do not purport to be indicative of our results of operations for
any future period.
It is important that you read this table along with "Pro Forma Condensed
Consolidated Statements of Operations," "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.
8
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA NINE MONTHS
YEAR ENDED YEAR ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, JUNE 30,
------------------------------ ------------- --------------------- PRO FORMA
1996 1997(A) 1998(B) 1998 1998(B) 1999(C) LTM PERIOD(D)
-------- -------- -------- ------------- -------- -------- -------------
HISTORICAL (UNAUDITED) (UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Revenues............. $136,066 $155,960 $180,916 $258,491 $131,920 $166,979 $282,979
Non-recurring
items(e)........... (2,200) -- (38,417) (38,417) (34,567) 3,000 (850)
Operating income
(loss)............. 25,446 29,504 (18,704) (17,757) (19,889) 26,165 32,471
Interest expense..... (27,307) (19,107) (27,894) (58,842) (14,333) (40,768) (59,805)
Other (charges) and
credits(f)......... (4,695) (7,504) 5,072 6,437 714 465 6,639
Income (Loss) from
continuing
operations before
income taxes....... (6,556) 2,893 (41,526) (70,162) (33,508) (14,138) (20,695)
Loss from continuing
operations......... (6,178) (2,241) (29,071) (49,118) (21,764) (10,354) (19,419)
Loss from continuing
operation per
share(g)........... (.25) (.09) (1.69) (43.89) (.96) (9.61) (17.35)
Other Data:
Rental revenues...... $114,275 $124,316 $142,736 $167,891 $103,700 $128,743 $177,456
Sales revenues....... $ 11,696 $ 20,230 $ 27,928 $ 73,677 $ 20,671 $ 28,925 $ 87,156
Other revenues....... $ 10,095 $ 11,414 $ 10,252 $ 16,923 $ 7,549 $ 9,311 $ 18,367
EBITDA(h)............ $ 55,603 $ 59,863 $ 22,988 $ 31,287 $ 11,761 $ 57,765 $ 78,284
Adjusted EBITDA(h)... $ 57,803 $ 59,863 $ 61,405 $ 69,704 $ 46,328 $ 54,765 $ 79,134
Depreciation and
amortization....... $ 30,157 $ 30,359 $ 41,692(i) $ 49,044(i) $ 31,650(i) $ 31,600 $ 45,813
Capital
expenditures....... $ 18,073 $ 15,458 $ 20,022 $ 24,254 $ 17,909 $ 18,254 $ 22,390
Branches and
distributors (at
end of period)..... 84 84 101 108 101 108 108
Equipment units (at
end of period)..... 120,388 131,897 152,853 156,720 150,050 165,393 165,393
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998(B) AS OF JUNE 30, 1999(C)
--------------------------- ----------------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Historical Balance Sheet Data:
Working capital.................................... $ 49,774 $ 68,944
Property, plant and equipment, net................. 103,917 111,040
Total assets....................................... 309,218 409,647
Total debt (including current portion of long-term
debt)............................................ 470,041 570,122
Mandatorily redeemable preferred stock............. 113,037 131,676
Stockholders' deficiency........................... (325,353) (347,380)
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
LTM PERIOD(D)
-------------
<S> <C>
Supplemental Pro Forma Data:
Ratio of adjusted EBITDA to adjusted interest expense
(excluding non-cash interest expense)..................... 1.69 times
Ratio of debt at June 30, 1999 to Adjusted EBITDA........... 7.20
</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 were included in the Company's operating results.
(b) On May 29, 1998, the Company effected a Merger accounted for as a
recapitalization. Accordingly, the historical basis of assets and
liabilities was not changed, and the residual effects of the Merger were
recorded in and created a stockholders' deficiency. In connection with the
Merger, new capital stock, including cumulative preferred stock, was issued,
debt was refinanced and additional debt incurred. Also, the number of shares
of Common Stock issued and outstanding was greatly reduced as a result of
the Merger, thereby affecting comparability of per share amounts.
Additionally, on May 29, 1998, the Company acquired the CH Medical Business
for $50.0 million, including related costs and expenses, that was financed
with long-term debt. On June 26, 1998, the Company acquired National Patient
Care Systems, Inc. ("NPC") for $11.0 million. The results of operations of
these acquired companies were included in the Company's results of
operations from the respective dates of acquisition.
(c) On June 15, 1999, the Company consummated the HTD Acquisition for
$59.7 million, comprised of $49.7 million in cash and $10.0 million
aggregate value of capital stock. The cash portion was financed under the
New Credit Facility. For accounting purposes, the effective date of the
acquisition was May 28, 1999. Accordingly, the results of operations of HTD
were included in the Company's results of operations beginning May 28, 1999.
(d) The Pro Forma LTM data represent the unaudited pro forma results of
operations from July 1, 1998 to June 30, 1999 (the "LTM Period"). Data for
the LTM Period was derived by subtracting pro forma results of operations
for the nine months ended June 30, 1998 from the unaudited pro forma results
of operations for the year ended September 30, 1998 (included elsewhere
herein) and then adding thereto the unaudited pro forma results of
operations for the nine months ended June 30, 1999 (included elsewhere
herein).
(e) Fiscal 1996 consists of restructuring charges of $2.2 million. Fiscal 1998
and the Pro Forma Year Ended September 30, 1998 consist of non-recurring
merger and acquisition charges aggregating $35.0 million (consisting of
compensation expense of $19.7 million upon the exercise of stock options by
employees of the Company, payment of special transaction bonuses to certain
current and former members of management of $6.7 million, the payment of a
transaction fee of $6.0 million to BRS and
10
<PAGE>
the Co-Investors and $2.6 million for acquisition costs related to the CHI
Acquisition), and a $3.4 million charge related to acquired receivables. The
nine months ended June 30, 1998 consists of non-recurring merger and
acquisition charges incurred to that time. The nine months ended June 30,
1999 and the pro forma LTM Period consist of a reduction in expense of
$3.0 million regarding a cash settlement of disputed items related to an
acquisition. The pro forma LTM Period also includes a $3.4 million charge
related to acquired receivables and $.5 million of merger and acquisition
charges.
(f) Fiscal 1996 includes a $6.0 million reserve on the note receivable from MHM
Services, Inc. ("MHM"), 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 and a gain on a
note receivable of $1.8 million. Fiscal 1998 and Pro Forma Year Ended
September 30, 1998 include a cash settlement on the fully reserved note
receivable from MHM of $3.0 million and recognition of discount on a note
receivable of $1.1 million.
(g) The weighted average number of common shares outstanding used in the
computations was 24.6 million for fiscal 1996, 25.3 million for fiscal 1997,
17.2 million for fiscal 1998, 1.1 million for the Pro Forma Year Ended
September 30, 1998, 22.7 million and 1.1 million for the nine months ended
June 30, 1998 and 1999, respectively, and 1.1 million for the LTM Period.
The weighted average number of shares outstanding for the periods presented
ended June 30, 1998 and thereafter reflect the weighted effects during the
periods of the recapitalization effected by the Merger. The weighted average
number of shares outstanding for the pro forma year ended September 30,
1998, nine months ended June 30, 1999 and the pro forma LTM Period reflect
the weighted effects of the shares of Common Stock issued in the HTD
Acquisition. For the pro forma year ended September 30, 1998 and pro forma
LTM Period, the number of shares effected by the Merger and HTD Acquisition
were assumed to be outstanding at the beginning of each respective period.
Basic and diluted per share amounts within each period are the same as no
effect is given to the Warrants and stock options outstanding during the
respective periods presented because they are antidilutive. At October 1,
1999, the number of shares of Common Stock that can be purchased by
employees under the stock option plan adopted by the Company on October 1,
1998 is 53,470. Stock options outstanding under prior stock option plans
were terminated with the Merger.
(h) EBITDA is defined as income from continuing operations before interest,
taxes, depreciation and amortization and other charges and credits. 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. EBITDA may be
calculated differently by different companies and analysts. Therefore, the
Company's computation of EBITDA may not be comparable to the EBITDA
computation of others. Adjusted EBITDA is EBITDA plus non-recurring items.
(i) Includes $6.0 million additional reserve to write down certain under
utilized equipment to net realizable value.
11
<PAGE>
RISK FACTORS
THIS INVESTMENT INVOLVES RISKS. YOU 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
We have incurred substantial indebtedness in connection with the
Transactions and the CHI Acquisition. At June 30, 1999, we had $570.1 million of
consolidated indebtedness and a shareholders' deficit of $347.4 million. See
"Capitalization" and "Selected Consolidated Historical Financial Information."
Accordingly, we have significant debt service obligations. On a Pro Forma Basis,
our ratio of earnings to fixed charges would have been 0.7 to 1 for the LTM
Period. In addition, we are likely to incur additional indebtedness in the
future, subject to certain limitations contained in the instruments and
documents governing our indebtedness. See "Description of Certain
Indebtedness--New Credit Facility," "--Notes" and "--Debentures."
The degree to which we are leveraged has important consequences. For
example:
- our ability to obtain additional financing for working capital, capital
expenditures, acquisitions, debt service requirements or other purposes
may be impaired;
- a substantial portion of MEDIQ/PRN's cash flow from operations will be
required to pay its interest expense and principal repayment obligations
and will not be available for its general corporate needs (including
distributions to Holdings for payments with respect to the Debentures);
- our flexibility to adjust to changing market conditions may be limited,
and our ability to compete against our less highly leveraged competitors
may be reduced;
- we may be more vulnerable in the event of a downturn in our business or in
the economy generally; and
- 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."
ABILITY TO SERVICE DEBT AND PREFERRED STOCK
The successful implementation of our business strategy is necessary for us
to meet our anticipated debt service and preferred stock redemption
requirements. In addition, our ability to meet our debt service and preferred
stock redemption requirements will depend on our future performance, which is
subject to a number of factors, most of which are outside our control. We can
give no assurance that we will generate sufficient cash flow from operating
activities to meet our debt service, preferred stock redemption 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. The Debentures will mature in June 2009. Moreover, the New Credit
Facility and the Notes currently require cash interest payments. Principal on
Term Loans made pursuant to the New Credit Facility require quarterly
amortization payments that began September 1999 until final maturity in
June 2006. Principal on Acquisition Loans and Subfacility B of the Revolving
Credit Facility both made pursuant to the New Credit Facility will require
quarterly amortization payments beginning March 2000 that increase incrementally
thereafter until final maturity in June 2004. Amounts borrowed under Subfacility
A of the Revolving Credit Facility pursuant to the New Credit Facility are to be
paid in full in May 2004. The Notes will mature in 2008. See "Description of
Certain Indebtedness--Debentures," "--New Credit Facility" and "--Notes."
Dividends on each of the Company's issued and outstanding preferred stock series
are cumulative. Cumulative unpaid dividends for each series compound annually.
12
<PAGE>
Outstanding shares of Series A and C Preferred Stock, plus unpaid cumulative
dividends, are required to be redeemed in December 2011 and 2012, respectively.
Redemption amounts could be substantial. See "Description of Capital
Stock--Series A", "--Series B Preferred Stock" and "--Series C Preferred Stock."
All or a portion of such indebtedness and preferred stock 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 us. In the absence of such refinancing, we
could be forced to dispose of assets in order to make up for any shortfall in
the payments due on our indebtedness and preferred stock under circumstances
that might not be favorable to realizing the highest price for such assets, and
there can be no assurance that our assets could be sold quickly enough, or for
sufficient amounts, to enable us to meet our obligations.
RESTRICTIVE COVENANTS
The instruments and documents governing our indebtedness contain, and any
additional financing agreements are likely to contain, certain restrictive
covenants. These covenants affect, and in some cases will significantly limit or
prohibit, among other things, our ability 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 our
ability to meet our debt service obligations (including our obligations with
respect to the Debentures and the Notes). In the event we fail to comply with
the various covenants contained in the instruments and documents governing our
indebtedness, we would be in default thereunder and the maturity of
substantially all of our long-term indebtedness could be accelerated. In
addition, in the event of a change of control, we will be required, subject to
certain conditions, to offer to purchase all outstanding Debentures and Notes at
a price equal to 101% of accreted value or principal amount, respectively, plus
accrued interest . There can be no assurance that we would be able to raise
sufficient funds to meet this obligation. A default under either of the
indentures under which the Debentures and the Notes have been issued would also
constitute an event of default under the New Credit Facility. See "Description
of Certain Indebtedness--Debentures," "--New Credit Facility" and "--Notes."
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, preferred stock, 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
13
<PAGE>
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 indenture under which the Notes have been issued 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, principal of the Debentures when due or upon a change of control or the
occurrence of any other event requiring the repayment of principal or preferred
stock redemption requirements. In such event, Holdings may be required to:
- refinance the Debentures;
- seek additional debt or equity financing;
- 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;
- 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 indenture under which the Notes have been issued);
- merge MEDIQ/PRN with Holdings, which merger would be subject to compliance
with applicable debt covenants and the consents of certain lenders or
- 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 and preferred stock redemption 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. We can give no assurance 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.
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 its subsidiaries, and by 100%
of the common stock of MEDIQ/PRN's subsidiaries. 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."
OPERATING LOSSES
We experienced losses from continuing operations of approximately
$6.2 million, $2.2 million and $29.1 million for the fiscal years ended
September 30, 1996, 1997 and 1998, respectively. On a Pro Forma Basis, our loss
from continuing operations for the fiscal year ended September 30, 1998 and for
the LTM Period would have been $49.1 million and $19.4 million, respectively. We
can give no assurance that we will not continue to incur operating losses.
14
<PAGE>
COMPETITION
The medical equipment rental industry is highly competitive and we encounter
competition in all our locations throughout the United States. Competition is
generated from:
- medical equipment manufacturers which sell medical equipment directly to
health care providers and which we believe generate the strongest
competition;
- general leasing and financing companies and financial institutions, such
as banks, which finance the acquisition of medical equipment by health
care providers; and
- national, regional and local medical equipment renting and leasing
companies and medical equipment distributors which rent medical equipment
to health care providers.
We believe 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. We face competitive pressure in all of
our markets from existing competitors and from the potential entry of new
competitors. Although we believe that we are able to demonstrate the
cost-effectiveness of renting medical equipment on a long term basis, we believe
that many health care providers will continue to purchase a substantial portion
of their medical equipment. We also face vigorous competition in our Support
Surfaces and Parts and Disposables businesses. There are numerous other
providers of these items, some of whom are larger than we are and have
considerably greater resources and experience in those businesses than we do. We
have a relatively small share of the markets for Support Surfaces and Parts and
Disposables. See "Business--Competition."
ABILITY TO IMPLEMENT ACQUISITION STRATEGY AND ABILITY TO MANAGE GROWTH
A key component of our business strategy has been the growth of our product
and customer base through the acquisition of companies in similar lines of
business. We have recently consummated the CHI Acquisition, the HTD Acquisition
and four other smaller acquisitions. See "Business--Acquisitions and
Dispositions."
As of June 30, 1999, subject to certain conditions, the terms of the New
Credit Facility provided MEDIQ/PRN with the capacity to borrow up to an
additional $32.0 million thereunder, of which, pursuant to the terms of the New
Credit Facility, the Notes and the Debentures, was limited in availability to
$15.0 million. In order to capitalize on future acquisition opportunities, we
may need to obtain additional capital and obtain Federal and/or state regulatory
approvals. To raise additional capital, we may elect to undertake additional
debt financings. Additional borrowings under the New Credit Facility, and the
issuance of additional debt securities or other borrowings, would result in
additional leverage and may reduce working capital. Furthermore, the issuance of
additional debt securities or other borrowings will be restricted by the terms
of the instruments and documents governing our indebtedness. We can give no
assurance that we will be able to obtain the necessary approvals or such
financing on terms acceptable to us, if at all, and the inability to obtain such
regulatory approvals or financing could have a material adverse effect on our
ability to capitalize on profitable acquisition opportunities.
Any growth of our business through further internal expansion or
acquisitions will place demands on our management, employees, operations and
physical and financial resources. To manage our growth, we must continue to
implement and improve our operational and financial systems and to expand, train
and manage our employee base. Any inability to attract and retain the executive
and managerial personnel required by our expanding business could have a
material adverse effect on our results of operations and financial condition. If
our systems, procedures or controls are not adequate to support our operations,
we may not be able to achieve the rapid expansion necessary to exploit potential
market opportunities for our products and services.
15
<PAGE>
Acquisitions involve a number of additional risks, including diversion of
management's attention from other business concerns, the possible loss of key
employees of acquired businesses and the potential difficulties in integrating
the operations of acquired businesses with our existing businesses. In light of
the foregoing, we can give no assurance as to the effect of acquired businesses
on our business or results of operations. See See "Business--Acquisitions and
Dispositions."
RELIANCE ON KEY PERSONNEL
Our 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 us. Although Mr. Thomas E. Carroll, President and Chief Executive
Officer of Holdings, and Mr. Jay M. Kaplan, Senior Vice President--Finance,
Treasurer and Chief Financial Officer of Holdings, and certain other members of
senior management are stockholders of Holdings and have employment contracts
with us, there can be no assurance that the services of such personnel will
continue to be available to us. See "Management" and "Ownership of Capital
Stock."
DEPENDENCE ON SALES REPRESENTATIVES AND SERVICE SPECIALISTS
We believe that to be successful we must continue to hire, train and retain
highly qualified sales representatives and service specialists. Our 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 our customers. Due to the relationships
developed between our sales representatives and our customers, upon the
departure of a sales representative we face the risk of losing the
representative's customers, especially if the representative were to represent
one of our competitors. In addition, there has been, and we expect that there
will continue to be, intense competition in our industry for divisional managers
and experienced sales representatives. We can give no assurance that we will be
able to retain or attract qualified personnel in the future. Our failure to
attract or retain such personnel could have a material adverse effect on our
business, financial condition or results of operations.
REGULATION OF THE HEALTH CARE INDUSTRY
We focus our business on providing services to health care institutions,
particularly hospitals. The health care industry is subject to extensive
government regulation, licensure, voluntary standards and prescribed operating
procedures. The continued acceptance of our services and products by our
customers will depend, to a very significant degree, upon whether such services
and products will be in compliance with applicable regulations and standards or
will assist health care institutions in complying with such regulations and
standards. While we closely monitor such regulations and standards and design
our services and products accordingly, a substantial change in the level of
regulation and standards or the substance of particular regulations and
standards could have a material adverse effect on our 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 significantly
reduces Federal spending on Medicare and Medicaid over a period of five years
after its enactment 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, and allowing states greater
flexibility in controlling Medicaid costs at the state level. We cannot reliably
predict the timing or the exact effect that these or similar initiatives could
have on the pricing and profitability of, or demand for, our products. However,
certain provisions of The Balanced Budget Act of 1997, such as the changes in
the way Medicare Part A reimburses skilled nursing facilities, may change the
way our customers make renting and purchasing decisions and could have a
material adverse effect on us.
16
<PAGE>
We also believe 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. We can give no assurance that current or
future initiatives will not have a material adverse effect on our business,
financial condition or results of operations.
Our 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, we also act as a
supplier of durable medical equipment under Federal law and, as such, furnish
products directly to customers and bill third-party payors. As a result, the
demand for our 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, we can give no assurance of the outcome of future coverage or payment
decisions for any of our products by governmental or private payors. If
providers, suppliers and other users of our products and services are unable to
obtain sufficient reimbursement for the rental and sale of our products, a
material adverse impact on our 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 our business, financial condition or results of
operations.
FRAUD AND ABUSE LAWS
We and our 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 our 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 durable medical equipment 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. We can give no assurance that our practices (including our
third-party billing practices with respect to the CH Medical Business since
consummation of the CHI Acquisition), the past third-party billing practices of
the CH Medical Business or the billing practices of our 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 our business,
financial condition or results of operations.
PRODUCT LIABILITY
The manufacture and marketing of medical products entails an inherent risk
of product liability claims. Although we have not experienced any significant
losses due to product liability claims and currently maintain umbrella liability
insurance coverage, we can give no assurance that the amount or scope of the
coverage we maintain will be adequate to protect us in the event a significant
product liability claim is successfully asserted against us.
17
<PAGE>
CONTROLLING STOCKHOLDERS
At October 1, 1999, the BRS Entities and the Co-Investors collectively own
approximately 74.1% of the outstanding Common Stock of Holdings. By virtue of
such ownership, the BRS Entities and the Co-Investors control our company, and
have the power to elect a majority of directors, appoint new management and
approve any action requiring the approval of our stockholders, including the
adoption of most amendments to our Certificate of Incorporation, the approval of
mergers or sales of substantially all of our assets and the creation of new
classes or series of capital stock. The directors elected by the BRS Entities
and the Co-Investors have the authority to make decisions affecting our capital
structure, including the issuance of additional capital stock, the
implementation of stock repurchase programs and the declaration of dividends.
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. We can give 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 us 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, we can give no assurance as to the liquidity of any
trading market for the Warrants or the Warrant Shares, or that an active market
for the Warrants or the Warrant Shares will develop. We do not intend to apply
for listing or quotation of the Warrants or Warrant Shares on any securities
exchange or stock market.
RISKS ASSOCIATED WITH THE WARRANTS
An investment in the Warrants is highly speculative, and we can give no
assurance as to when or if the Warrants will have any significant value.
We are required under the Warrant Agreement to use our best efforts to cause
the Registration Statement to remain effective for certain specified periods of
time. There can be no assurance that we 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 October 1, 1999, Holdings had 1,119,048 shares of Common Stock
outstanding and options issued under Holdings' stock option plan outstanding for
53,470 shares. The total number of shares authorized under the stock option plan
at October 1, 1999 is 61,543. If all outstanding Warrants and options were
exercised, Holdings would have 1,263,727 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 1,172,518 shares of
Common Stock and options outstanding were or would be 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.
18
<PAGE>
Furthermore, the indenture under which the Debentures have been issued
contains numerous restrictive covenants with which we are required to comply. If
we fail to comply with such covenants, resulting in an event of default, the
Debentures and substantially all of our 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
We have no plans to pay any dividends on any of our capital stock, including
our Common Stock, in the foreseeable future and currently we intend to retain
all earnings for reinvestment in our business and repayment of indebtedness. Our
ability to pay any dividends on any of our capital stock, including our Common
Stock, will depend on our receipt of cash dividends from MEDIQ/PRN. The timing
and amount of dividends, if any, will depend, among other things, on our results
of operations, financial condition, cash requirements and other relevant
factors. The New Credit Facility and the indentures under which the Notes and
Debentures were issued restrict the payment of dividends by MEDIQ/PRN and
Holdings. Such restrictions could materially and adversely affect our ability to
pay dividends on the Warrant Shares and therefore the value of the Warrants and
the Warrant Shares.
THE YEAR 2000 PROBLEM
The risks posed by the Year 2000 Problem may adversely affect our business
in a number of significant ways by affecting our operations and increasing our
costs. As a significant portion of our revenues and operating income are
directly related to our ability to rent our equipment, the failure of a material
portion of such equipment to be Year 2000 compliant could have a material
adverse effect on our operations. While we have obtained assurances from the
manufacturers of the products in our inventory that 88% of such products are
Year 2000 compliant, we cannot guarantee that such assurances are accurate.
Furthermore, we utilize third party network equipment and software products in
our operations. While we have been testing such equipment and products as well
as obtaining assurances from these third parties that their systems and products
are Year 2000 compliant, any delay in or failure to implement Year 2000
solutions for such systems, equipment and products could adversely affect our
operations. Therefore, we cannot guarantee that we will not experience
disruptions in our service or other disruptions due to Year 2000 problems. See
our "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Recent Developments" for a more detailed discussion of our Year 2000
circumstances.
19
<PAGE>
THE TRANSACTIONS
Concurrently with the issuance of the Units and the Notes, the Company
consummated the Merger and certain related transactions.
THE MERGER, THE REORGANIZATION AND THE REFINANCING
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, on May 29, 1998 MQ was merged with and into Holdings
with Holdings continuing as the surviving corporation (the "Surviving
Corporation"). MQ was a Delaware corporation organized by BRS solely to effect
the Merger and acquire, together with other investors, a controlling interest in
Holdings. 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 the New Credit
Facility providing for at that time 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 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:
- 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");
- 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
- the BRS Entities and the Co-Investors purchased $109.5 million of common
and preferred equity of MQ (the "Equity Contribution"). See "--The Rotko
Rollover," "--The Management Investment" and "--The Equity Contribution."
For accounting purposes, the Merger was treated as a recapitalization.
Accordingly, the historical basis of the Company's assets and liabilities was
not affected.
The Merger, the Reorganization, the Refinancing, the Equity Rollover and the
Equity Contribution, together with the initial offering of the Notes by
MEDIQ/PRN (the "Note Offering"), the Unit Offering, 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:
- Common Stock, par value $.01 per share ("Common Stock");
- Series A Preferred Stock;
- Series B 13.25% Cumulative Compounding Perpetual Preferred Stock, par
value $.01 per share ("Series B Preferred Stock"), and
20
<PAGE>
- 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").
Immediately following consummation of the Merger and the subsequent purchase by
the Management Stockholders in September 1998 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, 3.1% of the Series A
Preferred Stock (excluding any shares received in the Merger as Merger
Consideration by Management Stockholders other than Messrs. Carroll and Kaplan),
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, 9.1% of the
Series A Preferred Stock and 44.7% of the Series B Preferred Stock; and other
stockholders of Holdings held approximately 15.9% of the Series A Preferred
Stock. See "Ownership of Capital Stock."
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 of the Merger (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 are 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.
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."
21
<PAGE>
THE EQUITY CONTRIBUTION
The BRS Entities and the Co-Investors purchased $109.5 million of common and
preferred equity of MQ pursuant to the Equity Contribution. At the Effective
Time, the securities of MQ purchased by the BRS Entities and the Co-Investors
were converted into approximately $8.3 million of Common Stock, $56.2 million of
Series A Preferred Stock, $16.0 million of Series B Preferred Stock and
$29.0 million of Series C Preferred Stock. See "--Conversion of MQ Stock and
Holdings Shares in the Merger."
CONVERSION OF MQ STOCK AND HOLDINGS SHARES IN THE MERGER
As a result of the Merger, each share of capital stock of MQ issued and
outstanding immediately prior to the Effective Time (including the shares of
capital stock issued by MQ to the Management Stockholders pursuant to the
Management Investment and the shares of capital stock issued by MQ to the BRS
Entities and the Co-Investors pursuant to the Equity Contribution) was converted
into and represented the same number of shares of the same class and series of
capital stock of the Surviving Corporation.
As a result of the Merger, each share of Holdings Preferred Stock and each
share of common stock, par value $1.00 per share, of Holdings ("Holdings Common
Stock" and, together with the Holdings Preferred Stock, the "Holdings Shares")
issued and outstanding immediately prior to the Effective Time was converted
into the right to receive $13.75 in cash, without interest, and 0.075 of a share
of Series A Preferred Stock of the Surviving Corporation; provided that (i) the
Rolled Shares were converted into and represented the Converted Shares,
(ii) each Holdings Share that was issued and outstanding immediately prior to
the Effective Time and owned by MQ or Holdings or any direct or indirect
subsidiary of MQ or Holdings was cancelled and no payment of any consideration
was made with respect thereto and (iii) any Holdings Shares held by a holder who
had timely demanded and perfected his demand for appraisal of his Holdings
Shares (such shares being "Dissenting Shares") in accordance with Section 262 of
the Delaware General Corporation Law (the "DGCL") and as of the Effective Time
had neither effectively withdrawn nor lost his right to such appraisal was
entitled to only such rights as are granted by the DGCL.
22
<PAGE>
USE OF PROCEEDS
Holdings did not receive any proceeds from the initial registration and will
not receive any proceeds from the 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.
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. See "The Transactions" and "Description of Certain
Indebtedness."
<TABLE>
<CAPTION>
AMOUNT
-------------
(IN MILLIONS)
<S> <C>
SOURCES OF FUNDS:
- ------------------------------------------------------------
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
======
USES OF FUNDS:
- ------------------------------------------------------------
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
Rolled Shares 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%.
23
<PAGE>
MARKET INFORMATION AND DIVIDENDS
Holdings did not pay any dividends on its Common Stock during fiscal 1997,
fiscal 1998 or during the nine months ended June 30, 1999. 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 under which
the Debentures and Notes were issued restrict the payment of dividends by
MEDIQ/PRN and Holdings. See "Description of Certain Indebtedness."
No established public trading market exists for Holdings' Common Stock or
the Warrants. At October 1, 1999 employee stock options to purchase 53,470
shares of the Company's Common Stock were outstanding.
24
<PAGE>
CAPITALIZATION
The following table sets forth the historical consolidated capitalization of
Holdings as of June 30, 1999. 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, 1999
-------------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C>
Long-term debt, including current portion:
New Credit Facility......................................... $293,000
Capital lease obligations................................... 1,186
Notes....................................................... 190,000
Debentures.................................................. 85,309
Exchangeable Debentures..................................... 514
Other....................................................... 113
--------
Total long-term debt.................................... 570,122
Mandatorily redeemable preferred stock:
Series A Preferred Stock.................................... 94,565
Series C Preferred Stock.................................... 37,111
--------
Total mandatorily redeemable preferred stock................ 131,676
Stockholders' deficiency (a)................................ (347,380)
--------
Total capitalization.................................... $354,418
========
</TABLE>
- ------------------------
(a) The stockholders' deficiency of Holdings includes $31 of Series B Preferred
Stock, $11 of Common Stock, $43,669 of capital in excess of par and
$(391,091) 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.
25
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
The following unaudited pro forma condensed consolidated statements of
operations (the "Pro Forma Statements") are based on the historical results of
operations of the Company, CH Medical and the HTD Nonacute Care Business. The
CHI Acquisition was consummated on May 29, 1998. Accordingly, the Company's
historical consolidated results of operations include the results of operations
of the CH Medical Business from the acquisition date. The HTD Acquisition was
consummated on June 15, 1999. For accounting purposes, the acquisition was
effective May 28, 1999. Accordingly, the Company's historical results of
operations include the results of operations of the HTD Nonacute Care Business
beginning May 28, 1999. A pro forma balance sheet is not presented herein as the
Company's historical consolidated balance sheet at June 30, 1999 as contained in
the Company's Form 10-Q for the period ended June 30, 1999 includes the assets
and liabilities of the CH Medical Business, the HTD Nonacute Care Business and
amounts associated with the Transactions.
The unaudited pro forma condensed consolidated statements of operations for
the year ended September 30, 1998 and for the nine months ended June 30, 1999
give effect to the Transactions, the CHI Acquisition and the HTD Acquisition as
if they were consummated on October 1, 1997, to the extent not already included
in the historical results of operations. All the unaudited pro forma adjustments
are described more fully in the accompanying notes.
The CH Medical Business and HTD Nonacute Care Business were conducted as an
integral part of the overall operations of their respective entities, and
separate financial statements were not prepared for either. The Company has been
advised by the management of the respective acquired businesses that the results
of operations of each acquired business were prepared from historical accounting
records and include various allocations for costs and expenses. Therefore, the
results of operations of CH Medical and HTD Nonacute Care Business may not be
indicative of the results of operations that would have resulted if either had
operated on a stand-alone basis. The Company has been advised by the management
of the respective acquired businesses that all of the allocations and estimates
reflected in the results of operations of each acquired business are based on
assumptions that are believed to be reasonable under the circumstances.
The Pro Forma 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 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, CH Medical, HTD and Triad Holdings, Inc. ("Triad") included elsewhere
in this Prospectus. The financial statements of Triad are included because Triad
was a significant acquiree of HTD during HTD's year ended December 31, 1998
presented herein and represent the principal predecessor HTD Nonacute Care
Business during this year.
The unaudited 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 CHI Acquisition and HTD
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 of the CHI Medical Business
reflected in the Pro Forma Statements has been finalized without any material
adjustments from the allocation of the purchase price previously reported. The
allocation of the purchase price of the HTD Acquisition has been estimated and
is contingent upon determinations and valuations not yet completed. The Company
is unable to predict whether any adjustments to the allocation of the HTD
Acquisition purchase price may be material.
26
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1998
PRO FORMA ADJUSTMENTS FOR:
-----------------------------------------------------
THE THE PRO FORMA
HISTORICAL CHI HTD CONSOLIDATED
COMPANY THE TRANSACTIONS ACQUISITION(F) ACQUISITION(G) COMPANY
---------- ---------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental..................... $142,736 $ -- $15,056 $10,099 $167,891
Sales...................... 27,928 -- 2,181 43,568 73,677
Other...................... 10,252 -- -- 6,671 16,923
-------- -------- ------- ------- --------
180,916 -- 17,237 60,338 258,491
Costs and Expenses:
Cost of sales.............. 22,659 -- 392 41,530 64,581
Operating.................. 63,072 -- 7,449 -- 70,521
Selling.................... 16,590 -- 2,367 3,703 22,660
General and
administrative............. 20,586 667 (C) 4,688 8,480 34,421
Merger and acquisition
charges(A)............... 35,021 -- -- -- 35,021
Depreciation and
amortization............. 41,692 -- 2,801 4,551 49,044
-------- -------- ------- ------- --------
Operating (Loss) Income........ (18,704) (667) (460) 2,074 (17,757)
Other (Charges) Credits:
Interest expense........... (27,894) (24,959)(D) (205) (5,784) (58,842)
Other-net.................. 5,072 -- 265 1,100 6,437
-------- -------- ------- ------- --------
Loss from Continuing Operations
before Income Taxes.......... (41,526) (25,626) (400) (2,610) (70,162)
Income Taxes................... (12,455) (7,686)(E) (120) (783) (21,044)
-------- -------- ------- ------- --------
Loss from Continuing
Operations................... $(29,071) $(17,940) $ (280) $(1,827) $(49,118)
======== ======== ======= ======= ========
Loss from Continuing Operations
per Share(B)................. $ (1.69) $ (43.89)
======== ========
Weighted Average Number of
Common Shares
Outstanding(B)............... 17,205 1,119
======== ========
</TABLE>
See Notes to Pro Forma Condensed Consolidated Statements of Operations
27
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30, 1999
------------------------------------------
PRO FORMA
ADJUSTMENTS PRO FORMA
HISTORICAL FOR THE HTD CONSOLIDATED
COMPANY ACQUISITION(G) COMPANY
---------- -------------- ------------
<S> <C> <C> <C>
Revenues:
Rental................................................ $128,743 $ 7,084 $135,827
Sales................................................. 28,925 36,437 65,362
Other................................................. 9,311 4,455 13,766
-------- ------- --------
166,979 47,976 214,955
Cost and Expenses:
Cost of sales......................................... 22,589 33,638 56,227
Operating............................................. 48,117 -- 48,117
Selling............................................... 20,128 1,898 22,026
General and administrative............................ 18,380 5,815 24,195
Depreciation and amortization......................... 31,600 3,034 34,634
-------- ------- --------
Operating Income.......................................... 26,165 3,591 29,756
Other (Charges) Credits:
Interest expense...................................... (40,768) (4,066) (44,834)
Other-net............................................. 465 1,050 1,515
-------- ------- --------
Income (Loss) from Continuing Operations before Income
Taxes................................................... (14,138) 575 (13,563)
Income Taxes.............................................. (3,784) 154 (3,630)
-------- ------- --------
Income (Loss) from Continuing Operations.................. $(10,354) $ 421 $ (9,933)
======== ======= ========
Loss from Continuing Operations per Share (B)............. $ (9.61) $ (8.88)
======== ========
Weighted Average Number of Common Shares Outstanding (B).. 1,077 1,119
======== ========
</TABLE>
See Notes to Pro Forma Condensed Consolidated Statements of Operations
28
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
(A) Represents non-recurring charges related to the Merger consisting of
compensation expense of $19.7 million upon the exercise of stock options by
employees of the Company, payment of special transaction bonuses to certain
current and former members of management of $6.7 million, the payment of a
transaction fee of $6.0 million to BRS and the Co-Investors and $2.6 million for
acquisition costs related to the CHI Acquisition.
(B) The pro forma weighted average number of common shares outstanding for
each period presented reflect the 1,075,000 shares of Common Stock issued in
connection with the Merger and the 44,225 shares of Common Stock issued in
connection with the HTD Acquisition. These shares are assumed to be outstanding
at the beginning of each period presented. Basic and diluted per share amounts
within each period are the same as no effect is given to the Warrants and stock
options outstanding during the respective periods presented because they are
antidulitive. At October 1, 1999, the number of shares of Common Stock that can
be purchased by employees under the stock option plan adopted by the Company on
October 1, 1998 is 53,470. Stock options outstanding under prior stock option
plans were terminated with the Merger.
(C) Reflects a $1.0 million annual management fee to BRS and the
Co-Investors pro rated for eight months.
(D) Reflects the incremental interest expense related to the Debentures,
the New Credit Facility and the Notes, as follows:
<TABLE>
<S> <C>
Debentures.................................................. $ 10,067
New Credit Facility:
Revolving Credit Facility................................. 286
Acquisition Loans......................................... 375
Term Loans................................................ 16,953
Notes....................................................... 20,900
Amortization of financing fees/debt issue costs over the
period of the related financings.......................... 2,346
Existing borrowings (Exchangeable Debentures and capital
leases) and other interest to carry forward............... 1,926
--------
52,853
Historical interest expense................................. (27,894)
--------
Incremental interest expense................................ $ 24,959
========
</TABLE>
The Debentures were issued at an initial discounted value of $75.0 million
at a stated rate of interest of 13% along with detachable stock purchase
warrants. The cash proceeds from the Debentures were allocated to the Debentures
and the Warrants based on their relative fair values. Accordingly, the
Debentures bear interest at an effective rate of interest of approximately
13.1%. The Debentures are assumed to be outstanding throughout fiscal 1998.
The Revolving Credit Facility has a commitment in the amount of
$50.0 million and is assumed to bear interest at an annual rate of prime plus
applicable margins on amounts borrowed and bear a fee of 0.5% on the undrawn
portion of the commitment. Interest on the Revolving Credit Facility is on an
assumed average amount outstanding throughout fiscal 1998 of $.4 million, which
is reflective of the Company's actual experience in fiscal 1998 subsequent to
the Transactions, at the Company's actual
29
<PAGE>
average prime rate of interest plus applicable margins for fiscal 1998 of 9.04%
and commitment fees on the remaining $49.6 million undrawn portion of the
commitment. The Acquisition Loan Facility has a commitment in the amount of
$75.0 million. Interest on the Acquisition Loans represents commitment fees at
0.5% on an assumed undrawn commitment of $75.0 million, which is reflective of
the Company's actual experience in fiscal 1998. The Term Loan Facility has a
commitment of $200.0 million and is assumed to bear interest at an annual rate
of LIBOR plus applicable margins. All of the Term Loan commitment was assumed to
be borrowed and outstanding throughout fiscal 1998. The assumed rate of interest
on Term Loans is based on the Company's actual average LIBOR rate plus
applicable margins for fiscal 1998 of 8.48%. The Notes with a principal amount
of $190.0 million bear interest at 11.0% and are assumed to be outstanding
throughout fiscal 1998.
Deferred financing fees on the New Credit Facility are allocated between the
borrowings based on each borrowings' relative value to the total facility.
Amortization periods for deferred financing fees related to the Revolving Credit
Facility and the Acquisition Loans are approximately six years and approximately
eight years for the Term Loans. Debt issue costs on the Notes and Debentures are
amortized over 10 and 11 years, respectively.
(E) Reflects the Company's historical effective tax rate for fiscal 1998,
as the relationship that the Company's historical income taxes have with the
Company's historical loss from continuing operations before taxes is
representative for pro forma purposes.
(F) CHI was acquired by the Company on May 29, 1998 and, accordingly, four
months of their results of operations are included in the Company's historical
results of operations for fiscal 1998. The following unaudited pro forma
statement of operations for CHI is based on their eight months ended April 30,
1998. The unaudited pro forma statement of operations is based on the Company's
best estimate of the effects of the CHI Acquisition as if such acquisition had
occurred on October 1, 1997. The unaudited 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, 1997.
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED APRIL 30, 1998
------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Rental............................................. $15,056 $ -- $15,056
Sales.............................................. 2,181 -- 2,181
------- ------- -------
17,237 -- 17,237
Costs and Expenses:
Cost of sales...................................... 392 -- 392
Operating.......................................... 7,449 -- 7,449
Selling............................................ 2,367 -- 2,367
General and administrative......................... 4,688 -- 4,688
Depreciation and amortization...................... 1,184 1,617 (i) 2,801
------- ------- -------
Operating Income..................................... 1,157 (1,617) (460)
Other (Charges) Credits:
Interest expense................................... (205) -- (205)
Other-net.......................................... 265 -- 265
------- ------- -------
Income (Loss) from Continuing Operations before
Income Taxes....................................... 1,217 (1,617) (400)
Income Taxes......................................... 463 (583)(ii) (120)
------- ------- -------
Income (Loss) from Continuing Operations............. $ 754 $(1,034) $ (280)
======= ======= =======
</TABLE>
30
<PAGE>
- ------------------------
(i) Reflects the increase in depreciation and amortization from the allocation
of the acquisition cost of approximately $50.0 million to property, plant
and equipment and intangible assets, including goodwill acquired. Property,
plant and equipment, which is assumed to approximate historic net book
value, is depreciated over three years. The intangible assets represent a
covenant not to compete which is amortized over five years, five patents
which are amortized over the remaining life of each respective patent (which
averages approximately 11 years) and goodwill of $28.5 million which is
amortized over 20 years. Incremental depreciation and amortization expense
is calculated as follows:
<TABLE>
<CAPTION>
EIGHT MONTHS
ENDED
APRIL 30, 1998
--------------
<S> <C> <C>
Property, plant and equipment.......................... $ 1,452
Covenant not to compete................................ 67
Patents................................................ 333
Goodwill............................................... 949
-------
2,801
Historical depreciation and amortization expense....... (1,184)
-------
Incremental depreciation and amortization expense...... $ 1,617
=======
</TABLE>
(ii) The net effect on the historical tax expense and the pro forma adjustments
to arrive at a pro forma tax amount based on the Company's historical
effective tax rate of 30.0% for fiscal 1998. The relationship that the
Company's historical income taxes have with the Company's historical loss
from continuing operations before taxes is representative for pro forma
purposes.
(G) For accounting purposes, the HTD Acquisition was effective May 28,
1999. Accordingly, the Company's historical results of operations for the nine
months ended June 30, 1999 include the results of operations of the HTD Nonacute
Care Business beginning May 28, 1999. The following unaudited pro forma
statements of operations for the HTD Nonacute Care Business are based on its
year ended December 31, 1998 and its eight months ended May 27, 1999. The
historical results of operations of the HTD Nonacute Care Business for the year
ended December 31, 1998 consist of the historical results of operations of the
HTD Nonacute Care Business for the 12 months ended December 31, 1998 and the
historical results of operations of each of Triad and Bimeco, Inc. ("Bimeco")
for the four months ended April 30, 1998. The historical results of operations
of Triad and Bimeco for the four months ended April 30, 1998 represent the
predecessor operations of the HTD Nonacute Care Business during the year ended
December 31, 1998. HTD acquired Triad and Bimeco on May 1, 1998. The unaudited
pro forma statements of operations are based on the Company's best estimate of
the effects of the HTD Acquisition as if such acquisition had occurred on
October 1, 1997. The unaudited pro forma statements of operations may not be
indicative of the results of operations that actually would have been achieved
had the HTD Acquisition been consummated on October 1, 1997.
31
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
----------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Rental........................................... $10,099 $ -- $10,099
Sales............................................ 43,568 -- 43,568
Other............................................ 6,671 6,671
------- ------- -------
60,338 -- 60,338
Costs and Expenses:
Cost of sales.................................... 41,530 -- 41,530
Selling.......................................... 3,703 -- 3,703
General and administrative....................... 8,480 -- 8,480
Depreciation and amortization.................... 3,371 1,180 (i) 4,551
------- ------- -------
Operating Income................................... 3,254 (1,180) 2,074
Other (Charges) Credits:
Interest expense................................. (1,297) (4,487)(ii) (5,784)
Other-net........................................ 1,100 -- 1,100
------- ------- -------
Income (Loss) from Continuing Operations before
Income Taxes..................................... 3,057 (5,667) (2,610)
Income Taxes....................................... 1,501 (2,284)(iii) (783)
------- ------- -------
Income (Loss) from Continuing Operations........... $ 1,556 $(3,383) $(1,827)
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED MAY 27, 1999
----------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Rental........................................... $ 7,084 $ -- $ 7,084
Sales............................................ 36,437 -- 36,437
Other............................................ 4,455 4,455
------- ------- -------
47,976 -- 47,976
Costs and Expenses:
Cost of sales.................................... 33,638 -- 33,638
Selling.......................................... 1,898 -- 1,898
General and administrative....................... 5,815 -- 5,815
Depreciation and amortization.................... 2,427 607 (i) 3,034
------- ------- -------
Operating Income................................... 4,198 (607) 3,591
Other (Charges) Credits:
Interest expense................................. (1,569) (2,497)(ii) (4,066)
Other-net........................................ 1,050 -- 1,050
------- ------- -------
Income (Loss) from Continuing Operations before
Income Taxes..................................... 3,679 (3,104) 575
Income Taxes....................................... 2,968 (2,814)(iii) 154
------- ------- -------
Income (Loss) from Continuing Operations........... $ 711 $ (290) $ 421
======= ======= =======
</TABLE>
32
<PAGE>
- ------------------------
(i) Reflects the increase in depreciation and amortization expense from the
allocation of the acquisition cost of $59.7 million to property, plant and
equipment, other assets and intangible assets, including goodwill, acquired.
Property, plant and equipment, which is assumed to approximate historical
net book value, is estimated to be depreciated over five years. The
intangible assets primarily represent covenants not to compete which will be
amortized over five years. Other assets primarily consist of office
equipment, furniture and fixtures and machinery and equipment which are
being depreciated over three years. Goodwill of approximately $41.5 million
will be amortized over 20 years. Incremental depreciation and amortization
expense is calculated as follows:
<TABLE>
<CAPTION>
YEAR EIGHT MONTHS
ENDED ENDED
DECEMBER 31, 1998 MAY 27, 1999
----------------- ------------
<S> <C> <C>
Property, plant and equipment................... $ 2,151 $ 1,434
Intangible assets............................... 123 82
Other assets.................................... 204 136
Goodwill........................................ 2,073 1,382
------- -------
4,551 3,034
Historical depreciation and amortization
expense....................................... (3,371) (2,427)
------- -------
Incremental depreciation and amortization
expense....................................... $ 1,180 $ 607
======= =======
</TABLE>
(ii) Incremental interest expense connected with acquisition is as follows:
<TABLE>
<CAPTION>
YEAR EIGHT MONTHS
ENDED ENDED
DECEMBER 31, 1998 MAY 27, 1999
----------------- ------------
<S> <C> <C>
Revolving credit facility....................... $2,473 $1,443
Acquisition loan facility....................... 1,856 949
Amortization of amendment fee................... 158 105
------ ------
Incremental interest expense.................... $4,487 $2,497
====== ======
</TABLE>
To fund the cash portion of the HTD Acquisition, the Company borrowed
$27.5 million under the Revolving Credit Facility and $22.2 million under
the Acquisition Loan Facility. These borrowings are assumed to be
outstanding at the beginning of each period presented. The assumed rate of
interest on the borrowings under the Revolving Credit Facility is a weighted
average variable rate of 9.04% for HTD's year ended December 31, 1998 and
7.92% for HTD's eight months ended May 27, 1999. The assumed rate of
interest on the borrowings under the Acquisition Loan Facility is a weighted
average variable rate of 9.04% for HTD's year ended December 31, 1998 and
7.48% for HTD's eight months ended May 27, 1999. The assumed rate of
interest for HTD's year ended December 31, 1998 is the rate actually
incurred by the Company for its year ended September 30, 1998, and the rate
of interest for HTD's eight months ended May 27, 1999 is the rate actually
incurred by the Company in its nine months ended June 30, 1999. The assumed
rates include applicable margins. Commitment fees of the Company were
adjusted to reflect the additional amounts borrowed and no longer subject to
commitment fees. In connection with the HTD Acquisition, the new Credit
Facility was amended. The fee to effect this amendment of approximately
$1.0 million is assumed to be amortized over the remaining term of the
facilities of approximately six years.
(iii) The net effect on the historical tax expense and the pro forma adjustments
to arrive at a pro forma tax amount based on the Company's historical
effective tax rate of 30.0% for fiscal 1998 and 26.8% for the nine months
ended June 30, 1999. The relationship that the Company's historical income
taxes have with the Company's historical loss from continuing operations
before taxes is representative for pro forma purposes.
33
<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, 1998
and for the nine months ended June 30, 1998 and 1999. The statement of
operations data for the three years ended September 30, 1998 and the balance
sheet data as of September 30, 1997 and 1998 were 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, 1995 and the balance sheet data as of September 30, 1994, 1995 and
1996 were derived from audited consolidated financial statements of the Company.
The statement of operations data for the nine months ended June 30, 1998 and
1999 and the balance sheet data as of June 30, 1999 were 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,
---------------------------------------------------- -------------------
1994(A) 1995 1996 1997(B) 1998(C) 1998(C) 1999(D)
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues..................... $ 81,498 $132,241 $136,066 $155,960 $180,916 $131,920 $166,979
Non-recurring items(e)....... -- -- (2,200) -- (38,417) (34,567) 3,000
Operating income (loss)...... 1,354 24,202 25,446 29,504 (18,704) (19,889) 26,165
Interest expense............. (21,335) (29,241) (27,307) (19,107) (27,894) (14,333) (40,768)
Other (charges) and
credits(f)................. 7,381 1,381 (4,695) (7,504) 5,072 714 465
Income (loss) from continuing
operations before income
taxes...................... (12,600) (3,658) (6,556) 2,893 (41,526) (33,508) (14,138)
Loss from continuing
operations................. (8,254) (3,346) (6,178) (2,241) (29,071) (21,764) (10,354)
Loss from continuing
operations per share (g)... (.34) (.14) (.25) (.09) (1.69) (.96) (9.61)
Other Data:
Rental revenues.............. $ 69,079 $117,043 $114,275 $124,316 $142,736 $103,700 $128,743
Sales revenues............... $ 1,729 $ 7,036 $ 11,696 $ 20,230 $ 27,928 $ 20,671 $ 28,925
Other revenues............... $ 10,690 $ 8,162 $ 10,095 $ 11,414 $ 10,252 $ 7,549 $ 9,311
EBITDA(h).................... $ 22,480 $ 54,363 $ 55,603 $ 59,863 $ 22,988 $ 11,761 $ 57,765
Depreciation and
amortization............... $ 21,126 $ 30,161 $ 30,157 $ 30,359 $ 41,692(j) $ 31,650(j) $ 31,600
Capital expenditures......... $ 13,257 $ 13,356 $ 18,073 $ 15,458 $ 20,022 $ 17,909 $ 18,254
Cash dividends declared per
common share............... $ .09 -- -- -- -- -- --
Ratio of earnings to fixed
charges(i)................. .45 .88 .77 1.14 (.39) (1.15) .67
Branches and distributors (at
end of period)............. 73 84 84 84 101 101 108
Equipment units (at end of
period).................... 83,101 123,309 120,388 131,897 152,853 150,050 165,393
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, AS OF
----------------------------------------------------- JUNE 30,
1994(A) 1995 1996 1997(B) 1998(C) 1999(D)
-------- -------- -------- -------- --------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital (deficiency)....... $(24,569) $(20,249) $ (511) $ 29,732 $ 49,774 $ 68,944
Property, plant and equipment,
net.............................. 149,051 132,823 122,706 113,589 103,917 111,040
Total assets....................... 377,795 334,169 308,423 257,522 309,218 409,647
Total debt (including current
portion of long-term debt)....... 289,261 256,156 242,210 145,834 470,041 570,122
Mandatorily redeemable preferred
stock............................ -- -- -- -- 113,037 131,676
Stockholders' equity
(deficiency)..................... 36,280 31,517 17,445 48,603 (325,353) (347,380)
</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. ("KCI"). 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 SpectraCair's outstanding debt of $4.4 million. Accordingly, the
results of operations of SpectraCair for the one month ended September 30,
1997 were included in the Company's operating results.
(c) On May 29, 1998, the Company effected the Merger, accounted for as a
recapitalization. Accordingly, the historical basis of assets and
liabilities was not changed, and the residual effects of the Merger were
recorded in and created a stockholders' deficiency. In connection with the
Merger, new capital stock, including cumulative preferred stock, was issued,
debt was refinanced and additional debt incurred. Also, the number of shares
of common stock issued and outstanding was greatly reduced as a result of
the Merger, thereby affecting comparability of per share amounts.
Additionally, on May 29, 1998, the Company acquired the CH Medical Business
for $50.0 million, including related costs and expenses, that was financed
with long-term debt. On June 26, 1998, the Company acquired NPC for
$11.0 million. The results of operations of these acquired companies were
included in the Company's results of operations from the respective dates of
acquisition.
(d) On June 15, 1999, the Company consummated the HTD Acquisition for
$59.7 million, comprising $49.7 million in cash and $10.0 million aggregate
value of capital stock. The cash portion was financed under the New Credit
Facility. For accounting purposes, the effective date of the acquisition was
May 28, 1999. Accordingly, the results of operations of HTD were included in
the Company's results of operations beginning May 28, 1999.
(e) Fiscal 1996 consists of restructuring charges of $2.2 million. Fiscal 1998
consists of non-recurring merger and acquisition charges aggregating
$35.0 million (consisting of compensation expense of $19.7 million upon the
exercise of stock options by employees of the Company, payment of special
transaction bonuses to certain current and former members of management of
$6.7 million, the payment of a transaction fee of $6.0 million to BRS and
the Co-Investors and $2.6 million for acquisition costs related to the CHI
Acquisition), and a $3.4 million charge related to acquired receivables. The
nine months ended June 30, 1998 consists of non-recurring merger and
acquisition charges incurred to that time. The nine months ended June 30,
1999 consist of a reduction in expense of $3.0 million regarding a cash
settlement of disputed items related to an acquisition.
(f) Fiscal 1994 includes a net gain on the sale of assets of $5.8 million.
Fiscal 1995 includes a $0.4 million net loss on the sale of assets. Fiscal
1996 includes a $6.0 million reserve on the note receivable from
35
<PAGE>
MHM 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 and a gain on a note
receivable of $1.8 million . Fiscal 1998 includes a cash settlement on the
fully reserved note receivable from MHM of $3.0 million and recognition of
discount on a note receivable of $1.1 million.
(g) The weighted average number of common shares outstanding used in the
computations was 24.0 million for fiscal 1994, 24.2 million for fiscal 1995,
24.6 million for fiscal 1996, 25.3 million for fiscal 1997 and 17.2 million
for fiscal 1998, and 22.7 million and 1.1 million for the nine months ended
June 30, 1998 and 1999, respectively. The weighted average number of shares
outstanding for fiscal 1998 and the nine months ended June 30, 1998 and 1999
reflect the weighted effects during the periods of the recapitalization
effected by the Merger. The weighted average number of shares outstanding
for the nine months ended June 30, 1999 reflect the weighted effects of the
shares of Common Stock issued in the HTD Acquisition. Basic and diluted per
share amounts within each period are the same as no effect is given to the
Warrants and stock options outstanding during the respective periods
presented because they are antidilutive. At October 1, 1999, the number of
shares of Common Stock that can be purchased by employees under the stock
option plan adopted by the Company on October 1, 1998 is 53,470. Stock
options outstanding under prior stock option plans were terminated with the
Merger.
(h) Excluding the effects of non-recurring items, EBITDA as adjusted was
$57.8 million for fiscal 1996 and $61.4 million for fiscal 1998, and
$46.3 million and $54.8 million for the nine months ended June 30, 1998 and
1999, respectively.
(i) In fiscal 1994 through 1996, fiscal 1998 and the nine months ended June 30,
1998 and 1999, earnings were inadequate to cover fixed charges by
$12.6 million, $3.7 million, $6.6 million, $41.5 million, $33.5 million and
$14.1 million, respectively.
(j) Includes $6.0 million additional reserve to write-down certain
under-utilized equipment to net realizable value.
36
<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
Since September 30, 1994, the Company's revenues and operating income have
been driven principally by acquisitions in its core rental business and Parts
and Disposables, as well as internal growth in Parts and Disposables and to a
lesser extent in the core rental business. During this period, the Company
increased revenues from $81.5 million in fiscal 1994 to $180.9 million in fiscal
1998. In addition, as a result of acquisitions and management initiatives, the
Company increased operating income and operating margins from $1.4 million to
$19.7 million and from 2% to 11%, respectively, during the same period. The
fiscal 1998 amounts are exclusive of nonrecurring items. See
"Business--General."
During the last two fiscal years, operating margins have decreased largely
as a result of the growth experienced by the Company in sales of Parts and
Disposables and revenue share activities. These activities have lower operating
margins and have experienced higher growth rates than the Company's core rental
business. Additionally, operating margins have been depressed by added
operational, sales support and general and administrative costs associated with
actual and anticipated business expansion. The Company believes that it will
realize the full benefits of these added costs incrementally with future growth
in the business.
The Company's rental business is somewhat 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 27% of annual revenues.
The Company intends to continue to expand its business through strategic
partnerships and internal growth. However, no assurance can be given that other
partnerships will be consummated or that any consummated will be successful.
See the sections "The Transactions" and "Business" for information about the
Company's organization and business.
RESULTS OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 1999 COMPARED TO NINE MONTHS ENDED JUNE 30, 1998
Total revenue increased in the nine months ended June 30, 1999 by
$35.1 million, or 26.6%, to $167.0 million. This overall increase reflects
increases in each of the Company's revenue classifications. The increase in
rental revenue resulted from the Company's acquisitions in the last year. The
increase in sales and other revenues resulted from both internal growth and the
Company's acquisitions. The Company's acquisitions accounted for approximately
$31.0 million of the total revenue increase, while internal growth accounted for
approximately $4.1 million.
The Company's acquisitions prior to HTD focused on expanding the Company's
rental revenues, principally those in Support Surfaces. The HTD Acquisition
focused on expanding Parts and Disposables while also contributing to increases
in rental and biomedical repair revenues. The Company anticipates that the HTD
Acquisition will provide incremental annual revenues of approximately
$60.0 million. It is also anticipated that the three other acquisitions through
June 30 in fiscal 1999 will provide incremental annual revenues of approximately
$11.0 million. However, there is no assurance that such annual revenues from any
of these acquisitions will materialize.
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Total costs and expenses, exclusive of depreciation and amortization and
applicable non-recurring items, increased in the nine months ended June 30, 1999
by $26.6 million, or 31.1%, to $112.2 million. Included is a $2.0 million
additional bad debt charge related to the aging of receivables regarding Support
Surfaces and a $3.0 million reduction in expense regarding a cash settlement of
disputed items related to the CHI Acquisition reserved for in fiscal 1998.
Included in the fiscal 1998 period are non-recurring merger and acquisition
charges of $34.6 million. The increase in costs and expenses, as adjusted for
the non-recurring items, was broad-based and associated with the increased
operational requirements of the Company as a result of the actual and
anticipated growth in business. The increase in cost of sales correlates with
the increase in sales. Sales margin was 21.9% in the nine months ended June 30,
1999 compared to 19.1% in the prior year period. This increase was primarily
attributable to changes in the product mix in sales of Parts and Disposables and
equipment. Selling expenses in the nine months ended June 30, 1999 increased
$8.7 million, or 75.5%, to $20.1 million. This increase was due to increased
rental/ sales support related to the Company's expanded operations for Support
Surfaces and Parts and Disposables. The Company recently reduced the number of
sales personnel in its Support Surfaces business as a result of the leveling in
the growth curve of Support Surfaces. The total of operating expenses and
general and administrative expenses, exclusive of the applicable settlement
recovery, increased in the nine months ended June 30, 1999 by $12.1 million, or
21.1%, to $69.5 million. This increase, as adjusted, was primarily due to:
(i) the additional bad debt charge; (ii) increased infrastructure costs
associated with expanded operational requirements attributable to the actual and
anticipated growth in the business; (iii) increased equipment service
requirements associated with a larger and expanded product fleet and
(iv) management fees resulting from the Merger.
Depreciation and amortization, excluding in the prior year a $6.0 million
depreciation reserve to write-down certain under-utilized equipment to net
realizable values, increased in the nine months ended June 30, 1999 by
$6.0 million, or 23.2%, to $31.6 million. This increase, as adjusted, resulted
from additional depreciable equipment purchased and obtained in acquisitions and
increased goodwill associated with acquisitions since May 1998.
Operating margin for the nine months ended June 30, 1999, exclusive of
applicable non-recurring items, was 13.9% compared to 15.7% in the prior year
period. This decrease was primarily due to the additional bad debt charge,
increased infrastructure costs in support of the actual and anticipated growth
in business and added depreciation and amortization.
Adjusted EBITDA was $54.8 million in the nine months ended June 30, 1999
compared to $46.3 million in the prior year period. Although EBITDA is a widely
accepted financial indicator of a company's ability to service indebtedness, it
should not be considered as an alternative to income from operations or to cash
flows from operating activities, and should not be construed as an indication of
a company's performance or as a measure of liquidity.
Interest expense was $40.8 million in the nine months ended June 30, 1999
compared to $14.3 million in the prior year period. This increase was
principally due to the amount of time the substantially higher level of debt
resulting from the Transactions and CHI Acquisition was outstanding during each
period and the additional debt undertaken in fiscal 1999 to fund acquisitions.
The cash portion of this interest expense was $30.8 million in the nine months
ended June 30, 1999. The remaining interest expense primarily represented
non-cash accretion of the Debentures and amortization of deferred debt issuance
costs.
The estimated annual effective income tax rate associated with the loss from
continuing operations for the nine months ended June 30, 1999 was 26.8%. This
rate is lower than the overall statutory rate of 40.0% for the Company due to
estimated non-deductible costs associated with the Company's acquisitions and
valuation allowances against net operating losses available for state income
taxes.
Accreted but unpaid dividends on preferred stock in the nine months ended
June 30, 1999 was $13.9 million compared to $1.6 million in the prior year
period. This variance was due to the amount of time the related preferred stock
issued in connection with the Merger was outstanding in each period.
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<PAGE>
For the nine months ended June 30, 1999, there was a loss available to
common shareholders of $24.3 million. Due to the amount of cash and non-cash
interest and non-cash preferred stock dividend requirements, combined with
non-cash depreciation and amortization, it is likely that the Company will
continue to report a net loss available to common shareholders in the
foreseeable future.
The disparity in the weighted average number of common shares used in the
earnings per share computations in each period primarily resulted from the
Merger and recapitalization.
FISCAL 1998 COMPARED TO FISCAL 1997
Revenues were $180.9 million in fiscal 1998 compared to $156.0 million in
the prior year, an increase of 16%. The revenue growth was attributable to a 15%
increase in rental revenue and a 38% increase in sales, offset by a 10% decrease
in other revenue. The growth in rental revenue is primarily attributable to the
acquisitions of SpectraCair in September 1997, and the CH Medical Business and
NPC in May and June 1998, respectively. These three acquisitions established the
Company in the Support Surfaces business. Rental revenue related to Medical
Equipment remained flat with the prior year, with increased revenues related to
revenue share activities offset by decreases in the core rental business. The
increases in revenue share activities related to increased volume primarily with
existing customers. The decrease in the core rental business was principally
attributable to a shift from rental to purchase by one of the Company's larger
home care customers in the fourth quarter of fiscal 1997. The growth in sales
revenue related to increased volume in the sales of Parts and Disposables and
Medical Equipment and Support Surfaces, as well as from growth in 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 that had been provided to SpectraCair by the Company prior
to the acquisition of SpectraCair by the Company in September 1997 and a
reduction in consulting services, partially offset by increased revenues from
biomedical repair services and asset management projects.
Adjusted EBITDA increased $1.5 million from the prior year to $61.4 million
principally as a result of the items discussed above. The adjusted EBITDA margin
decreased to 34% from 38% in fiscal 1997 primarily attributable to the growth in
sales and revenue share activities that have lower margins than the Company's
core rental businesses and increases in selling and operating expenses.
The operating loss for fiscal 1998 of $18.7 million includes non-recurring
charges of $35.0 million related to the Merger and the acquisition of the CH
Medical Business, a $3.4 million charge related to acquired receivables and a
$6.0 million depreciation reserve to write-down certain under-utilized rental
equipment to net realizable value. Exclusive of the items noted above, operating
income decreased $3.8 million from the prior year to $25.7 million principally
as a result of investments in sales and operational personnel to facilitate the
growth in Support Surfaces, sales of disposables and Outsourcing Services and
increased depreciation and amortization expenses related to capital equipment
purchases and the acquisitions of CHI and NPC.
Interest expense increased 46% from the prior year to $27.9 million
principally as a result of the substantial increase in debt incurred in
connection with the Transactions and the acquisition of the CH Medical Business
and the termination of existing interest rate hedging contracts.
In the fourth quarter of fiscal 1998, the Company received a $3.0 million
settlement on its note receivable with MHM. The Company had previously written
off the note receivable in fiscal 1997 and 1996.
On June 5, 1998, pursuant to the change of control provisions of the
indenture under which the Exchangeable Debentures were issued, the Company made
a tender offer to repurchase the $10.1 million remaining outstanding balance. On
July 3, 1998, the Company redeemed $9.5 million of the Exchangeable Debentures
pursuant to the tender offer and received 621,830 shares of NutraMax
Products, Inc. ("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
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<PAGE>
payment on its note receivable from NutraMax. The Company recorded a gain of
$1.1 million on this transaction as a result of recognizing substantially all of
the remaining discount on the note.
The Company's income tax benefit at its effective tax rate for fiscal 1998
was lower than the tax benefit computed at the statutory rate as a result of the
non-deductibility of certain goodwill amortization and the non-recognition for
state income tax purposes of certain operating losses.
In November 1997, the Company sold to InnoServ Technologies ("InnoServ") all
of the shares of InnoServ common stock owned by the Company, together with a
warrant to acquire additional shares of InnoServ common stock. Under the terms
of the agreement, InnoServ made no cash payment, however, the parties agreed to
terminate a noncompete covenant relating to maintenance and repair services. In
addition, in the event of a change of control in InnoServ before September 30,
1998, the Company was entitled to certain payments from the acquiring party as
if the Company had continued to own the shares. In the fourth quarter of fiscal
1998, InnoServ had an event that triggered the change of control provisions of
the agreement. The Company recognized a gain of $2.9 million ($2.0 million, net
of tax) as a result of such change in control. The gain was reflected as a
component of Income from Discontinued Operations in the Consolidated Statement
of Operations.
The Refinancing, related to the Merger and the tender offer for the
Exchangeable Debentures, caused the Company to recognize an extraordinary charge
of $6.5 million ($4.5 million net of tax) as a result of the write-off of
deferred financing fees for the debt repaid.
FISCAL 1997 COMPARED TO FISCAL 1996
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 73%
increase in sales, and a 13% 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 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.
EBITDA increased $2.1 million to $59.9 million from adjusted EBITDA in the
prior year of $57.8 million. EBITDA margins decreased from 42% in the prior year
to 38% primarily as a result of the growth in sales and revenue share activities
that have lower margins than the core rental businesses and increased selling
and operating expenses.
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 within 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 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
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interest rates associated with the refinancing of the 11 1/8% Senior Secured
Notes due 1999 that occurred on October 1, 1996.
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 KCI in
1994.
In February 1997, the Company entered into an 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. The transaction was structured as a cash merger.
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) 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 as a result of its assessment of the net realizable
value of these amounts in light of continued deterioration in MHM's financial
condition.
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.
The Company 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 in connection with the sale of
InnoServ Common Stock.
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 was due on the promissory note for the first eighteen
months. Quarterly principal and interest payments commenced on January 1, 1999.
The sale resulted in an after-tax charge of $1.0 million 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 Company recognized an
after-tax gain of $4.8 million on the sale of the NutraMax Common Stock which is
included in Discontinued Operations in the Company's Consolidated Statements of
Operations. Cash payments on the NutraMax Note of $10.5 million were received by
the Company in fiscal 1997. The Company recorded a $1.8 million pre-tax gain for
a portion of the discount initially recorded on the NutraMax Note relative to
the cash payments received. This gain is reflected in Other-net in the Company's
Consolidated Statements of Operations. 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 MEDIQ
Mobile X-Ray Services, Inc. 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. In 1997, the Company received
additional proceeds of $1.1 million. The loss on the disposal of these assets
was recorded in fiscal
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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 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. 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.
As a result of the refinancing that occurred on October 1, 1996 and the
repurchases of the Company's 7.25% Convertible Subordinated 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.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the nine months ended
June 30, 1999 was $8.2 million, compared to net cash used in operating
activities of $1.9 million in the corresponding prior year period. Included in
the nine months ended June 30, 1999 is a $3.0 million cash settlement recovery.
Included in the prior year period are cash payments for expenses related to the
Merger and CHI Acquisition totaling approximately $34.3 million. Adjusting for
these non-recurring cash items, cash provided by operating activities in the
nine months ended June 30, 1999 decreased by $27.2 million from the
corresponding prior year period. This decrease was principally due to interest
payments in the current year substantially exceeding those in the prior year due
to the considerably greater amounts of indebtedness resulting from the
Transactions and acquisitions since May 1998. Also contributing to the reduced
level of net cash from operations during the current year when compared to the
prior year was an increase in working capital requirements principally related
to an increase in accounts receivable.
In the nine months ended June 30, 1999, the Company used its Acquisition
Loan Facility to fund $50.0 million of acquisitions and its Revolving Credit
Facility to fund $43.0 million of acquisitions, purchases of equipment and
general corporate purposes. At June 30, 1999, borrowings outstanding under the
Acquisition Loan and Revolving Credit facilities were $50.0 million and
$43.0 million, respectively. At June 30, 1999, availability under the Revolving
Credit Facility was approximately $15.0 million.
The variable rate of interest on the Term Loan Facility at June 30, 1999 was
effectively 8.06% compared to 8.50% at September 30, 1998. The Term Loan rate of
8.06% is fixed until December 10, 1999. The combined weighted average variable
rate of interest on the Revolving Credit Facility at June 30, 1999 was 7.77%
compared to 9.00% at September 30, 1998. The combined weighted average variable
rate of interest on the Acquisition Loan Facility at June 30, 1999 was 7.42%. No
amounts were outstanding under the Acquisition Loan Facility at September 30,
1998. The changes in the rates of interest indicated above reflect the movement
in short-term market rates of interest. All of the above noted rates of interest
include applicable margins.
The New Credit Facility was amended in June 1999. This amendment reduced the
borrowing capacity under the Acquisition Loan Facility from $75.0 million to
$50.0 million and increased the total borrowing capacity under the Revolving
Credit Facility from $50.0 million to $75.0 million. The amendment established
Subfacility A and Subfacility B under the Revolving Credit Facility. Subfacility
A has a borrowing capacity of $50.0 million and Subfacility B has a borrowing
capacity of $25.0 million. All of the
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$25.0 million capacity under Subfacility B was utilized to fund the HTD
Acquisition. The Company was charged a fee of approximately $1.0 million to
effect the amendment. Borrowings outstanding under Subfacility B are subject to
variable rates of interest. Principal amounts outstanding on November 30, 1999
under Subfacility B commence to amortize quarterly on March 31, 2000 in
increasing increments as scheduled in the New Credit Facility, as amended. Any
remaining principal balance under Subfacility B is due on its termination date
of June 30, 2004.
The Company expects to grow internally and potentially through additional
acquisitions. It is likely that the Company will incur additional indebtedness
to consummate any future significant acquisitions, thereby adding to the
existing debt service requirements. The Company expects that cash flows
generated from any acquisitions consummated will be sufficient to cover
additional debt service, that total Company leverage will decrease and that the
acquisitions will provide additional shareholder value. However, no assurance
can be given that any acquisitions will be consummated, or if consummated will
meet the Company's expectations.
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. The Company anticipates that its 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 for the foreseeable future.
In fiscal 1998, cash used by operating activities was $0.5 million, compared
to cash provided by operating activities of $1.2 million in the prior year.
Included in fiscal 1998 is a charge of $19.7 million related to the purchase of
stock options as a result of the Merger. The stock option purchase was funded by
borrowings under the Company's debt facilities.
Net cash used in investing activities was $72.2 million for fiscal 1998, and
consisted primarily of expenditures for the acquisitions of the CH Medical
Business and NPC of $59.5 million and expenditures for rental equipment of
$20.0 million, partially offset by collections under the NutraMax note
receivable of $7.9 million. The Company expects capital expenditures of
approximately $20.0 million for fiscal 1999, primarily for rental equipment.
Also, the Company has entered into long term agreements with two vendors to
purchase approximately $14.5 million of certain products in fiscal 1999.
Net cash provided by financing activities was $71.5 million for fiscal 1998
and consisted primarily of borrowings of $464.3 million and issuances of capital
stock of $149.0 million to fund the Merger, the Refinancing and the acquisition
of the CH Medical Business. Repurchases of capital stock pursuant to the Merger
were $377.9 million, debt repayments were $143.9 million related to the
Refinancing, subordinated debenture repurchases and debt service, and costs
associated with the issuance of the above noted borrowings was $20.8 million.
In July 1998, the Company terminated its existing interest rate hedging
contracts at a cost of approximately $0.6 million which was 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%.
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 $10.1 million remaining outstanding balance. On July 3,
1998, the Company redeemed $9.5 million of the Exchangeable Debentures pursuant
to its tender offer and received 621,830 shares of NutraMax common stock from
escrow.
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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.
MARKET RISK SENSITIVITY
In the fourth quarter of 1998 and in accordance with the terms of the New
Credit Facility, the Company entered into three interest rate swap contracts
("Swap Contracts"). The Swap Contracts hedge the Company's interest rate
exposure and terminate in fiscal 2003. The Company did not enter into the Swap
Contracts for trading or speculative purposes.
In connection with the Transactions, substantially all of the Company's debt
outstanding at the date of the Transactions was repaid or refinanced. A
comparison of the effects of material changes in interest rates from
September 30, 1997 to September 30, 1998 is not meaningful.
The information below summarizes the Company's market risks associated with
debt obligations and Swap Contracts outstanding as of September 30, 1998. Fair
values of debt instruments included herein have been determined based on quoted
market prices where available. The fair values of interest rate instruments are
the estimated amounts the Company would expect to pay to terminate the Swap
Contracts. The information presented below should be read in conjunction with
Notes I and J of the Company's Notes to Consolidated Financial Statements as
contained in the Company's Form 10-K for fiscal 1998 included elsewhere in this
Prospectus.
For debt obligations, the table presents principal cash flows and related
interest rates by fiscal year of maturity. Fixed interest rates disclosed
represent the weighted average rates for the Company's capital leases, except
where noted. Variable interest rates disclosed represent the weighted average
rates of the portfolio at September 30, 1998. For interest rate swaps, the table
presents notional amounts and related interest rates by fiscal year of maturity.
EXPECTED FISCAL YEAR OF MATURITY
(IN THOUSANDS, EXCEPT PERCENTAGES)
<TABLE>
<CAPTION>
DEBT 1999 2000 2001 2002 2003 THEREAFTER TOTAL FAIR VALUE
- ---- -------- -------- -------- -------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate............... $1,537 $ 262 $ 166 -- $ 514(a) $330,885(b) $333,364 $250,572
Average interest rate.... 9.61% 8.86% 8.08% -- 7.50%(a) 11.85%(b)
Variable rate............ $ 500 $2,000 $2,000 $2,000 $ 2,000 $191,500 $200,000 $200,000
Average interest rate.... 8.50% 8.50% 8.50% 8.50% 8.50% 8.50%
INTEREST RATE COLLARS
- -------------------------
Notional amount.......... $100,000 $100,000 $ (2,183)
Cap...................... 7.00% 7.00%
Floor.................... 5.03% 5.03%
</TABLE>
- ------------------------
(a) Represents the Company's Exchangeable Debentures.
(b) Represents the Company's Notes and Debentures. The Debentures are reflected
at their aggregate principal amount at maturity of $140.9 million. At
September 30, 1998, the carrying value was $77.6 million.
In July 1998, the Company entered into an interest rate swap agreement in
the notional amount of $100.0 million. The swap effectively fixes the Company's
borrowing rate on $100.0 million of the Term Loan Facility at 5.35% until
July 2003 as long as the three month LIBOR rate does not exceed 6.25%. If the
three month LIBOR rate exceeds 6.25%, the swap temporarily terminates until the
three month LIBOR rate drops back below 6.25%. The anniversary dates for
determining the three month LIBOR rate are the closest business day to
January 3, April 3, July 3 and October 3 in each year. The LIBOR rate at
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October 4, 1999 was 6.08%. The estimated cost to terminate this swap at
September 30, 1998 was $2.9 million. The estimated net settlement amount at
September 30, 1999 was less than $.1 million.
There were no changes during the nine months ended June 30, 1999 in the way
that the Company manages its interest rate risk. Also, there were no material
payments associated with the Company's interest rate swap and collar instruments
during the nine months ended June 30, 1999.
RECENT DEVELOPMENTS
ACCOUNTING PRONOUNCEMENTS. The Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," which requires disclosure of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. This standard became applicable to the
Company in fiscal 1999 without any material impact.
The FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," which established 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. This standard
becomes applicable to the Company in its annual reporting for fiscal 1999. The
Company has determined that it operates in only one reportable operating
segment.
The FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits." This statement provides for additional
disclosure regarding pensions and other postretirement benefits and becomes
applicable to the Company in its annual reporting for fiscal 1999. The Company
will incorporate the required disclosures in its annual reporting for fiscal
1999.
In July 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. In
June 1999, the FASB issued SFAS No. 137 which delayed the effective date of SFAS
No. 133 to fiscal years beginning after June 15, 2000. At this time, the Company
has not determined the impact the adoption of this standard will have on the
Company's financial statements.
YEAR 2000. The Company continues to evaluate the risks associated with its
operations as a result of Year 2000 compliance issues. The Company has evaluated
these risks on three levels: internal and existing computer programs and
applications; rental equipment; and customers and suppliers. In evaluating these
risks, the Company considered the material implications of each of these items
on its operations on and subsequent to January 1, 2000. The Company's internal
business information systems have been analyzed for Year 2000 compliance and the
Company believes that these systems are Year 2000 compliant. The Company
commenced testing of the compliance readiness of the internal business
information systems in January 1999, and continues testing on an ongoing basis.
The Company utilizes third-party network equipment and software products, which
may or may not be Year 2000 compliant. Delays in the implementation of the Year
2000 solutions for such systems, equipment and products which may not be Year
2000 compliant could adversely effect the Company's operations. At this time,
the Company believes that resolution of this Year 2000 issue will not have a
material adverse effect on the Company's operations or results of operations.
A significant portion of the Company's revenues and operating income are
directly related to the Company's ability to rent its equipment. Should a
material portion of such equipment not be Year 2000 compliant and, therefore,
not suitable for its designed purpose, there could be a material adverse effect
on the Company's results of operations. The Company believes that Support
Surfaces that have been manufactured by the Company and entities acquired by the
Company are fully Year 2000 compliant. The
45
<PAGE>
Company continues to conduct formal communications with the equipment
manufacturers for products the Company maintains in its inventory to determine
the extent to which the Company's rental equipment may be vulnerable to Year
2000 issues. As of October 1, 1999, approximately 97% of the equipment
manufacturers have responded to the Company's requests. As of October 1, 1999,
based on the responses received from manufacturers of the related equipment,
approximately 88% of the Company's rental inventory is fully Year 2000
compliant, as represented by the manufacturers. The Company relies on these
representations made by the manufacturers. An internal evaluation of Year 2000
compliance was made on some of the equipment for which the Company could not
locate the manufacturers. This evaluation concluded that an additional 4% of the
rental inventory is Year 2000 compliant, making 92% the total amount of rental
inventory that is Year 2000 compliant. For manufacturers that have not yet
responded, the Company has a formal follow-up plan that is being executed. The
Company expects to complete the evaluation process of its rental inventory by
November 15, 1999. As of October 1, 1999, based on responses from the equipment
manufacturers and the Company's internal evaluation, the Company believes it
would need to spend approximately $4.0 million to bring its entire rental
inventory into Year 2000 compliance. The Company may decide not to modify its
entire rental inventory. The extent to which expenditures, if any, are incurred
to modify the inventory, and the timing thereof, will be based on yet-to-be
determined anticipated utilization of compliant equipment. The Company is not
able to estimate the costs associated with Year 2000 issues for rental equipment
whose manufacturers have not yet replied. The status and timing of compliance is
subject to adjustment in accordance with future changing circumstances and the
pace of efforts of third parties upon which the Company relies.
The Company has determined that no one individual customer or supplier could
create a material adverse effect for the Company as a result of not being Year
2000 compliant. However, should a number of individual customers of and/or
suppliers to the Company not be compliant, there could be a material adverse
effect on the Company's operations and results of operations. The Company cannot
predict the extent or dollar amount, if any, of such effect.
Should a material portion of the Company's rental inventory not be Year 2000
compliant and, therefore, not suitable for its designed purpose, an interruption
in or a failure of certain normal business activities or operations could occur.
There can be no assurance that the systems of other parties upon which the
Company relies will be Year 2000 compliant and, therefore, not have a material
adverse effect on the Company. The Company cannot predict the extent or dollar
amount, if any, of such effect.
The cost of compliance and the date on which the compliance will be
completed are based on estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of certain
resources and other factors. However, there can be no assurance that these
estimates will be achieved. Actual results could differ materially from the
projections. Specific factors that might cause a material change include, but
are not limited to, the availability and cost of personnel trained in this area,
the ability to obtain all necessary components or upgrade parts and similar
uncertainties.
The Company has investigated developing contingency plans for dealing with
worst case scenarios regarding its rental inventory and overall operations. The
Company believes that it is not necessary or practical to implement contingency
measures; however, the Company will make available all of its Year 2000
compliant equipment to customers that desire to have sufficient back up units on
hand for their own contingency plans. Concerning its internal systems, the
Company performs ongoing testing of these and believes them to be Year 2000
compliant.
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<PAGE>
BUSINESS
GENERAL
Over the past five fiscal years, the Company has grown significantly to
become the largest Medical Equipment rental business in the United States. This
growth was primarily a result of strategic acquisitions and ensuing internal
development and growth of the business. Also through acquisitions and internal
development and growth, the Company has grown to be a leading national provider
of Support Surfaces on a rental basis and a leading seller of Parts and
Disposables nationwide. The Company has focused on developing and growing its
core rental business, sales of Parts and Disposables and providing Outsourcing
Services during this period, and the Company has shed a number of non-core
businesses and investments over this five-year period. See "--Acquisitions and
Dispositions." Total revenues have grown to $180.9 million in fiscal 1998 from
$81.5 million in fiscal 1994.
Through its extensive distribution network, the Company serves more than
5,000 hospitals, alternate care and home care providers, nursing homes and other
health care providers nationwide and in Puerto Rico and Canada. The Company
rents over 1,100 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. In fiscal 1998, approximately 81%
of the Company's rental revenues were generated from 133 contracts with national
health care providers and group purchasing organizations, including some of the
largest hospital chains in the United States. These contracts numbered 145 at
October 1, 1999. In addition, the Company rents Support Surfaces. On a Pro Forma
Basis, the Company generated $283.0 million of revenue and $79.1 million of
Adjusted EBITDA during the LTM Period.
In addition to its core rental business, the Company sells a variety of
Parts and Disposables. Also, 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.
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 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 and/or minimizing technological obsolescence of
equipment. Additionally, by outsourcing activities such as asset management and
repair and maintenance to third parties, hospitals and other health care
providers can reduce operating costs and increase efficiency.
The percentage breakdown of total revenues within each of the past three
fiscal years were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Rentals.................................................... 79% 80% 84%
Sales...................................................... 15 13 9
Other...................................................... 6 7 7
</TABLE>
RENTALS. The Company rents its approximately 165,000 unit Medical Equipment
and Support Surfaces inventory to customers through 108 locations in major
metropolitan areas nationwide and in Puerto Rico and Canada. Such locations
operate 24 hours a day, 365 days a year. The Company's customers receive a full
range of rental and related services, including equipment delivery, inspection,
maintenance, repair and documentation. The acquisition by the Company of
SpectraCair in September 1997, the CH Medical Business in May 1998 and four
other acquisitions between June 1998 and February 1999 broadened the Company's
equipment rental product lines to include rentals of Support Surfaces. The HTD
Acquisition in
47
<PAGE>
June 1999 further contributed to rentals of Medical Equipment. See
"--Acquisitions and Dispositions." On a Pro Forma Basis, the Company's rental
activities generated $177.5 million or 62.7% of total revenue during the LTM
Period.
PARTS AND DISPOSABLES. The Company sells a variety of parts primarily for
use with the types of Medical Equipment and Support Surfaces it rents. The sales
of such parts are a natural complement to the Company's rental business. The HTD
Acquisition in June 1999 further contributed to sales of Parts and Disposables.
The Company supplies over 14,000 Parts and Disposables products, actively
stocking over 7,000 items, through seven distribution centers strategically
located throughout the United States. The Company has a dedicated sales and
marketing operation to support the growth in Parts and Disposables. The Company
also sells repair parts to its customers for the repair of their own equipment.
On a Pro Forma Basis, the Company's sales of Parts and Disposables generated
$77.3 million or 27.3% 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:
- 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 Medical Equipment;
- a biomedical service which provides safety inspections, preventive
maintenance and repairs for most critical care equipment through a team of
226 experienced biomedical technicians;
- a logistics and distribution service to assist equipment manufacturers in
reducing their distribution costs through utilization of the Company's
branch office network;
- 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
- 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 generated
$13.9 million or 4.9% 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 overall growth strategy:
- LEADING MARKET POSITION. The Company is the largest Medical Equipment
rental company in the United States. The Company's Medical Equipment
rental revenues during the LTM Period were over twice as large as those of
its nearest rental competitor for their most recent annual period
reported. The Company has achieved and maintained a market leadership
position by making strategic acquisitions, investing in an extensive
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 RENTAL DISTRIBUTION NETWORK AND BROADEST RENTAL PRODUCT LINE. The
Company has invested significant amounts to establish an extensive rental
distribution network and the broadest rental product line in its industry.
The Company's rental distribution network has the most expansive
geographic coverage in its industry with 108 locations in 42 states, the
District of Columbia, Puerto Rico and Canada. The Company's product line
consists of approximately 165,000 units of Medical Equipment and Support
Surfaces rental inventory. Accordingly, the Company can provide Medical
48
<PAGE>
Equipment and Support Surfaces directly to its customers on a rapid and
efficient basis. Because of the Company's branch network and a gross
investment in rental inventory of $265.9 million as of June 30, 1999, 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 strategic partnerships, the provision of
Outsourcing Services and to some extent sales of Parts and Disposables to
its existing customers.
- EXTENSIVE VARIETY OF PARTS AND DISPOSABLES. The Company supplies over
14,000 Parts and Disposables products, actively stocking over 7,000 items,
through seven distribution centers strategically located throughout the
United States. A marketing and customer service operation dedicated to
Parts and Disposables is in place to satisfy customer demand quickly and
efficiently. This capability enables us to position ourselves as a
single-source supplier to our equipment rental customers and others.
- SOLID CUSTOMER BASE. During fiscal 1998, approximately 81% of the
Company's 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 rental
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 rental 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 also employs another sophisticated
information system to handle Parts and Disposables. The Company believes
that its advanced rental and other information systems position it well to
service the needs of the increasingly larger and more complex health care
providers and provide 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 BUSINESS. 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 as a result
of fewer purchases of medical equipment by customers.
- STRONG AND COMMITTED MANAGEMENT TEAM. The Company is led by a seven person
senior management team with approximately 170 years combined experience in
the health care industry. Management has invested approximately
$4.2 million in common and preferred equity of Holdings.
49
<PAGE>
GROWTH STRATEGY
In order to take full advantage of its market leadership and 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 increase 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:
- capitalizing on its customer base, which the Company believes is the
largest in the Medical Equipment rental industry;
- focusing on sub-acute and long-term health care providers which are facing
substantial pressure to reduce operating costs;
- identifying incremental rental opportunities through its CAMP programs as
it increases the number of hospitals under CAMP contracts,
- increasing strategic partnerships and
- 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 rental 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, strategic
partnerships and sales of Parts and Disposables to its existing rental
customer base. In addition, the HTD Acquisition has significantly
increased our marketing capabilities with respect to Parts and
Disposables, giving us a dedicated distribution network and customer
service operation. 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. Since
December 31, 1996, hospitals under CAMP contracts increased from three to
23.
- ENTER INTO STRATEGIC PARTNERSHIPS. The Company will continue to seek new
strategic partnerships to increase revenues, and plans to increase
revenues by partnering with equipment manufacturers to provide biomedical
repair services for their equipment.
- PURSUED STRATEGIC ACQUISITIONS. The Company has acquired businesses
complementary with its businesses 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, optimizing 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 $283.0 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:
50
<PAGE>
- present a relatively low level of integration risk;
- allow the Company to effectively leverage its extensive distribution
network;
- are complementary to the Company's lines of business; and
- have identifiable synergies.
ACQUISITIONS AND DISPOSITIONS
In September 1994, MEDIQ/PRN acquired the Medical Equipment inventory of KCI
for a total cost of approximately $88.0 million.
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. In September 1997, SpectraCair was merged with
and into MEDIQ/PRN following the acquisition and made into a division called
MEDIQ/FST. The SpectraCair Acquisition created several opportunities to bolster
MEDIQ/PRN's competitive presence with respect to Support Surfaces. The Company's
national agreements provide a wider group of customers with access to
MEDIQ/FST's product lines.
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 cost of approximately $50.0 million in cash, including
related costs and expenses, and the assumption of certain obligations related to
the CH Medical Business. The CHI Acquisition improved the Company's competitive
position in the acute health care sector.
CHI is a Texas-based corporation which has specialized in the development of
various medical products utilized in patient care treatment and therapy for over
30 years. In addition to its development of medical products, CHI is a national
sales, rental and service corporation specializing in patient beds, overlays,
mattress replacement systems, pressure relieving pads and surfaces and other
therapeutic support surfaces with approximately 75 business locations
nationwide. CHI has, among other things, developed technology used in the
manufacture of beds and frameless systems for hospitals, extended care
facilities and homes to effectively treat the severe conditions and
complications inherent to patients who are bed confined. CHI offers a complete
line of portable pressure relieving products to provide hospitals and extended
care facilities with an array of bed therapies in a cost effective manner. The
assets acquired in the CHI Acquisition 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. In November 1998, the Company
closed the manufacturing facility acquired in the CHI Acquisition.
On June 15, 1999, MEDIQ/PRN acquired all of the issued and outstanding
common stock of HTD. Total consideration paid was approximately $59.7 million,
comprising $49.7 million in cash and $10.0 million aggregate value of capital
stock of the Company. MEDIQ/PRN retained HTD's nonacute care business serving
the acute care, alternate care and home care marketplace, consisting of its core
business of sales of disposable products along with rental of moveable medical
equipment and biomedical repair services. The HTD Acquisition provides the
Company with a broader customer base, an expanded product line in Parts and
Disposables and added experience and sophistication in this business.
Contemporaneously with the Company's acquisition of HTD, HTD sold to a third
party unrelated to the Company and HTD all of the issued and outstanding common
stock of HTD's subsidiaries that specialized in the acute care distribution
business. Following the acquisition, HTD was merged into MEDIQ/PRN.
The Company has made other acquisitions as follows:
- National Patient Care Systems, Inc. in June 1998;
- Vivax Medical Services, Inc. in November 1998;
51
<PAGE>
- Veritas Enterprises, Incorporated in January 1999; and
- Hospital Rentals of America, Inc. in February 1999.
The aggregate purchase price of these acquisitions was $43.3 million. The
Company believes these acquisitions further strengthen the Company. Based on the
most recent annual revenues available for each acquisition, the Company expects
that these acquisitions will contribute incremental annual revenues of
approximately $24.0 million in the aggregate.
The Company believes that the previously mentioned acquisitions will:
- generate financial leverage;
- strengthen the Company's market leadership position;
- enable existing customers to reduce; their costs by consolidating vendors;
- enhance the quality and selection of products offered by the Company;
- expand the presence of the Company's national accounts; and
- enhance the operations of the Company by providing additional dedicated
and experienced employees.
In November 1997, the Company sold to InnoServ all of the 2,026,483 shares
of InnoServ common stock owned by the Company, together with a warrant to
acquire additional shares of InnoServ common stock. No cash payment was made by
InnoServ, however, the parties agreed to terminate a noncompete 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 would be
entitled to certain payments from the acquiring party. InnoServ was acquired in
May 1998, and in September 1998, the Company received $2.9 million, net of
expenses, in settlement of the amounts due the Company.
In fiscal 1997, the Company completed its previously announced strategy of
divesting non-core operating assets. Since fiscal 1994, a total of 10 businesses
and investments were sold. Cash resulting from these sales was approximately
$157.0 million. Additionally, in these sales the Company received notes of
approximately $23.0 million and had debt of the Company assumed by purchasers of
approximately $37.0 million. Net cash proceeds from these sales were used to
reduce indebtedness outstanding at the time of these sales.
INDUSTRY OVERVIEW
The United States health care system includes approximately 5,200 acute care
community hospitals and a number 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."
52
<PAGE>
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 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 medical equipment, these fixed
costs include equipment acquisition costs and the substantial costs associated
with servicings necessary to maintain the equipment. Consequently, many entities
may elect to rent equipment, rather than incur the substantial capital related
costs associated with owning or leasing equipment for which they may not be
reimbursed during non-use periods.
MEDICAL EQUIPMENT AND SUPPORT SURFACES RENTALS
The Company operates the largest Medical Equipment rental business in the
United States, serving more than 5,000 hospitals, alternate care and home care
providers, nursing homes and other health care providers nationwide and in
Puerto Rico and Canada. The Company offers the broadest selection of Medical
Equipment for rent in the country, and 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.
GEOGRAPHIC SCOPE. The Company rents its inventory to customers through 108
office locations in major metropolitan areas nationwide and in Puerto Rico and
Canada. 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. 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
226 experienced biomedical technicians and 330 customer service representatives.
CONVENIENT SERVICE. Medical Equipment and Support Surfaces inventories are
maintained at each of the Company's locations. The Company utilizes a
centralized order entry and dispatching system which processes on average
approximately 40,000 deliveries and pickups per month. Most orders 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 a Company repair facility in Pennsauken,
New Jersey or Santa Fe Springs,
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<PAGE>
California. The Company's state-of-the-art information and inventory systems
have sufficient capability and capacity to adequately handle the large
quantities and variety of rental units and Parts and Disposables as well as
track essential activities, such as equipment availability, training, repair and
maintenance, delivery and pickup, pre-delivery inspections, major inspections
and call backs.
DIVERSE PRODUCT OFFERING. The Company's approximately 165,000 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 1,100 types of Medical
Equipment and offers the most complete selection 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 Ventilators Oxygen Concentrators
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 Devices Infusion Pumps
Suction Units Telemetry Units
</TABLE>
In addition to the above, the Company also provides Support Surfaces on a
rental basis to acute care, long-term care and home care providers nationwide
through MEDIQ/FST. MEDIQ/FST purchases and supplies, on a rental basis, Support
Surfaces that are installed on top of standard hospital beds. MEDIQ/ FST'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. MEDIQ/ FST's
products match the clinical efficacy of the specialized beds for prices
generally ranging from $10 to $35 per day. MEDIQ/FST has 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, the
Company believes MEDIQ/FST can provide a lower cost, clinically equivalent
alternative.
SALES OF PARTS AND DISPOSABLES
The Company sells a variety of parts to its customers primarily for use with
the types of Medical Equipment and Support Surfaces it rents. The sales of such
parts are a natural complement to the Company's 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 sells a variety of disposable products to both the
rental customer base and to other markets requiring quick turnaround and
specialized products. The Company supplies over 14,000 Parts and Disposables
products, actively stocking over 7,000 items from more than 1,500 manufacturers
through seven distribution centers strategically located throughout the United
States. Each distribution center maintains a level of products sufficient to
supply the customer base that it serves. In addition, a small quantity of Parts
and Disposables are maintained at each branch office in order to provide
immediate delivery of certain products on an emergency basis. The Company also
sells repair parts to its customers for the repair of their own
54
<PAGE>
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 a dedicated sales and marketing operation
incorporating telephone sales, direct mail and trade publication advertising. To
better serve customers for Parts and Disposables, 16 customer service
representatives are dedicated to this business.
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:
- 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;
- a biomedical service which provides safety inspections, preventive
maintenance and repairs for most critical care equipment through a team of
226 experienced biomedical technicians;
- a logistics and distribution service to assist equipment manufacturers in
reducing their distribution costs through utilization of the Company's
branch office network;
- a medical gas supply program designed to complement the Company's
respiratory equipment rentals; and
- a health care consulting and management service designed to assist the
Company's customers in the management of their businesses.
The Company believes that its Outsourcing Services businesses offer further
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 provides
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 may be 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.
55
<PAGE>
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 operates 15 asset management programs covering 23 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 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 226 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, two major service centers or at a service
center in Phoenix, Arizona that specializes in biomedical equipment.
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 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. This business 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, Santa
Fe Springs, California or Phoenix, Arizona facilities.
56
<PAGE>
SALES AND MARKETING
The Company markets its rental programs and Outsourcing Services primarily
through its field sales force, which consists of 78 promotional sales
representatives. MEDIQ/FST's sales and marketing efforts are conducted through a
separate 95 person sales force and are augmented by the efforts of the Company's
field sales force. The sales and marketing efforts for Parts and Disposables are
conducted by a sales staff of 16 people. In its marketing efforts, the Company
primarily targets key operational and administrative decision makers, such as
materials managers, department heads and directors of purchasing, nursing and
central supply, as well as administrators, chief executive officers and chief
financial officers. The Company also promotes its programs and services to
hospital and health care provider groups and associations. The Company develops
and provides its field sales force with a variety of materials designed to
support its promotional efforts. The Company also uses direct mail advertising
to supplement this activity, as well as specifically targeted trade journal
advertising.
A corporate accounts team negotiates and sells national contract agreements
to group purchasing organizations ("GPOs") for acute care hospitals, alternate
care and home care providers, nursing homes and other health care providers.
This same team also sells to the corporate headquarters of proprietary national
and regional hospital chains ("National Providers"). In addition, the Company's
sales force is also active in selling individual members of these organizations
on the benefits of each individual contract. For those health care providers who
are not members of a National Provider or a GPO, individual rental agreements
are negotiated by the Company's field sales organization.
From time to time, the Company has developed specific marketing programs
intended to address current market demands. The most significant of such
programs includes the Company's CAMP programs, which present hospitals with a
total management approach to equipment needs. See "--Outsourcing Services--Asset
Management."
CUSTOMERS
The Company's customer base is composed of National Providers, GPOs and
acute and non-acute care facilities and organizations. In total, the Company
services more than 5,000 hospitals, alternate care and home care providers,
nursing homes and other health care providers. The Company's top ten national
accounts and GPO's generated approximately 57% of its total rental revenues in
fiscal 1998, with no single account representing more than 10% of total
revenues. The following table illustrates the Company's rental revenue breakdown
by business classification.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1996 1997 1998
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Acute facilities............................................ $ 76,118 $ 83,846 $ 89,724
Home health care providers.................................. 18,655 17,631 13,546
Sub-acute facilities........................................ 9,779 10,783 14,260
Other....................................................... 9,723 12,056 25,206
-------- -------- --------
Total................................................... $114,275 $124,316 $142,736
======== ======== ========
</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.
57
<PAGE>
The Company's contracts with National Providers and GPOs are generally three to
five years in duration. At October 1, 1999, the Company had 145 contracts with
National Providers and GPO's.
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, Support
Surfaces and Parts and Disposables from approximately 400 suppliers. At
October 1, 1999, the Company has no commitment to purchase a required dollar
amount in fiscal 2000. The Company is not dependent upon any single supplier and
believes that alternative purchasing sources of Medical Equipment, Support
Surfaces and Parts and Disposables are available to the Company should they be
needed.
The Company is currently in dispute with one of the vendors with whom it has
a purchase agreement. See "--Legal Proceedings."
EMPLOYEES
The Company has approximately 1,430 employees. 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 is owned by MEDIQ/PRN and is 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 performed at this facility and this facility also serves as
a distribution center. Repairs of Medical Equipment and Support Surfaces are
also performed at a leased facility located in Santa Fe Springs, California. A
leased facility in Phoenix, Arizona specializes in biomedical repairs. The
Company provides services to its customers through 108 locations in major
metropolitan areas nationwide and in Puerto Rico and Canada. Eighty-eight of
such sites contain office and warehouse space and are leased by the Company. The
remaining 20 office locations are operated by independent distributors. Seven
leased facilities, located in Texas, California, Florida, Georgia, Illinois and
New York, serve as distribution centers for Parts and Disposables. 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 medical equipment rental industry is highly competitive and the Company,
which operates throughout the United States, and in Puerto Rico and Canada,
encounters competition in all locations in which it operates. Competition is
generated from:
- medical equipment manufacturers which sell medical equipment directly to
health care providers and which the Company believes generate the
strongest competition;
- national, regional and local medical equipment rental and leasing
companies and medical equipment distributors which rent medical equipment
to health care providers; and
58
<PAGE>
- general leasing and financing companies and financial institutions, such
as banks, which finance the acquisition of medical equipment by health
care providers.
The Company's principal competitor in the medical equipment rental business
is UHS. The Company believes that its geographic scope and national account
relationships provide it with competitive advantages over UHS. The Company
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."
The Company faces vigorous competition in its Support Surfaces and Parts and
Disposables businesses as well. In Support Surfaces, the Company believes it is
third in terms of market share, with less than 10% of the overall market. The
two largest competitors are KCI and Hill-Rom, Inc. These two companies are much
larger and have considerably more resources and experience in the market for
Support Surfaces than the Company. Parts and Disposables include a very large
variety of items. There are numerous providers of Parts and Disposables, many of
which are much larger and with considerably more resources and experience in
this market than the Company. The Company has a relatively small share of the
market in Parts and Disposables. The Company believes the key competitive
factors in these businesses are selection, quality and availability of products,
dependability and service and pricing.
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 but not
limited to standards established by the following organizations and federal
laws: the Joint Commission on Accreditation of Healthcare Organizations,
Underwriter Laboratories ("UL"), National Fire Protection Agency ("NFPA") the
Safe Medical Devices Act of 1990, as amended, and the FDA Modernization Act of
1997. Some states and municipalities also have similar laws. The Company's CAMP
programs help customers meet their documentation and reporting needs under such
standards, laws and regulations. As a provider of such services, the Company may
be subject to liability for violating, directly or indirectly, such standards,
laws and regulations.
Manufacturers and certain providers of the Company's Medical Equipment and
Support Surfaces are subject to regulations and standards developed and enforced
by agencies and organizations such as the Food and Drug Administration ("FDA"),
the Association for the Advancement of Medical Instrumentation, UL, the NFPA and
the Canadian Standards Association. The FDA regulates companies which
manufacture, prepare, propagate or install 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 Quality
Systems Regulations ("QSR's"), and are subject to FDA inspection. The QSR's
specify the minimum standards for the manufacture, storage, distribution 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 is 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, service, repair, 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. In
November 1998, the Company closed the manufacturing operation it acquired in the
CHI
59
<PAGE>
Acquisition and became what the FDA calls a "specification developer" type of
manufacturer. The actual manufacturing activities were transferred to
third-party contract manufacturers which are also registered with the FDA.
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 regulations 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 Company
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 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. Changes to reimbursement methodologies or amounts
may have a material adverse effect on 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 past 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 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.
60
<PAGE>
On October 16, 1998, the Company filed a complaint in the Superior Court of
New Jersey, Camden County, against Siemens Medical Systems, Inc. ("Siemens") in
connection with the latter's attempted termination of a distribution agreement
between the parties. The lawsuit seeks declaratory relief and monetary damages
for breach of contract, common law fraud, breach of the implied covenant of fair
dealing and statutory violations. Siemens filed a motion to dismiss the
complaint, which was denied. Discovery in this case has not yet commenced. The
Company believes that resolution of the suit will not have a material adverse
effect on the operations or financial condition of the Company.
On July 8, 1999, SizeWise Rental, Inc. ("SizeWise") filed a suit against the
Company in the United States District Court, District of Kansas. The suit is in
connection with the purported termination by SizeWise of a rental agreement with
the Company due to an alleged breach of the agreement by the Company. The
complaint seeks a declaratory judgment and damages. The Company believes that
the allegations are without merit and intends to vigorously defend this case.
Based on information available, the Company believes that resolution of the suit
will not have a material adverse effect on the operations or financial condition
of the Company.
Other than the foregoing matters, the Company is not a party to any material
pending legal proceedings. The Company is subject to ordinary litigation
incidental to the conduct of its businesses and the ownership of its properties.
61
<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 56 President, Chief Executive Officer and
Director
Jay M. Kaplan 51 Senior Vice President--Finance, Treasurer
and Chief Financial Officer
Bruce C. Bruckmann 46 Director
Michael J. Rotko 61 Director
Stephen C. Sherrill 46 Director
Robert T. Thompson 44 Director
L. John Wilkerson 56 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.
Mr. Carroll is a director of Roy F. Weston, Inc.
JAY M. KAPLAN has served as the Senior Vice President--Finance, Treasurer
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.
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. ("BRS Inc."), an investment firm. 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. and Anvil Knitwear, Inc.
MICHAEL J. ROTKO has been a Director of Holdings since 1965 and was Chairman
of the Board of Holdings prior to the Merger. Mr. Rotko presently is of Counsel
to the law firm of Drinker Biddle & Reath LLP ("DBR"). In 1997 and 1998,
Mr. Rotko served as Special Counsel to the United States Senate investigation
into issues arising from the Persian Gulf War. Mr. Rotko was a partner at DBR
from 1993 to 1997. Prior to joining DBR, Mr. Rotko was the United States
Attorney, Eastern District of Pennsylvania.
STEPHEN C. SHERRILL has been a Director of Holdings since the consummation
of the Transactions. Mr. Sherrill is a Managing Director of BRS Inc. 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., B&G
Foods, Inc., HealthPlus Corporation, Doane Pet Care Enterprises, Inc. and
Alliance Laundry Systems LLC.
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<PAGE>
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 ("FFT"), an investment firm, the general partner of Health
Care Capital Partners, L.P., and Health Care Executive Partners, L.P. From 1988
to 1995, Mr. Thompson was Managing Director and Equity Group Leader of GE
Capital Corporation. Prior to joining GE Capital, Mr. Thompson was a consultant
with Bain & Company from 1983 to 1988. Mr. Thompson is currently a director of
Vista Hospice Care and Timm Medical Technologies.
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
("Galen"), a risk capital partnership, since 1990. 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 firm. 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>
Jorge Gonzalez............................ 51 Senior Vice President-Corporate
Operations, Alternate Sales, Business
Development and Corporate Accounts
Steve Hansen.............................. 39 Senior Vice President-MEDIQ/FST
Katherine Hill............................ 48 Senior Vice President-Asset Management
Group
John Morgan............................... 40 Senior Vice President-Rental/Sales
Jo Surpin................................. 45 President, MEDIQ Management Services
</TABLE>
DIRECTOR COMPENSATION AND ARRANGEMENTS
Each non-employee director of Holdings is entitled to 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
1998, 1997 and 1996 to the Chief Executive Officer of Holdings and MEDIQ/PRN and
to the other executive officers of Holdings and MEDIQ/PRN whose total annual
salary and bonus exceeded $100,000 for services rendered to
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<PAGE>
Holdings and its subsidiaries, including MEDIQ/PRN, during fiscal 1998 (each
such person being referred to as a "Named Executive Officer").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL -----------------
COMPENSATION (1) COMMON STOCK
---------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) STOCK OPTIONS (#) COMPENSATION ($)
- --------------------------- -------- ---------- --------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
Thomas E. Carroll........................ 1998 374,500 112,000 -- 4,793,000(2)
President and Chief Executive 1997 350,000 192,000 50,000 2,000(3)
Officer of Holdings and 1996 297,000 135,000 250,000 2,000(3)
MEDIQ/PRN
Jay M. Kaplan............................ 1998 200,000 40,000 -- 484,000(2)
Senior Vice President -- 1997 187,500 94,000 25,000 2,000(3)
Finance, Treasurer and Chief 1996 177,000 70,000 85,000 2,000(3)
Financial Officer of Holdings
and Senior Vice President and
Chief Financial Officer 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) Consists of:
<TABLE>
<CAPTION>
MR. CARROLL MR. KAPLAN
----------- ----------
<S> <C> <C>
Cash bonus paid upon consummation of the Merger....... $4,790,000 $481,000
Company's matching contribution to the Company's
Profit Sharing Plan and Trust ("401(k) Savings
Plan").............................................. 3,000 3,000
</TABLE>
(3) Company's matching contribution to 401(k) Savings Plan
The following table summarizes option exercises during fiscal 1998 and
option/SAR (Stock Appreciation Rights) at the end of fiscal 1998 for each Named
Executive Officer.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
NUMBER OF FISCAL YEAR END FISCAL YEAR END
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(1) REALIZED(2) UNEXERCISABLE UNEXERCISABLE
- ---- --------------- ----------- ---------------------- --------------------
<S> <C> <C> <C> <C>
Thomas E. Carroll............. 23,062 $2,950,000 -- --
Jay M. Kaplan................. 9,225 1,156,000 -- --
</TABLE>
- ------------------------
(1) Number of shares of Series A Preferred Stock, issued upon the exercise of
307,500 and 123,012 stock options for Mr. Carroll and Mr. Kaplan,
respectively, in connection with the Merger.
(2) Cash consideration, net of exercise price, of $2,719,000 and $1,064,000,
respectively, plus value attributed to Series A Preferred Stock of $231,000
and $92,000, respectively, for Mr. Carroll and Mr. Kaplan.
64
<PAGE>
On October 1, 1998, Holdings adopted a stock option plan, under which
options to purchase shares of its Common Stock were issued to employees. Under
this plan, Mr. Carroll and Mr. Kaplan were each issued options to purchase 4,914
and 3,076 shares, 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 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 provided that Mr. Carroll receive a one-time
"success bonus" if a "Strategic Transaction" (as defined therein) occurred
before June 30, 1998. The Merger constituted a "Strategic Transaction;"
accordingly, the Company paid a bonus to Mr. Carroll in fiscal 1998 of
approximately $4.8 million upon consummation of the Transactions. Upon receipt
of such "success bonus," Mr. Carroll forfeited any stock appreciation rights
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 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 was
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 fiscal 1998 in the amount of approximately
$481,000 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 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.
65
<PAGE>
The following table shows at September 30, 1998 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>
$200,000 and above...................... $20,436 $39,943 $59,362 $69,244
100,000................................. 12,036 23,143 34,162 39,844
</TABLE>
During fiscal 1998, the maximum amount of annual compensation which may be
included for Pension Plan purposes was $160,000. 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, 1998 is $125,000, 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, 1998, Messrs. Carroll and Kaplan had 10 and 25 years of service
credited, respectively, under the Pension Plan.
401(K) SAVINGS PLAN
The Company maintains a 401(k) Savings Plan for the benefit of its employees
who have satisfied the plan's eligibility requirements. Employees aged 21 or
older are eligible to participate on their date of hire. 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 and is invested according to the participant's
contribution allocation. Matching contributions commence upon one year of
service by the participant and vest immediately. Shares of Holdings Common Stock
held under the 401(k) Savings 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, Mr. 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 did not
participate in any matter relating to his compensation.
Mr. Bruckmann is a Managing Director of BRS Inc., which was the sponsoring
investor in the Merger and is a principal stockholder of Holdings' Common Stock.
Mr. Thompson is a Managing Director of FFT, which was a principal Co-Investor in
the Merger and is a principal stockholder of Holdings' Common Stock.
Mr. Wilkerson is a General Partner of Galen, which was a principal Co-Investor
in the Merger and is a principal stockholder of Holdings' Common Stock. Each of
BRS Inc., FFT and Galen also provides management, business and organizational
strategy and merchant and investment banking services to the Company.
66
<PAGE>
OWNERSHIP OF CAPITAL STOCK
The following table sets forth as of October 1, 1999 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 officer 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
---------------------------------------------------------------
SERIES A SERIES B SERIES C
COMMON PREFERRED PREFERRED PREFERRED
NAME OF BENEFICIAL OWNER STOCK STOCK STOCK STOCK
- ------------------------ ------------ -------------- -------------- --------------
<S> <C> <C> <C> <C>
Bruckmann, Rosser, Sherrill & Co., 465,259/41.6% 3,155,841/37.9% 899,057/28.6% 1,625,015/49.8%
L.P.(1)..........................
Two Greenwich Plaza
Suite 100
Greenwich, CT 06830
Health Care Capital Partners, L.P. 199,013/17.8% 1,349,896/16.2% 384,567/12.2% 695,092/21.3%
(2)..............................
c/o Ferrer Freeman Thompson &
Co. LLC
The Mill
10 Glenville Street
Greenwich, CT 06831
Galen Partners III, L.P.(3)........ 132,675/11.9% 899,930/10.8% 256,378/8.2% 463,395/14.2%
610 Fifth Avenue
Rockefeller Center
New York, NY 10020
Michael J. Rotko (4)............... 54,891/4.9% 389,108/4.7% 475,017/15.1% --
Bessie G. Rotko (5)................ -- 504,541/6.1% 1,340,219/42.6% --
Rotko 1983 Trust................... -- 243,252/2.9% 475,017/15.1% --
--Michael J. Rotko Share (6)
Rotko 1983 Trust................... -- 243,253/2.9% 475,016/15.1% --
--Judith M. Shipon Share (7)
Judith M. Shipon (8)............... 54,891/4.9% 306,616/3.7% 475,016/15.1% --
Thomas E. Carroll (9), (10)........ 56,888/5.1% 94,816/1.1% 19,724* 35,650/1.1%
Jay M. Kaplan (9).................. 10,077* 29,724* 5,149* 9,306*
Bruce C. Bruckmann (11)............ 497,531/44.5% 3,374,739/40.5% 961,418/30.6% 1,737,731/53.2%
Stephen C. Sherrill(11)............ 497,531/44.5% 3,374,739/40.5% 961,418/30.6% 1,737,731/53.2%
Robert T. Thompson(12)............. 199,013/17.8% 1,349,896/16.2% 384,567/12.2% 695,092/21.3%
L. John Wilkerson(13).............. 132,675/11.9% 899,930/10.8% 256,378/8.2% 463,395/14.2%
All directors and executive
officers as a group
(7 persons)...................... 951,075/85.0% 6,138,213/73.6% 2,102,253/66.8% 2,941,174/90.1%
</TABLE>
- ------------------------
* Less than one percent of total outstanding.
(1) BRS is a limited partnership, the sole general partner of which is BRS
Partners, Limited Partnership ("BRS Partners") and the manager of which is
BRS Inc. 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 BRS Inc. and
BRSE Associates and may
67
<PAGE>
be deemed to share beneficial ownership of the shares shown as beneficially
owned by BRS. Such individuals disclaim beneficial ownership of any such
shares.
(2) 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 Entities are limited partnerships for which 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.
(3) 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.
(4) Includes 243,252 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. Address is: P.O. Box 369,
Unionville, PA 19375.
(5) Includes 243,252 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 475,016 shares of Series B Preferred Stock held by the
Rotko 1983 Trust--Judith M. Shipon Share, of which Ms. Rotko is a
co-trustee. Address is: c/o Schnader Harrison Segal & Lewis, 1600 Market
Street, Suite 3600, Philadelphia, PA 19103.
(6) Michael J. Rotko, Bessie G. Rotko, First Union National Bank and John
Iskrant, of the law firm of Schnader Harrison Segal & Lewis, share voting
and dispositive power as co-trustees of the Rotko 1983 Trust--Michael J.
Rotko Share. Address is: c/o First Union National Bank,
P.O. Box 7558-PA4394, Philadelphia, PA 19101.
(7) Judith M. Shipon, Bessie G. Rotko, PNC Bank Corp. and John Iskrant share
voting and dispositive power as co-trustees of the Rotko 1983 Trust--Judith
M. Shipon Share. Address is: c/o PNC Bank Corp., 1600 Market Street,
Philadelphia, PA 19103.
(8) Includes 243,253 shares of Series A Preferred Stock and 475,016 shares of
Series B Preferred Stock held by the Rotko 1983 Trust--Judith M. Shipon
Share, of which Ms. Shipon is a co-trustee. Address is: c/o Schnader
Harrison Segal & Lewis, 1600 Market Street, Suite 3600, Philadelphia, PA
19103.
(9) Address is: c/o MEDIQ Incorporated, One MEDIQ Plaza, Pennsauken, NJ
08110-1460.
(10) Includes 9,000 shares of Common Stock, 45,474 shares of Series A Preferred
Stock, 15,000 shares of Series B Preferred Stock and 15,000 shares of
Series C Preferred Stock owned by individuals and trusts related to
Mr. Carroll.
(11) 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 1 above.
68
<PAGE>
(12) 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 2 above.
(13) 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 3 above. Address
is: Galen Associates, 610 Fifth Avenue, 5th Floor, New York, NY 10020.
HOLDERS AGREEMENT
Upon consummation of the Transactions, MQ, Holdings, the BRS Entities, the
Co-Investors, the Rotko Entities and the Management 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. Upon consummation of the HTD
acquisition, PENMAN Private Equity and Mezzanine Fund, L.P. ("PENMAN") also
became a party to the Holders Agreement. 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
69
<PAGE>
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,
PENMAN 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.
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
Holdings is authorized to issue up to 30,000,000 shares of Common Stock. As
of October 1, 1999, 1,119,048 shares of Common Stock were outstanding and there
were 49 holders of record 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. As of October 1, 1999, there were 8,336,310 shares outstanding.
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 become a party may, restrict the ability of
Holdings to pay cash dividends.
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<PAGE>
LIQUIDATION PREFERENCE. Upon any voluntary or involuntary liquidation,
dissolution or winding up of Holdings, the holders of all shares of Series A
Preferred Stock then outstanding will be entitled to be paid out of the assets
of Holdings available for distribution to its stockholders an amount in cash
equal to $10.00 per share, plus an amount equal to full cumulative dividends
(whether or not earned or declared) accrued and unpaid thereon, including
additional dividends accrued on such unpaid dividends ("Additional Dividends"),
to the date of final distribution (the "Series A Liquidation Preference") and no
more, before any distribution is made on any Series A Junior Securities. After
payment in full in accordance with the preceding sentence, the holders of the
Series A Preferred Stock shall not be entitled to any further participation in
any distribution in the event of liquidation, dissolution or winding up of the
affairs of Holdings with respect to the shares of Series A Preferred Stock.
OPTIONAL REDEMPTION. Holdings may, at its option, redeem at any time or
from time to time, from any source of funds legally available therefor, in whole
or in part, any or all of the shares of Series A Preferred Stock, at the
redemption prices set forth below, plus an amount equal to full cumulative
dividends (whether or not earned or declared) accrued and unpaid thereon,
including Additional Dividends, to the redemption date. The redemption prices
for optional redemptions are as follows:
<TABLE>
<CAPTION>
REDEMPTION PRICE
REDEMPTION DATE PER SHARE
- --------------- ----------------
<S> <C>
On or before December 31, 1999.............................. $11.00
On or after January 1, 2000 but before January 1, 2002...... $10.50
On or after January 1, 2002................................. $10.00
</TABLE>
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.
71
<PAGE>
SERIES B PREFERRED STOCK
Holdings is authorized to issue up to 5,000,000 shares of Series B Preferred
Stock. As of October 1, 1999, there were 3,146,302 shares outstanding.
RANK. The Series B Preferred Stock, with respect to dividend rights and
rights on liquidation, winding up and dissolution of Holdings, ranks junior to
the Series A Preferred Stock and senior to the Series C Preferred Stock.
Although the Series B Preferred Stock, with respect to dividend rights and
rights on liquidation, ranks senior to Series C Preferred Stock issued by
Holdings, it is junior in right of payment to all existing and future
indebtedness and obligations of Holdings.
DIVIDENDS. Each holder of Series B Preferred Stock is entitled to receive,
when, as and if declared by the Board of Directors, out of funds legally
available therefor, cash dividends on each share of Series B Preferred Stock at
a rate equal to $1.325 per share per annum. All dividends are cumulative and
compounding, whether or not earned or declared, accrue on a daily basis from the
date of issuance of Series B Preferred Stock and are payable semi-annually in
arrears. Dividends with respect to the Series B Preferred Stock can only be paid
by Holdings to the extent funds are legally available therefor under the DGCL.
The New Credit Facility and the Indentures do, and any future credit agreements
or indentures to which MEDIQ/PRN or Holdings becomes a party may, restrict the
ability of Holdings to pay cash dividends.
LIQUIDATION PREFERENCE. Upon any voluntary or involuntary liquidation,
dissolution or winding up of Holdings, the holders of all shares of Series B
Preferred Stock then outstanding will be entitled to be paid out of the assets
of Holdings available for distribution to its stockholders an amount in cash
equal to $10.00 per share, plus an amount equal to full cumulative dividends
(whether or not earned or declared) accrued 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. As of October 1, 1999, there were 3,264,438 shares outstanding.
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.
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<PAGE>
DIVIDENDS. Each holder of Series C Preferred Stock is entitled to receive,
when, as and if declared by the Board of Directors, out of funds legally
available therefor, cash dividends on each share of Series C Preferred Stock at
a rate equal to $1.35 per share per annum. All dividends are cumulative and
compounding, whether or not earned or declared, accrue on a daily basis from the
date of issuance of Series C Preferred Stock and are payable semi-annually in
arrears. Dividends with respect to the Series C Preferred Stock can only be paid
by Holdings to the extent funds are legally available therefor under the DGCL.
The New Credit Facility and the Indentures do, and any future credit agreements
or indentures to which MEDIQ/PRN or Holdings becomes a party may, restrict the
ability of Holdings to pay cash dividends.
LIQUIDATION PREFERENCE. Upon any voluntary or involuntary liquidation,
dissolution or winding up of Holdings, the holders of all shares of Series C
Preferred Stock then outstanding will be entitled to be paid out of the assets
of Holdings available for distribution to its stockholders an amount in cash
equal to $10.00 per share, plus an amount equal to full cumulative dividends
(whether or not earned or declared) accrued and unpaid thereon, including
additional dividends, to the date of final distribution, after distributions are
made on the Series A Preferred Stock and the Series B Preferred Stock (the
"Series C Liquidation Preference"). After payment in full in accordance with the
preceding sentence, the holders of the Series C Preferred Stock shall not be
entitled to any further participation in any distribution in the event of
liquidation, dissolution or winding up of the affairs of Holdings with respect
to the shares of Series C Preferred Stock.
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.
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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 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.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT AND OTHERS
Pursuant to the Merger Agreement, Holdings merged with MQ on May 29, 1998.
MQ was formed by BRS solely to consummate the Merger and acquire a controlling
interest in Holdings. The BRS Entities and Co-Investors together beneficially
owned 829,219 shares, or 74.1%, of Holdings' Common Stock at October 1, 1999.
Mr. Bruckmann and Mr. Sherrill are Managing Directors of BRS Inc., and may be
deemed to control the BRS entities. Mr. Thompson is a Managing Director of FFT
and Mr. Wilkerson is a General Partner in Galen and may be deemed to control the
Co-Investors affiliated with each. Mr. Bruckman, Mr. Sherrill, Mr. Thompson and
Mr. Wilkerson are Directors of Holdings Board of Directors.
Upon consummation of the Merger, the Company paid BRS, FFT and Galen a
closing fee and related expenses of $6.2 million in the aggregate. In addition,
MEDIQ/PRN entered into a management services agreement with BRS, FFT and Galen
in which BRS, FFT and Galen will be paid annually in the aggregate the greater
of $1.0 million or 1.5% of EBITDA 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. The Company incurred $0.3 million in
fiscal 1998 and $1.0 million through August in fiscal 1999 in fees with respect
to the management services agreement.
In connection with the Merger, Michael F. Sandler, a member of the Board of
Directors until the date of the Merger and a former executive officer, received
a one time special cash bonus of $1.3 million.
Upon consummation of the Merger, Mr. Carroll, Holdings' President and Chief
Executive Officer and a Director, and Mr. Kaplan, Holdings' Senior Vice
President-Finance, Treasurer and Chief Financial Officer, each received a
special cash bonus of $4.8 million and $.5 million, respectively.
Prior to the Merger, the Rotko Entities collectively controlled 63.4% of the
combined voting power of the then outstanding common and preferred stocks. Their
voting power alone was sufficient to approve the Merger. At October 1, 1999 the
Rotko Entities together beneficially own 109,781 shares, or 9.8% of Holdings'
Common Stock.
CERTAIN BUSINESS RELATIONSHIPS
Mr. Rotko is of Counsel to Drinker, Biddle & Reath, which provided legal
services to the Company during fiscal 1998 and 1999.
STOCK OPTION PLAN
On October 1, 1998, the Board of Directors adopted a stock option plan
("Plan"). The Plan authorized the issuance of nonqualified options to certain
employees to purchase up to a maximum of 61,543 shares of Common Stock in the
aggregate, subject to adjustment as provided in the Plan. The maximum number of
shares of Common Stock with respect to which options may be granted to an
employee is 5,121, subject to adjustment as provided in the Plan. The exercise
price of the options is equal to the fair market value, as determined under the
Plan, of the Common Stock at the date the option is granted. Options have a term
no greater than 10 years and no option is exercisable sooner than six months
from the date of grant. Unvested options vest immediately in the event of a
significant corporate event, as defined in the Plan. As of October 1, 1999, the
number of shares of Common Stock under outstanding options under the Plan was
53,470.
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.
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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, amounting 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, at that time, 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 21, 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.
At June 30, 1999, the amount outstanding for the Debentures including
accreted interest was $85.3 million.
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. At June 30, 1999, $514,000 in
principal amount of the Exchangeable Debentures is 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, 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
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<PAGE>
following the Merger. Accordingly, Holdings received approximately $5.6 million
in cash in respect of the NutraMax note in July 1998. The net amount of the note
on June 3, 1999 was $.3 million.
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, as amended, consists of three facilities: (i) a
senior secured term loan facility in an aggregate principal amount equal to
$200.0 million (the "Term Loan Facility") that expires June 30, 2006; (ii) a
revolving credit facility in an aggregate principal amount not to exceed
$75.0 million (the "Revolving Credit Facility") that expires June 30, 2004; and
(iii) a senior secured acquisition facility in an aggregate principal amount not
to exceed $50.0 million (the "Acquisition Facility") that expires June 30, 2004.
The Revolving Credit Facility has two subfacilities--Subfacility A in the amount
of $50.0 million and Subfacility B in the amount of $25.0 million. 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 Subfacility A may be reborrowed prior to the final maturity of the
Revolving Credit Facility, provided that availability requirements are met.
Amounts repaid under Subfacility B may not be reborrowed. 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
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of the commitments in respect of the facilities (subject to adjustment as set
forth below), commencing to accrue upon the execution and delivery of the New
Credit Facility and payable quarterly in arrears and upon the termination of any
commitment, in each case for the actual number of days elapsed in a 360-day
year. The New Credit Facility contains provisions under which commitment fees
and margins on interest rates under the facilities will be adjusted in
increments based on performance goals.
The Term Loans began amortizing on a quarterly basis on September 30, 1999,
payable in installments under a schedule contained in the New Credit Facility.
Principal amounts outstanding under Subfacility B begin amortizing on a
quarterly basis on March 31, 2000 and are payable in installments under a
schedule contained in the New Credit Facility. Principal amounts outstanding
under Subfacility A 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 commencing March 31, 2000 and are payable in
installments under a schedule contained in the New Credit Facility. The Term
Loans, Revolving Loans and Acquisition Loans are subject to mandatory
prepayments and reductions in the event of certain extraordinary transactions or
issuances of debt and equity by MEDIQ/PRN or any Facility Guarantor. Such loans
are also required to be prepaid with 75% of the Excess Cash Flow (as such term
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 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.
At June 30, 1999, principal amounts outstanding were $200.0 million under
the Term Loan Facility, $50.0 million under the Acquisition Facility,
$18.0 million under Subfacility A and $25.0 million under Subfacility B.
Pursuant to the terms of the New Credit Facility and/or the Indentures, the
availability under Subfacility A was limited to approximately $15.0 million at
June 30, 1999.
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
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<PAGE>
Indenture) following which there is a Public Market (as defined in the Note
Indenture) if at least $142.5 million aggregate principal amount of the Notes
remains outstanding after any such redemption. On or after June 1, 2003, the
Notes may be redeemed at the option of MEDIQ/PRN, in whole or in part, at the
following redemption prices (expressed as percentages of principal amount), plus
accrued and unpaid interest, if redeemed during the 12 months beginning June 1
of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2003.............................................. 105.500%
2004.............................................. 103.667
2005.............................................. 101.834
2006 and thereafter............................... 100.000
</TABLE>
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. The Exchange Offer Registration Statement
became effective under the Securities Act on October 21, 1998 and MEDIQ/PRN
commenced its offer to exchange the New Notes for surrender of the Notes on such
date. 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 became exercisable on May 30, 1999. 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
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
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.
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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 21, 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.
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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.
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.
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.
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
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(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.
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.
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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.
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
89
<PAGE>
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, 2000.
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 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 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.
90
<PAGE>
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 and the related financial statement
schedule of MEDIQ Incorporated and subsidiaries as of September 30, 1998 and
1997 and for each of the three years in the period ended September 30, 1998
included in this Prospectus and the related financial statement schedule
included elsewhere in the registration statement have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their reports
appearing herein and elsewhere in the registration statement, and have been so
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.
The combined financial statements of HTD Corporation and subsidiaries,
excluding the acute care division, as of and for the year ended December 31,
1998 and the consolidated financial statements of Triad Holdings, Inc. and
subsidiaries for the four months ended April 30, 1998 included in this
Prospectus and elsewhere in the registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports thereto, and are included herein in reliance upon the authority of said
firm as experts in accounting and auditing in giving said reports.
91
<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 F-3
September 30, 1998........................................
Consolidated Balance Sheets--September 30, 1998 and 1997.... F-4
Consolidated Statements of Stockholders' Equity--Three Years F-5
Ended September 30, 1998..................................
Consolidated Statements of Cash Flows--Three Years Ended F-6
September 30, 1998........................................
Notes to Consolidated Financial Statements.................. F-7
Unaudited Condensed Consolidated Statements of F-28
Operations--Three and Nine Months Ended June 30, 1999 and
1998......................................................
Condensed Consolidated Balance Sheets--June 30, 1999 F-29
(unaudited) and September 30, 1998........................
Unaudited Condensed Consolidated Statements of Cash F-30
Flows--Nine Months Ended June 30, 1999 and 1998...........
Notes to Unaudited Condensed Consolidated Financial F-31
Statements................................................
CH MEDICAL, INC. AND SUBSIDIARIES
Report of Independent Certified Public Accountants.......... F-34
Consolidated Statements of Net Assets--August 31, 1997 and F-35
1996......................................................
Consolidated Statements of Income--Three Years Ended August F-36
31, 1997..................................................
Consolidated Statements of Cash Flows--Three Years Ended F-37
August 31, 1997...........................................
Summary of Accounting Policies.............................. F-38
Notes to Consolidated Financial Statements.................. F-40
Unaudited Consolidated Statements of Net Assets--February F-43
28, 1998..................................................
Unaudited Consolidated Statements of Income--Six Months F-44
Ended February 28, 1998 and 1997..........................
Unaudited Consolidated Statements of Cash Flows--Six Months F-45
Ended February 28, 1998 and 1997..........................
Unaudited Summary of Accounting Policies.................... F-46
Unaudited Notes to Consolidated Financial Statements........ F-48
HTD CORPORATION AND SUBSIDIARIES, EXCLUDING THE ACUTE CARE
DIVISION
Report of Independent Public Accountants.................... F-50
Combined Statement of Net Assets--December 31, 1998......... F-51
Combined Statement of Operations--Year Ended December 31, F-52
1998......................................................
Combined Statement of Changes in Net Assets--Year Ended F-53
December 31, 1998.........................................
Combined Statement of Cash Flows--Year Ended December 31, F-54
1998......................................................
Notes to Combined Financial Statements...................... F-55
Unaudited Condensed Combined Statements of Net Assets--April F-64
30, 1999..................................................
Unaudited Combined Statement of Operations--Four Months F-65
Ended April 30, 1999......................................
Unaudited Condensed Combined Statement of Cash Flows--Four F-66
Months Ended April 30, 1999...............................
Notes to Condensed and Combined Financial Statements F-67
(unaudited)...............................................
TRIAD HOLDINGS, INC. AND SUBSIDIARIES
Report of Independent Public Accountants.................... F-69
Consolidated Statement of Operations--Four Months Ended F-70
April 30, 1998............................................
Consolidated Statement of Changes in Net Assets--Four Months F-71
Ended April 30, 1998......................................
Consolidated Statement of Cash Flows--Four Months Ended F-72
April 30, 1998............................................
Notes to Consolidated Financial Statements--Four Months F-73
Ended April 30, 1998......................................
</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, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended September 30, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1998 in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
December 30, 1998
F-2
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues:
Rental...................................................... $ 142,736 $ 124,316 $ 114,275
Sales....................................................... 27,928 20,230 11,696
Other....................................................... 10,252 11,414 10,095
--------- --------- ---------
180,916 155,960 136,066
Costs and Expenses:
Cost of sales............................................... 22,659 16,334 9,534
Operating................................................... 63,072 46,139 47,934
Selling..................................................... 16,590 13,353 8,795
General and administrative.................................. 20,586 20,271 12,000
Merger and acquisition charges.............................. 35,021 -- --
Restructuring charges....................................... -- -- 2,200
Depreciation and amortization............................... 41,692 30,359 30,157
--------- --------- ---------
199,620 126,456 110,620
--------- --------- ---------
Operating (Loss) Income..................................... (18,704) 29,504 25,446
Other (Charges) and Credits:
Interest expense............................................ (27,894) (19,107) (27,307)
Interest income............................................. 948 2,069 1,452
Other-net................................................... 4,124 (9,573) (6,147)
--------- --------- ---------
(Loss) Income from Continuing Operations before Income
Taxes..................................................... (41,526) 2,893 (6,556)
Income Tax (Benefit) Expense................................ (12,455) 5,134 (378)
--------- --------- ---------
Loss from Continuing Operations before Discontinued
Operations and Extraordinary Item......................... (29,071) (2,241) (6,178)
Discontinued Operations:
Income from operations (net of income taxes of $2,025)...... -- -- 3,929
Gain (Loss) on disposal (net of income taxes of $875 in
1998, $20,507 in 1997 and $(5,406) in 1996)............... 2,044 34,941 (14,598)
--------- --------- ---------
2,044 34,941 (10,669)
--------- --------- ---------
(Loss) Income before Extraordinary Item..................... (27,027) 32,700 (16,847)
Extraordinary (Loss) Gain-Early Retirement of Debt (net of
income taxes of $(1,939) in 1998, $(5,316) in 1997 and
$587 in 1996)............................................. (4,527) (8,037) 1,143
--------- --------- ---------
Net (Loss) Income........................................... (31,554) 24,663 (15,704)
Dividends on Preferred Stock................................ (6,149) -- --
--------- --------- ---------
Net (Loss) Income Available for Common Shareholders......... $ (37,703) $ 24,663 $ (15,704)
========= ========= =========
Basic and Diluted Earnings per Share:
Continuing operations, net of preferred dividends........... $ (2.05) $ (.09) $ (.25)
Discontinued operations..................................... .12 1.38 (.43)
Extraordinary item.......................................... (.26) (.32) .04
--------- --------- ---------
Net (loss) income available for common shareholders......... $ (2.19) $ .97 $ (.64)
========= ========= =========
Weighted average number of common shares outstanding........ 17,205 25,297 24,578
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1998 1997
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Assets
Current Assets:
Cash........................................................ $ 2,411 $ 3,639
Accounts receivable (net of allowance of $11,432 in 1998 and
$4,077 in 1997)........................................... 52,659 39,686
Inventories................................................. 21,820 13,047
Deferred income taxes....................................... 6,267 6,967
Income taxes receivable..................................... 2,556 4,917
Other current assets........................................ 1,100 1,495
--------- --------
Total Current Assets.................................... 86,813 69,751
Property, Plant and Equipment--net.......................... 103,917 113,589
Goodwill--net............................................... 91,121 57,056
Deferred Financing Costs--net............................... 20,013 8,478
Other Assets................................................ 7,354 8,678
--------- --------
Total Assets................................................ $ 309,218 $257,552
========= ========
Liabilities and Stockholders' Equity (Deficiency)
Current Liabilities:
Accounts payable............................................ $ 14,152 $ 8,793
Accrued expenses............................................ 20,569 22,732
Other current liabilities................................... 281 846
Current portion of long term debt........................... 2,037 7,648
--------- --------
Total Current Liabilities............................... 37,039 40,019
Senior Debt................................................. 277,490 128,131
Subordinated Debt........................................... 190,514 10,055
Deferred Income Taxes....................................... 14,019 28,178
Other Liabilities........................................... 2,472 2,566
Commitments and Contingencies (Note K)...................... -- --
Mandatorily Redeemable Preferred Stock...................... 113,037 --
Stockholders' Equity (Deficiency):
Series B 13.25% Cumulative Compounding Perpetual Preferred
Stock ($.01 par value).................................... 30 --
Series A Preferred Stock ($.50 par value)................... -- 3,322
Common stock ($.01 par value: authorized 30,000 shares;
issued and outstanding 1,075)............................. 11 --
Common stock ($1.00 par value).............................. -- 20,068
Capital in excess of par value.............................. 41,450 27,127
(Accumulated deficit) Retained earnings..................... (366,844) 2,892
Treasury stock, at cost..................................... -- (4,806)
--------- --------
Total Stockholders' Equity (Deficiency)................. (325,353) 48,603
--------- --------
Total Liabilities and Stockholders' Equity (Deficiency)..... $ 309,218 $257,552
========= ========
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
SERIES B
CUMULATIVE
COMPOUNDING
SERIES A PERPETUAL
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
------------------- ------------------- ------------------- (ACCUMULATED
CAPITAL IN DEFICIT)
SHARES SHARES SHARES EXCESS OF RETAINED
ISSUED AMOUNT ISSUED AMOUNT ISSUED AMOUNT PAR VALUE EARNINGS
-------- -------- -------- -------- -------- -------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance October 1, 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
Net loss........................ (31,554)
Recapitalization................ (6,644) (3,322) 3,000 $30 (18,993) (20,057) 13,605 (332,033)
Issuance of warrants............ 743
Stock options exercised......... (25)
Dividends earned on preferred
stock......................... (6,149)
------ ------- ------ --- ------- -------- ------- ---------
Balance September 30, 1998...... -- $ -- 3,000 $30 1,075 $ 11 $41,450 $(366,844)
====== ======= ====== === ======= ======== ======= =========
<CAPTION>
TREASURY
STOCK
--------
<S> <C>
Balance October 1, 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)
Net loss........................
Recapitalization................ 4,651
Issuance of warrants............
Stock options exercised......... 155
Dividends earned on preferred
stock.........................
-------
Balance September 30, 1998...... $ --
=======
</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,
------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net (loss) income........................................... $(31,554) $ 24,663 $(15,704)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization............................. 41,692 30,359 30,157
Provision for deferred income taxes....................... (11,465) 29,480 (650)
Reserve on note receivable from MHM....................... -- 5,523 6,000
Accretion on discount debentures.......................... 3,305 -- --
Cash provided by discontinued operations.................. -- 660 3,240
(Income) loss from discontinued operations................ -- (34,941) 10,669
Extraordinary item--early retirement of debt.............. 6,466 2,879 (1,730)
Gain on sale of Cardinal stock............................ -- (9,213) --
Equity participation--MEDIQ/PRN warrants.................. -- 11,047 625
Other..................................................... 1,478 1,751 484
Increase (decrease), net of effects from acquisitions:
Accounts receivable--net.................................. (8,529) (4,833) (1,191)
Inventories............................................... (6,504) (6,397) (2,433)
Accounts payable.......................................... 4,773 (1,577) 2,213
Accrued expenses.......................................... (1,297) (4,402) (2,973)
Federal and state taxes payable........................... 2,184 (36,273) --
Deferred income taxes..................................... (1,994) (2,559) 1,933
Other current assets and liabilities...................... 913 (4,930) (1,572)
-------- -------- --------
Net cash (used in) provided by operating activities......... (532) 1,237 29,068
Cash Flows From Investing Activities
Purchase of equipment....................................... (20,022) (15,458) (18,073)
Acquisitions................................................ (59,468) (1,915) --
Collection of notes receivable.............................. 7,862 -- --
Proceeds from sale of discontinued operations............... -- 130,259 1,500
Repurchase of MEDIQ/PRN warrants............................ -- (12,500) (1,625)
Other....................................................... (603) 947 1,249
-------- -------- --------
Net cash (used in) provided by investing activities......... (72,231) 101,333 (16,949)
Cash Flows From Financing Activities
Borrowings.................................................. 464,257 214,000 25,747
Debt repayments............................................. (143,889) (307,639) (39,045)
Issuance of capital stock................................... 148,983 -- --
Repurchase of capital stock................................. (377,875) -- --
Deferred financing fees..................................... (20,814) (8,874) --
Other....................................................... 873 363 1,432
-------- -------- --------
Net cash provided by (used in) financing activities......... 71,535 (102,150) (11,866)
-------- -------- --------
(Decrease) increase in cash................................. (1,228) 420 253
Cash:
Beginning balance......................................... 3,639 3,219 2,966
-------- -------- --------
Ending balance............................................ $ 2,411 $ 3,639 $ 3,219
======== ======== ========
Supplemental disclosure of cash flow information:
Interest paid............................................. $ 16,746 $ 21,381 $ 25,563
======== ======== ========
Income taxes paid......................................... $ 833 $ 7,553 $ 557
======== ======== ========
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.................................................. $ 534 $ -- $ 840
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1998, 1997, 1996
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF OPERATIONS--MEDIQ Incorporated and its subsidiaries (the
"Company") rents movable critical care and life support medical equipment and
support surfaces, distributes disposable products, accessories and repair parts
used with the types of equipment and support surfaces it rents and provides
outsourcing services to its customers in the healthcare industry throughout the
United States.
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include
the accounts of MEDIQ Incorporated and its subsidiaries. Investments in
companies owned 20% to 50% were 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 are eliminated.
INVENTORIES--Inventories, which consist primarily of disposable products,
repair parts and raw materials 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 the fair value of net
assets is amortized on a straight line basis primarily over 20 years.
Accumulated amortization was $16.7 million and $12.3 million as of
September 30, 1998 and 1997, respectively. Amounts accumulated through the
respective dates are adjusted for associated write offs.
DEFERRED FINANCING COSTS--Costs incurred in the issuance of long term debt
are amortized on a straight line basis over the term of the related debt
instrument. Accumulated amortization was $.7 million and $1.5 million as of
September 30, 1998 and 1997, respectively. Amounts accumulated through the
respective dates are adjusted in association with the early retirement of the
related debt instruments.
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--Rental revenue is recognized in accordance with the
terms of the related rental agreement and/or the usage of the related rental
equipment. Revenues from other activities are recognized as services are
rendered, income is earned or products are shipped.
The Company entered into several revenue share arrangements with original
equipment manufacturers ("OEMs") whereby the Company rents moveable medical
equipment and support surfaces and sells disposable products owned by the
OEMs to the Company's customers. Under these arrangements, the Company bills the
customer and pays the OEMs a fee based upon a percentage of the amount billed.
The Company bears the risk of loss relating to the equipment and collection of
revenue. Revenue related to the rental of equipment owned by the OEMs is
included in rental revenue while the related fees are reflected in operating
expenses. Revenue related to the sale of the OEMs' disposable products is
included in sales while the related fees are reflected in cost of goods sold.
F-7
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1998, 1997, 1996
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SUBSIDIARY AND UNCONSOLIDATED AFFILIATE STOCK TRANSACTIONS--Gains and losses
resulting from the issuance or repurchase of stock by subsidiaries and
unconsolidated affiliates are recognized by the Company as equity participation
and included in Other-net within Other Charges and Credits in the Consolidated
Statements of Operations.
EARNINGS (LOSS) PER SHARE--The Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share", which the Company adopted in the first quarter of fiscal 1998.
Accordingly, earnings (loss) per share ("EPS") for 1997 and 1996 has been
restated in conformity with the computational requirements of SFAS No. 128.
Basic EPS is computed by dividing net income (loss) available for common
shareholders, as well as other applicable items in the Consolidated Statement of
Operations, by the weighted average number of common shares outstanding during
the respective periods. Diluted EPS gives effect to potential common shares
outstanding during the respective periods and related adjustments to net income
(loss) available for common shareholders and other reportable items as
applicable.
In accordance with the provisions of SFAS No. 128, no potential common
shares shall be included in the computation of any diluted per share amount when
a loss from continuing operations exists, even if the entity reports net income.
Accordingly, earnings per share assuming dilution on the face of the income
statement reflects the same earnings per share and weighted average shares
outstanding as for the basic EPS.
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--MERGER, REORGANIZATION, REFINANCING AND RECAPITALIZATION
Pursuant to the terms of an Agreement and Plan of Merger dated January 14,
1998, as amended between the Company and MQ Acquisition Corporation ("MQ"), on
May 29, 1998, MQ was merged with and into the Company (the "Merger") with the
Company continuing as the surviving corporation (the "Surviving Corporation").
MQ was organized by Bruckmann, Rosser, Sherrill & Co., L.P. ("BRS") solely to
effect the Merger and acquire, together with other investors, a controlling
interest in the Company. In connection with the consummation of the Merger, a
corporate restructuring took place in which the Company contributed the capital
stock of all of its subsidiaries other than MEDIQ/PRN Life Support
Services, Inc. ("MEDIQ/PRN") to MEDIQ/PRN.
Simultaneously with the Merger, a refinancing was undertaken in which
(i) MEDIQ/PRN sold $190.0 million principal amount of senior subordinated notes,
(ii) the Company sold 140,885 units, each unit consisting of senior discount
debentures and warrants to purchase Common Stock of the Surviving Corporation
for gross proceeds of $75.0 million, (iii) MEDIQ/PRN entered into a new senior
secured credit facility amounting to $325.0 million and (iv) all indebtedness of
the Company except approximately
F-8
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1998, 1997, 1996
NOTE B--MERGER, REORGANIZATION, REFINANCING AND RECAPITALIZATION (CONTINUED)
$10.1 million of the 7.50% Exchangeable Subordinated Debentures due 2003 and
$2.0 million of MEDIQ/ PRN's capital leases was repaid.
In the Merger, each share of the Company's existing Series A Preferred
Stock, par value $.50 per share and Common Stock, par value $1.00 per share
issued and outstanding immediately prior to the Merger was converted into the
right to receive $13.75 in cash, without interest, and 0.075 of a share of
Series A 13.0% Cumulative Compounding Preferred Stock, par value $.01
("Series A Preferred Stock") of the Surviving Corporation, except that certain
premerger controlling stockholders converted 1,000,000 shares of preferred stock
into shares of Series B 13.25% Cumulative Compounding Perpetual Preferred Stock,
par value $.01 per share ("Series B Preferred Stock") and Common Stock, par
value $.01 per share ("Common Stock") of the Surviving Corporation. Options to
purchase common stock outstanding at the date of the Merger became exercisable
on that date. The options were exchanged for cash consideration of $13.75 for
each option less the exercise price per option and 0.075 shares of Series A
Preferred Stock. Additionally, shares of common and preferred stock held in
treasury at the date of the Merger were cancelled.
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").
For accounting purposes the Merger was treated as a recapitalization. The
historical basis of the Company's assets and liabilities was not affected.
The aggregate consideration paid in connection with the Merger was
approximately $390.8 million. Certain costs were incurred to effect the Merger.
Such costs aggregated $32.4 million and were charged to expense as Merger and
Acquisition Charges in the Consolidated Statement of Operations. The costs
consisted of $19.7 million related to the exercise of stock options outstanding
at the date of the Merger, $6.7 million in incentive bonuses paid in connection
with the Merger and a one time $6.0 million management fee to BRS and its other
investors.
NOTE C--ACQUISITIONS
On May 29, 1998, the Company purchased specified assets and rights of CH
Industries, Inc. ("CHI"), certain subsidiaries (including CH Medical, Inc.) and
certain other parties (the "CH Medical Business") for a purchase price of
$48.5 million in cash (subject to adjustment based on closing net asset
adjustments), 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 of the CH Medical Acquisition with the proceeds from Term Loans
under the Senior Secured Credit Facility. CHI developed various medical products
utilized in patient care treatment and therapy. In addition to its development
of medical products, CHI was 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. CHI
developed, among other things, 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.
On June 26, 1998, the Company acquired certain assets of National Patient
Care Systems, Inc. ("NPC") for $11.0 million in cash, including related costs
and expenses, with contingent consideration of
F-9
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1998, 1997, 1996
NOTE C--ACQUISITIONS (CONTINUED)
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.
Both acquisitions were accounted for by the purchase method of accounting
and, accordingly, the purchase price was allocated to the assets acquired based
on their estimated fair values on the date of purchase. The excess of the
purchase price over the estimated fair values of the net assets acquired,
$27.9 million for the CH Medical Business and $9.0 million for NPC, was recorded
as goodwill and is being amortized on a straight line basis over twenty years.
In connection with the CH Medical Business, the Company acquired five patents.
Such patents were issued between September 1990 and February 1995. The Company
has assigned a value to the patents based on its best estimate until a valuation
is completed by an independent appraiser. Although the Company is unable to
predict whether there will be an adjustment, if any, as a result of such
valuation, the Company does not believe there will be any material adverse
effect on the Company's results of operations. The Company incurred
$2.6 million of costs related to severance and future purchase commitments as a
result of the acquisition of the CH Medical Business. Such costs are reflected
as Merger and Acquisition Charges in the Consolidated Statement of Operations.
Currently, the Company is in negotiations with CHI to resolve proposed
closing net asset adjustments and guaranteed current asset realization. The
Company cannot determine at this time the amount of funds, if any, it will
ultimately receive as a result of such negotiations. The Company believes that
the results of such negotiations will not have a material adverse effect on its
financial position or results of operations.
The operations of the CH Medical Business and NPC are included in the
Company's Consolidated Statement of Operations from their respective acquisition
dates. The following pro forma financial information presents the consolidated
results of operations of the Company as if the acquisitions had occurred on
October 1 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 on such
date.
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-------------------------
1998 1997
-------- --------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C>
Revenues........................................... $207,814 $195,552
(Loss) income from continuing operations........... (33,052) 4,341
Net (loss) income.................................. (35,535) 31,245
(Loss) earnings per share.......................... (33.06) 29.07
</TABLE>
On September 18, 1997, the Company acquired the remaining 50% interest in
its SpectraCair Joint Venture ("SpectraCair") from a subsidiary of Huntleigh
Healthcare ("Huntleigh") for $1.9 million in cash and the assumption of
Huntleigh's portion of the outstanding debt of SpectraCair. The acquisition was
accounted for under the purchase method of accounting and, accordingly, the
purchase price was allocated to assets acquired and liabilities assumed based on
their estimated fair market values at the date of the acquisition. The excess of
the purchase price over the estimated fair values of the net assets acquired was
not material.
F-10
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1998, 1997, 1996
NOTE D--DISPOSITIONS
In fiscal 1997, the Company recorded a reserve of $5.0 million in Loss on
Disposal within Discontinued Operations in the Consolidated Statement of
Operations against its investment in InnoServ Technologies ("InnoServ") in
anticipation of the sale to InnoServ of all of the common stock of InnoServ
owned by the Company. The sale occurred in November 1997. In a change of control
of InnoServ thereafter, and before September 30, 1998, the Company was entitled
to certain payments from the acquiring party. InnoServ was acquired in
May 1998, and in September 1998 the Company received $2.9 million, net of
expenses, in settlement of the amounts due the Company. This gain is reflected
in Gain on Disposal within Discontinued Operations in the Consolidated Statement
of Operations.
In December 1996, the Company sold to NutraMax Products, Inc. ("NutraMax")
all of the shares of NutraMax common stock owned by the Company and recognized
an after tax gain of $4.8 million. The Company received from NutraMax
$19.9 million in cash and an interest bearing promissory note in the amount of
$16.4 million. The shares sold were placed in escrow in support of the Company's
7.50% Exchangeable Subordinated Debentures ("Exchangeable Debentures"). The note
is payable when the shares are delivered to NutraMax upon release from escrow.
NutraMax shares are released from escrow upon the purchase or redemption of the
Exchangeable Debentures by the Company. In the event the Exchangeable Debentures
are exchanged into shares of NutraMax, the note is reduced on a pro rata basis.
The note does not bear a market rate of interest for its full term and,
accordingly, the note was discounted to $13.6 million. Repurchases of
Exchangeable Debentures by the Company in fiscal 1997 and 1998 resulted in the
release from escrow and delivery of NutraMax common shares to NutraMax.
Accordingly, the Company received $10.5 million and $5.6 million in cash on the
note and recognized gains of $1.8 million and $1.1 million on the note in 1997
and 1998, respectively. These gains are reflected in Other-net within Other
Charges and Credits in the Consolidated Statement of Operations. At
September 30, 1998, the balance of the note receivable was $.2 million.
In May 1997, the Company sold the stock of Health Examinetics, Inc. 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 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, which
was in addition to the estimated net loss on the disposal recorded in fiscal
1996. The charge is netted in Gain on Disposal within Income from Discontinued
Operations in the Consolidated Statement of Operations.
In November 1996, the Company sold substantially all of the assets of MEDIQ
Mobile X-Ray Services, Inc. to a subsidiary of Integrated Health Services, Inc.
("IHS"). The consideration received was $5.3 million in cash and shares of IHS
common stock valued at $5.2 million, with potential for additional cash
consideration based upon the occurrence of certain future events. In July 1997,
the Company sold the IHS shares at an amount approximating carrying value. Also,
in fiscal 1997 the Company received approximately $1.1 million in additional
cash consideration.
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 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 Consolidated Statement of Operations. The Company sold its
Cardinal shares in January 1997 for $88.4 million and used the proceeds to
reduce debt.
F-11
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1998, 1997, 1996
NOTE D--DISPOSITIONS (CONTINUED)
Revenues from discontinued operations (excluding equity investees) were
$6.6 million in 1997 and $36.8 million in 1996. No revenues were recorded in
1998.
NOTE E--NONRECURRING CHARGES
In February 1997, the Company entered into an agreement with Universal
Hospital Services, Inc. ("UHS") to acquire the outstanding shares of UHS.
Including the assumption of debt, the total purchase price was to be
$138 million. In July 1997, the Company and UHS were informed by the Federal
Trade Commission ("FTC") that it was to take legal action to block the proposed
transaction. Facing the likelihood of a protracted proceeding before the FTC,
the uncertainty of the outcome and the costs associated with continuing to
defend against the FTC, in September 1997 the Company and UHS mutually
terminated the proposed acquisition. The Company wrote off $4 million
($2.4 million net of taxes) of deferred acquisition and financing costs related
to the proposed acquisition which is included in Other-net within Other Charges
and Credits in the Consolidated Statement of Operations.
In the first quarter of fiscal 1996, the Company recorded a restructuring
charge of $2.2 million for employee severance costs in connection with a plan
approved by the Board of Directors to downsize corporate functions and
consolidate certain activities with MEDIQ/PRN. The Company paid approximately
$1.5 million of severance benefits through September 30, 1998. Payments in
settlement of the remaining restructuring obligation will be substantially
completed in fiscal 1999.
NOTE F--INVENTORY
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Raw materials............................................. $ 2,791 $ --
Finished goods............................................ 19,029 13,047
------- -------
$21,820 $13,047
======= =======
</TABLE>
NOTE G--PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Rental equipment........................................ $236,828 $229,095
Equipment and fixtures.................................. 14,561 12,787
Building and improvements............................... 8,128 7,589
Land.................................................... 149 149
-------- --------
259,666 249,620
Less accumulated depreciation and amortization.......... 155,749 136,031
-------- --------
$103,917 $113,589
======== ========
</TABLE>
F-12
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1998, 1997, 1996
NOTE G--PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
Depreciation and amortization expense related to property, plant and
equipment was $36.9 million, $26.5 million and $26.3 million in 1998, 1997 and
1996, respectively. Fiscal 1998 included a $6.0 million charge to write down
certain under utilized rental equipment to net realizable value.
NOTE H--ACCRUED EXPENSES
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Interest.................................................. $ 8,086 $ 2,135
Payroll and related taxes................................. 2,490 3,588
Commissions............................................... 1,876 1,693
Severance................................................. 1,038 2,431
Government investigations................................. -- 4,200
Insurance................................................. 1,433 1,960
Pension................................................... 1,910 1,961
Other..................................................... 3,736 4,764
------- -------
$20,569 $22,732
======= =======
</TABLE>
F-13
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1998, 1997, 1996
NOTE I--LONG TERM DEBT
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Senior debt:
Term loans............................................ $200,000 $128,933
Revolving credit...................................... -- 3,500
13% senior discount debentures due 2009............... 77,562 --
Capital lease obligations payable in varying
installments through 2001 at fixed rates from 8.1%
to 13.6%............................................ 1,965 3,346
-------- --------
279,527 135,779
Less current portion.................................... 2,037 7,648
-------- --------
$277,490 $128,131
======== ========
Subordinated debt:
11% senior subordinated notes due 2008................ $190,000 $ --
7.50% exchangeable subordinated debentures due 2003... 514 10,055
-------- --------
$190,514 $ 10,055
======== ========
</TABLE>
To finance a portion of the cash consideration pursuant to the Merger and
the CH Medical Acquisition and pay off certain outstanding debt, the Company and
MEDIQ/PRN undertook a refinancing consisting of: (i) a $325.0 million Senior
Secured Credit Facility ("New Credit Facility"); (ii) $190.0 million principal
amount of 11% Senior Subordinated Notes due 2008 ("Notes"); and
(iii) $140.9 million aggregate principal amount at maturity of 13% Senior
Discount Debentures due 2009 ("Debentures"). The New Credit Facility replaced a
$260.0 million facility formerly in place.
The New Credit Facility is secured by a (i) first priority lien and security
interests in substantially all tangible and intangible assets of MEDIQ/PRN and
its subsidiaries presently owned and subsequently acquired or organized,
(ii) first priority pledge of all capital stock of MEDIQ/PRN's subsidiaries
presently owned and subsequently acquired or organized and (iii) mortgage on the
Company's corporate headquarters building and certain personal property therein.
Also, each subsidiary of MEDIQ/PRN presently owned and subsequently acquired or
organized is a party to and an unconditional guarantor under the New Credit
Facility.
The New Credit Facility consists of (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"). The Acquisition Facility is
available through November 1999. Amounts borrowed under the Term and Acquisition
Facilities and repaid may not be reborrowed. Amounts borrowed under the
Revolving Credit Facility and repaid may be reborrowed.
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
F-14
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1998, 1997, 1996
NOTE I--LONG TERM DEBT (CONTINUED)
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%. At September 30, 1998, borrowings under the Term Loan Facility
principally bear interest at 8.50%. On December 10, 1998, the interest rate on
the Term Loan Facility was reduced to 7.88% as a result of a reduction in LIBOR.
Such rate will be in effect until June 10, 1999, when it will be adjusted to the
then current LIBOR or prime rate. In addition, commitment fees are required at
0.5% per year of the undrawn portion of the commitments in respect of the
facilities. 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 meeting certain performance goals.
Principal amounts outstanding under the Revolving Credit Facility are due
and payable in full at maturity. The Term Loans amortize on a quarterly basis
commencing September 30, 1999. Principal amounts outstanding under the
Acquisition Facility on November 30, 1999 will amortize on a quarterly basis.
The Term, Revolving 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 of its subsidiary guarantors. Such loans
are required to be prepaid with 75% of the excess cash flow (as defined in the
New Credit Agreement) of MEDIQ/PRN or, if MEDIQ/PRN's ratio of funded debt to
pro forma earnings before interest, taxes, depreciation and amortization for the
preceding 12 month period is less than 5.0 to 1.0, 50% of such excess cash flow.
At September 30, 1998, pursuant to the terms of the New Credit Facility
and/or the indentures for the Notes and Debentures, availability under the
Revolving Credit Facility and the Acquisition Facility was limited to
$29.8 million and $50.0 million, respectively.
The Notes, issued on May 29, 1998, are unsecured obligations of MEDIQ/PRN
maturing on June 1, 2008 and bear interest at 11% per year payable on June 1 and
December 1. The Notes are supported by unconditional guaranties of each of
MEDIQ/PRN's subsidiaries presently owned and subsequently acquired or organized.
Commencing June 1, 2003, the Notes may be redeemed at MEDIQ/PRN's option at
prices specified in the indenture. Prior to June 1, 2001, MEDIQ/PRN may at its
option redeem a limited amount of the Notes at a redemption price of 111%, plus
accrued and unpaid interest, with proceeds from a public offering of equity
securities. In the event of a change in control of the Company, MEDIQ/PRN may be
required to repurchase Notes at a redemption price of 101%, plus accrued and
unpaid interest. The Notes are subordinate to senior indebtedness of MEDIQ/PRN
and its subsidiaries, including obligations under the New Credit Facility.
The Debentures, issued on May 29, 1998, are unsecured obligations of the
Company maturing on June 1, 2009. The Debentures were issued at an aggregate
discounted amount of $74.3 million. The carrying amount per bond accretes
incrementally at an effective rate of 13.2% to the full principal amount on
June 1, 2003. No cash interest accrues on the Debentures through June 1, 2003.
Thereafter, interest accrues at 13% per year, payable on June 1 and December 1.
Commencing June 1, 2003, the Debentures may be redeemed at the Company's option
at prices specified in the indenture. Prior to June 1, 2001, the Company may at
its option redeem a limited amount of the Debentures at a redemption price of
113% of accreted value, plus accrued and unpaid interest, with proceeds from a
public offering of equity securities. In the event of a change in control of the
Company, the Company may be required to repurchase Debentures at a redemption
price of 101% of the accreted value per bond, plus accrued and unpaid interest.
The Debentures are subordinate to the New Credit Facility and 11% Senior
Subordinated Notes
F-15
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1998, 1997, 1996
NOTE I--LONG TERM DEBT (CONTINUED)
due 2008, as well as to all other creditors of MEDIQ/PRN and its subsidiaries
even if the indebtedness of MEDIQ/PRN and its subsidiaries is not designated as
senior indebtedness. The Debentures were initially issued in units with warrants
to purchase Common Stock of the Company. The Debentures and Warrants have since
become separable from one another. (See Note N.)
On June 5, 1998, pursuant to a change of control provision, the Company made
a tender offer to repurchase the remaining outstanding balance of the
Exchangeable Debentures of approximately $10.1 million. On July 3, 1998, the
Company redeemed $9.5 million of the Exchangeable Debentures pursuant to the
tender offer. Early retirement of this debt resulted in an extraordinary loss of
$.2 million, related to the write off of deferred financing costs. The
outstanding balance of the Exchangeable Debentures at September 30, 1998 is
subject to redemption at the Company's option at a redemption price per bond of
$103.33 through July 14, 1999 and $102.50 from July 15, 1999 through July 14,
2000.
Term loans and revolving credit advances outstanding at the date of the
Merger were repaid with proceeds from the refinancing described above. As a
result of such refinancing, the Company recognized an extraordinary loss of
$4.3 million (net of tax of $1.9 million) related to the write off of deferred
financing costs.
During 1998, weighted average interest rates incurred on the New Credit
Facility were (i) Term Facility--8.64% and (ii) Revolving Credit
Facility--9.50%. No borrowings were made under the Acquisition Facility.
Weighted average interest rates incurred in 1998 under the previous credit
arrangements were: term loan A--7.79%, (ii) term loan B--8.50% and
(iii) revolving credit advances--9.00%. Aggregate commitment fees incurred under
all facilities in 1998 were $.4 million.
The New Credit Facility and the indentures related to the Debentures and
Notes include significant operating and financial restrictions, such as limits
on the Company's ability to incur indebtedness, create liens, sell assets,
engage in mergers and consolidations, make investments and capital expenditures
and pay dividends.
Maturities of long term debt in the next five years are: $2.0 million in
1999; $2.3 million in 2000; $2.2 million in 2001; $2.0 million in 2002; and
$2.5 million in 2003.
NOTE J--FINANCIAL INSTRUMENTS
The Company utilizes interest rate swap contracts to manage interest rate
exposure. The principal object of such contracts is to minimize the risks and/or
costs associated with financial activities. The Company does not use swap
contracts for trading or other speculative purposes. The counterparties to these
arrangements are a diverse group of major financial institutions. The Company is
exposed to credit loss in the event of nonperformance by these counterparties.
The Company does not anticipate nonperformance by the counterparties.
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
F-16
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1998, 1997, 1996
NOTE J--FINANCIAL INSTRUMENTS (CONTINUED)
hedge interest rate exposures, the net cash amounts paid or received on the
contract are accrued and recognized as an adjustment to interest expense.
In July 1998, the Company entered into a new interest rate swap agreement in
the notional amount of $100.0 million. The swap effectively fixes the Company's
borrowing rate on $100.0 million of the Term Loan Facility at 5.35% until
July 2003 as long as the three month LIBOR rate does not exceed 6.25%. If the
three month LIBOR rate exceeds 6.25%, the swap temporarily terminates until the
three month LIBOR rate drops back below 6.25%. The Company must pay the actual
LIBOR rate when LIBOR exceeds 6.25%. The anniversary dates for determining the
three month LIBOR rate are the closest business day to January 3, April 3,
July 3 and October 3 in each year. On the latest anniversary date, October 5,
1998, the three month LIBOR rate was 5.31%. The estimated cost to terminate this
swap at September 30, 1998 was $2.9 million.
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 collars are in effect until July 2003. The estimated cost to
terminate this collar at September 30, 1998 was $2.2 million.
In July 1998, the Company terminated previously existing interest rate
hedging contracts at a cost of approximately $.6 million, which was reflected as
interest expense.
NOTE K--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
- ------------------------- -------- ---------
(IN THOUSANDS)
<S> <C> <C>
1999........................................................ $1,845 $ 5,294
2000........................................................ 345 3,968
2001........................................................ 312 2,601
2002........................................................ -- 1,572
2003 and thereafter......................................... -- 778
------ -------
Total minimum lease payments................................ 2,502 $14,213
=======
Less amount representing interest........................... 537
------
Present value of minimum lease payments..................... $1,965
======
</TABLE>
Total rent expense under operating leases was $5.7 million, $5.6 million and
$5.2 million in 1998, 1997 and 1996, respectively. Certain leases, which are for
terms of up to five years, contain options to renew for additional periods.
At September 30, 1998, rental equipment and machinery and equipment included
assets under capitalized lease obligations of $7.0 million, less accumulated
amortization of $3.0 million.
F-17
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1998, 1997, 1996
NOTE K--COMMITMENTS AND CONTINGENCIES (CONTINUED)
PURCHASE COMMITMENTS--The Company entered into two long term agreements to
purchase approximately $14.5 million of products in the next fiscal year. The
Company purchased $13.8 million, $1.2 million and $5.9 million under purchase
commitment agreements in 1998, 1997 and 1996, respectively.
EMPLOYMENT AGREEMENTS--The Company maintains employment agreements with its
two Executive Officers and certain officers 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, 1998, the aggregate minimum
commitment under these employment agreements, excluding bonuses, was
approximately $6.3 million.
MANAGEMENT AGREEMENT--As a result of the Merger, MEDIQ/PRN entered into a
management agreement with BRS and its other investors for them to provide
business and organizational strategy, financial and investment management and
merchant and investment banking services. The annual management fee is the
greater of $1.0 million or 1.5% of EBITDA (as defined in the agreement).
MEDIQ/PRN paid $.3 million under the management agreement in 1998.
INVESTIGATIONS AND LEGAL PROCEEDINGS--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, a stockholder of the Company, 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.
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.
MEDIQ Imaging Services, Inc., 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 United States 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 the
Company reached a settlement with the United States 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"). The suit
challenged the validity of a note receivable in the original principal amount of
$11.5 million that MEDIQ and MHM entered into in connection with the spin off of
MHM to the Company's shareholders in August 1993. In addition, beginning in
February 1997,
F-18
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1998, 1997, 1996
NOTE K--COMMITMENTS AND CONTINGENCIES (CONTINUED)
MHM stopped making the required monthly installments on the note, upon which the
Company gave notice to MHM of its default and declared all sums outstanding
under the note immediately due and payable. In October 1997, the Company 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 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
in which MHM paid the Company $3.0 million in cash in full satisfaction of all
amounts due. This gain is reflected in Other-net within Other Charges and
Credits in the Consolidated Statement of Operations.
On June 12, 1996, the Company, ATS Medical Services, Inc. ("ATS") and MEDIQ
Mobile X-Ray Services, Inc. were sued in United States District Court for the
Middle District of Pennsylvania by former employees of ATS. The lawsuit alleges
that the former employees were wrongfully terminated and asserts claims pursuant
to the whistleblower provision of the False Claims Act and the Pennsylvania Wage
Payment and Collection Law. In December 1997, the Company, without admission of
guilt and desiring to avoid the expense of further litigation, reached a
settlement, the amount of which was immaterial to the Company's financial
statements.
The Company has pending other legal claims incurred in the normal course of
business which the Company believes will not have a material effect on the
consolidated financial statements.
VENDOR DISPUTE--Currently, the Company is in a dispute with a significant
vendor. The vendor wishes to terminate a contract with the Company and the
Company intends to vigorously defend its rights under the contract. As such the
Company has filed a complaint in the Superior Court of New Jersey to protect its
rights under the contract. Pursuant to the contract, the Company purchases parts
and disposables and re-sells such products. The Company recognized
$10.3 million in revenues in fiscal 1998 pursuant to this activity. The vendor
also contended the Company was in arrears on its payments to the vendor. The
Company has reviewed its internal books and records and disagrees with the
vendor. However, the Company paid the vendor the alleged arrearage in order that
the vendor could not contend the Company was in breach of contract. The two
parties have agreed to attempt to work out the dispute prior to litigation. The
Company believes any such resolution will not have a material adverse effect on
the Company's results of operations.
REIMBURSEMENTS--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. With the acquisition of the
CH Medical Business, the Company also acts as a supplier of durable medical
equipment 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 is 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 and other users of the Company's products and services are unable
to obtain sufficient reimbursement, a material adverse impact may result.
F-19
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1998, 1997, 1996
NOTE L--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, 1998.
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 $470.0 million and $450.6 million,
respectively.
INTEREST RATE INSTRUMENTS--The fair values are the estimated amounts that
the Company would receive or pay to terminate the agreements at September 30,
1998, taking into account current interest rates and the current
creditworthiness of the counterparties. At September 30, 1998, the notional
amounts were $200.0 million, there was no carrying value and the fair value was
$5.1 million, 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, 1998, 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 M--PREFERRED STOCK
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Mandatorily Redeemable Preferred Stock:
Series A 13.0% cumulative compounding..................... $ 81,669 $ --
Series C 13.5% cumulative compounding..................... 31,368 --
-------- ------
$113,037 $ --
======== ======
Series B 13.25% cumulative compounding perpetual.......... $ 30 $ --
Series A.................................................. -- 3,322
-------- ------
$ 30 $3,322
======== ======
</TABLE>
F-20
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1998, 1997, 1996
NOTE M--PREFERRED STOCK (CONTINUED)
In connection with the Merger, the Company issued the following preferred
stocks: (i) Series A Preferred Stock; (ii) Series B Preferred Stock; and
(iii) Series C Preferred Stock. At September 30, 1998, authorized shares issued
and outstanding for each series were: Series A Preferred Stock-- authorized
10 million, issued and outstanding 7,823,506; Series B Preferred
Stock--authorized 5 million, issued and outstanding 2,999,999; Series C
Preferred Stock--authorized 5 million, issued and outstanding 3,000,000.
Dividend rates per share of each series of preferred stock are $1.30 for
Series A Preferred Stock, $1.325 for Series B Preferred Stock and $1.35 for
Series C Preferred Stock. Each series has a stated value per share of $10.00.
Dividends for each series are payable on June 30 and December 31 of each year,
commencing December 31, 1998, but only upon declaration by the Company's Board
of Directors. Accrued and unpaid dividends are cumulative for each series and
are added to the liquidation value for Series A Preferred Stock and Series C
Preferred Stock and to long term liabilities with respect to Series B Preferred
Stock. Accrued dividends not paid on any dividend payment date accrue additional
dividends compounded annually. Liquidation, whether voluntary or involuntary,
preference per share for each series is $10.00, plus cumulative dividends in
arrears.
All outstanding shares of Series A Preferred Stock and Series C Preferred
Stock are required to be redeemed by the Company from legally available funds on
December 31, 2011 and 2012, respectively, both at a liquidation value per share
of $10.00, plus accrued and unpaid dividends. At its option, subject to debt
restrictions, the Company may redeem outstanding shares on a pro rata basis
among all holders of each respective Series A Preferred Stock or Series C
Preferred Stock at any time in whole or part from legally available funds.
Series A Preferred Stock has an optional redemption price per share through
December 31, 1999 of $11.00, plus accrued and unpaid dividends. Series C
Preferred Stock has an optional redemption price per share of $10.00, plus
accrued and unpaid dividends. No partial redemption of either Series A Preferred
Stock or Series C Preferred Stock may occur unless all accrued and unpaid
dividends to the date of redemption have been declared and paid, or a sum
sufficient for such payments has been separately set apart. The Company has
neither the right nor is required to redeem any outstanding shares of Series B
Preferred Stock. However, outstanding shares of Series B Preferred Stock may be
repurchased by the Company with the consent of the selling holder, subject to
debt restrictions.
Series A Preferred Stock has priority with respect to dividends and
liquidation rights over the other two series. Series B Preferred Stock has
priority over Series C Preferred Stock with respect to such rights. Each series
of preferred stock has priority over common stock, and each series of preferred
stock is junior in priority to all existing and future indebtedness. Generally,
no series of preferred stock is entitled nor permitted to vote on any matter
required or permitted to be voted on by the holders of common stock.
Accrued and unpaid dividends for fiscal 1998 from the date of issue were
$3.4 million for Series A Preferred Stock, $1.3 million for Series B Preferred
Stock and $1.4 million for Series C Preferred Stock. Accrued dividends for each
series were charged to accumulated deficit. For Series A Preferred Stock and
Series C Preferred Stock, the accrued dividends were added to the respective
carrying amount of each series. For Series B Preferred Stock, the accrued
dividends were recorded in long term liabilities.
There is no established public market for the Company's preferred stock, and
as such, there is no practicable manner to obtain an aggregate market valuation.
At the date of the Merger, all but 1.0 million outstanding shares of the
premerger Series A preferred stock, par value $.50 were exchanged for 0.075
shares of post-merger Series A Preferred Stock and cash
F-21
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1998, 1997, 1996
NOTE M--PREFERRED STOCK (CONTINUED)
consideration. The 1.0 million shares were exchanged for Series B Preferred
Stock and new Common Stock. Premerger Series A was subsequently cancelled. All
shares of preferred stock held in treasury at the date of Merger were also
cancelled.
The Company has 20 million authorized shares, par value $.01 available for
issuance in one or more series. These may be issued by the Board of Directors of
the Company, with preference, terms and rights determined by the Board of
Directors, without further action by the holders of the Company's Common Stock.
Terms of the New Credit Facility, Notes and Debentures restrict the ability
of the Company to pay dividends with respect to each series of preferred stock.
NOTE N--COMMON STOCK AND WARRANTS
In the recapitalization effected by the Merger, the Company authorized
30 million shares of Common Stock and issued 1.0 million shares. In
September 1998, certain members of management purchased an additional 74,823
shares. Total shares of Common Stock issued and outstanding at September 30,
1998 were 1,074,823.
Holders of Common Stock are entitled to one vote per share on all matters
required or permitted to be submitted for action by stockholders. Subject to the
preference on dividends of preferred stock, all shares of Common Stock are
entitled to share in dividends as the Board of Directors of the Company may
declare from legally available funds.
The Company issued 140,885 Warrants entitling holders to purchase 91,209
shares of the Company's Common Stock. The Warrants have an exercise price of
$.01 and are exercisable from May 30, 1999 to the expiration date of June 1,
2009. The value attributed to the Warrants upon issuance was $.7 million and was
recorded in Capital in Excess of Par Value. The Warrants were initially issued
as a unit with the Debentures. The Warrants and Debentures have since become
separable from one another.
Shares of Common Stock, par value $1.00 outstanding at the Merger date were
exchanged for 0.075 of a share of post-merger Series A preferred stock and cash
consideration. Premerger common stock was subsequently cancelled. Options to
purchase shares of premerger common stock outstanding at the Merger date became
exercisable on that date and were exchanged for 0.075 of a share of post-merger
Series A preferred stock and cash consideration. All shares of common stock held
in treasury at the Merger date were cancelled.
Terms of the New Credit Facility, Notes and Debentures restrict the ability
of the Company to pay dividends on the Common Stock.
In the first quarter of fiscal 1999, the Company's Board of Directors
adopted a stock option plan. The plan authorizes the issuance of options for
61,543 shares of Common Stock. Also in the first quarter, the Company issued
options for 54,115 shares of Common Stock. Such options have an exercise price
of $10.00 per share, expire on October 1, 2008 and vest over four years in
accordance with a formula defined in the plan.
F-22
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1998, 1997, 1996
NOTE O--INCOME TAXES
Income tax (benefit) expense relating to continuing operations consisted of:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal........................................ $ 547 $(24,397) $ --
State.......................................... 176 51 272
-------- -------- -----
723 (24,346) 272
-------- -------- -----
Deferred:
Federal........................................ (13,178) 29,641 (810)
State.......................................... -- (161) 160
-------- -------- -----
(13,178) 29,480 (650)
-------- -------- -----
Total income tax (benefit) expense............... $(12,455) $ 5,134 $(378)
======== ======== =====
</TABLE>
The differences between the Company's income tax (benefit) expense and the
income tax (benefit) expense computed using the Federal income tax rate were:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Statutory federal tax (benefit) expense.......... $(14,119) $ 984 $(2,229)
State income taxes, net of federal income
taxes.......................................... 116 (72) 1,201
Goodwill amortization............................ 916 350 368
Equity participation--MEDIQ/PRN warrants......... -- 3,756 213
Other items--net................................. 632 116 69
-------- ------ -------
Income tax (benefit) expense..................... $(12,455) $5,134 $ (378)
======== ====== =======
</TABLE>
F-23
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1998, 1997, 1996
NOTE O--INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
were:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Liabilities:
Depreciation............................................ $27,527 $28,004
Intangible assets....................................... 2,543 2,050
Accrued expenses........................................ 5,198 4,510
Prepaid expenses........................................ 48 117
Other................................................... 118 768
------- -------
Gross deferred tax liabilities........................ 35,434 35,449
------- -------
Assets:
Net operating and capital loss carry forwards........... 7,119 4,894
Tax credit carry forwards............................... 5,219 1,997
Accrued expenses and reserves........................... 10,350 6,972
Intangible assets....................................... 3,702 364
Other................................................... 8,411 4,905
------- -------
Gross deferred tax assets............................. 34,801 19,132
Valuation allowance..................................... (7,119) (4,894)
------- -------
27,682 14,238
------- -------
Net deferred tax liability................................ $ 7,752 $21,211
======= =======
</TABLE>
During fiscal 1998, the Company generated $13.6 million of net operating
losses and $2.4 million of capital losses. These losses will be carried back to
a prior period. As a result of such carryback, the Company anticipates a refund
of $2.2 million and the generation of Federal alternative minimum tax credits of
$2.7 million and general business tax credits of $.5 million. At September 30,
1998, the Company has Federal alternative minimum tax credit carryforwards of
$4.5 million and general business tax credits of $.7 million that expire through
2003. State net operating losses of $104.6 million expire in varying amounts
through 2018, and are fully reserved in the valuation allowance.
NOTE P--RELATED PARTY TRANSACTIONS
MHM was spun off from the Company in fiscal 1993. MHM remained a related
party through individuals with beneficial ownership interests in both MHM and
the Company. MHM was obligated to the Company pursuant to a promissory note 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 million and $1.1 million in 1997
and 1996, 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 July 1998, the Company received $3.0 million from MHM
in full satisfaction of all amounts due the Company.
F-24
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1998, 1997, 1996
NOTE P--RELATED PARTY TRANSACTIONS (CONTINUED)
Fees incurred by the Company with firms in which members of its Board of
Directors are partners were $8.3 million, $2.3 million and $.8 million for 1998,
1997 and 1996, respectively. Included in 1998 is a one time fee of $6.0 million
with respect to consummation of the Merger.
NOTE Q--PENSION PLAN
The Company maintains a noncontributory defined benefit 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 benefits based on
years of credited service and compensation. The Company makes contributions that
are sufficient to fully fund its actuarially determined cost, generally equal to
the minimum amounts required by ERISA. Assets of the plan consist primarily of
stocks and bonds.
Net periodic pension expense is comprised of:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost-benefits earned during the period.... $ 551 $ 451 $ 609
Interest cost on projected benefit obligation..... 1,196 1,158 1,066
Actual return on plan assets...................... (861) (3,029) (1,463)
Net amortization and deferrals.................... (471) 1,952 544
------ ------- -------
Net periodic pension expense...................... $ 415 $ 532 $ 756
====== ======= =======
</TABLE>
The following table presents the funded status of the plan and the amounts
reflected in the Consolidated Balance Sheets:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits....................................... $(17,771) $(15,116)
======== ========
Accumulated benefit obligation........................ $(18,376) $(15,857)
======== ========
Projected benefit obligation............................ $(19,309) $(16,680)
Plan assets at fair value............................... 17,046 16,528
-------- --------
Projected benefit obligation in excess of plan assets... (2,263) (152)
Unrecognized net loss (gain)............................ 139 (2,047)
Balance of unrecorded transition obligation............. 214 238
-------- --------
Accrued pension liability............................... $ (1,910) $ (1,961)
======== ========
</TABLE>
F-25
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1998, 1997, 1996
NOTE Q--PENSION PLAN (CONTINUED)
The actuarial assumptions used in determining net periodic pension costs were:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Discount rate.......................................... 6.75% 7.5% 8%
Expected long term return on plan assets............... 8% 8% 8%
Weighted average rate of increase in compensation
levels............................................... 5% 5% 5%
</TABLE>
NOTE R--SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data (in thousands, except per share amounts)
for 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1998 QUARTER QUARTER QUARTER QUARTER
- ---- -------- -------- -------- ---------
<S> <C> <C> <C> <C>
Revenues.............................................. $42,570 $46,409 $ 42,941 $ 48,996
Operating income (loss)(A)............................ 5,851 9,555 (35,295) 1,185
Income (loss) from continuing operations.............. 1,333 3,429 (26,526) (7,307)
Income from discontinued operations................... -- -- -- 2,044
Extraordinary item.................................... -- -- (4,098) (429)
Net income (loss) available for common shareholders... 1,333 3,429 (32,224) (10,241)
Earnings per share:
Income (loss) before extraordinary items, net of
preferred dividends
Basic............................................. .05 .13 (1.68) (9.59)
Diluted........................................... .05 .13 (1.68) (9.59)
<CAPTION>
FIRST SECOND THIRD FOURTH
1997 QUARTER QUARTER QUARTER QUARTER
- ---- -------- -------- -------- ---------
Revenues. $ 35,483 $ 42,566 $ 39,625 $ 38,286
<S> <C> <C> <C> <C>
Operating income (loss)............................... 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) available for common shareholders... 23,286 5,829 1,393 (5,845)
Earnings per share:
Income (loss) before extraordinary items, net of
preferred dividends
Basic............................................. 1.20 .25 .06 (.19)
Diluted........................................... 1.20 .24 .06 (.19)
</TABLE>
- ------------------------
(A) Includes nonrecurring merger and acquisition costs of $.4 million in the
second quarter, $34.2 million in the third quarter and $.4 million in the
fourth quarter. The third quarter also reflects a $6.0 million
F-26
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1998, 1997, 1996
NOTE R--SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
charge to write down under utilized rental equipment to net realizable value
and the fourth quarter includes a $3.4 million charge for acquired
receivables.
(B) Reflects gain on sales of PCI and NutraMax, net of taxes.
(C) Includes MHM reserves of $3.6 million and the write off of UHS deferred
acquisition costs of $2.4 million, net of tax benefits.
NOTE S--BUSINESS SEGMENT DATA
The Company operates primarily in one business segment. The Company rents
movable medical equipment and support surfaces 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 T--NEW ACCOUNTING PRONOUNCEMENTS
FASB 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.
FASB 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
preliminarily determined that it only operates in one business segment.
In February 1998, 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. The Company does not believe the
adoption of this standard will have a material impact on the Company's financial
statements.
In July 1998, 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 imbedded in other contracts, and for hedging activities,
is effective for fiscal years beginning after June 15, 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-27
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Rental............................................. $ 41,602 $ 33,706 $128,743 $103,700
Sales.............................................. 12,848 6,692 28,925 20,671
Other.............................................. 4,005 2,543 9,311 7,549
-------- -------- -------- --------
58,455 42,941 166,979 131,920
Costs and Expenses:
Cost of sales...................................... 10,197 5,455 22,589 16,725
Operating.......................................... 17,823 14,415 48,117 42,864
Selling............................................ 7,062 3,912 20,128 11,469
General and administrative......................... 6,005 5,186 18,380 14,534
Merger charges..................................... -- 34,204 -- 34,567
Depreciation and amortization...................... 11,301 15,064 31,600 31,650
-------- -------- -------- --------
52,388 78,236 140,814 151,809
-------- -------- -------- --------
Operating Income (Loss).............................. 6,067 (35,295) 26,165 (19,889)
Other (Charges) and Credits:
Interest expense................................... (13,956) (7,098) (40,768) (14,333)
Other-net.......................................... 72 235 465 714
-------- -------- -------- --------
Loss from Continuing Operations before
Income Taxes and Extraordinary Item................ (7,817) (42,158) (14,138) (33,508)
Income Tax Benefit................................... (1,626) (15,632) (3,784) (11,744)
-------- -------- -------- --------
Loss before Extraordinary Item....................... (6,191) (26,526) (10,354) (21,764)
Extraordinary Item--Early Retirement of Debt (net of
taxes)............................................. -- (4,098) -- (4,098)
-------- -------- -------- --------
Net Loss............................................. (6,191) (30,624) (10,354) (25,862)
Dividends on Preferred Stock......................... (4,802) (1,600) (13,900) (1,600)
-------- -------- -------- --------
Net Loss Available for Common Shareholders........... $(10,993) $(32,224) $(24,254) $(27,462)
======== ======== ======== ========
Basic and Diluted Per Share Amount:
Continuing operations, net of preferred
dividends........................................ $ (10.15) $ (1.68) $ (22.51) $ (1.03)
Extraordinary item................................. -- (.25) -- (.18)
-------- -------- -------- --------
Available for common shareholders.................. $ (10.15) $ (1.93) $ (22.51) $ (1.21)
======== ======== ======== ========
Weighted Average Number of Common Shares Outstanding:
Basic and Diluted.................................... 1,083 16,702 1,077 22,650
======== ======== ======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
F-28
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1999 1998
----------- ----------------
(UNAUDITED) (SEE NOTE BELOW)
<S> <C> <C>
Assets
Current Assets:
Cash...................................................... $ -- $ 2,411
Accounts receivable (net of allowance of $9,370 and
$11,432, respectively).................................. 75,148 52,659
Inventories............................................... 27,321 21,820
Other current assets...................................... 13,061 9,923
--------- ---------
Total Current Assets.................................. 115,530 86,813
Property, Plant and Equipment (net of accumulated
depreciation and amortization of $180,647 and $155,749,
respectively)............................................. 111,040 103,917
Goodwill (net of accumulated amortization of $21,201 and
$16,658, respectively).................................... 153,200 91,121
Deferred Financing Costs (net of accumulated amortization of
$2,650 and $862, respectively)............................ 19,523 20,013
Other Assets................................................ 10,354 7,354
--------- ---------
Total Assets................................................ $ 409,647 $ 309,218
========= =========
Liabilities and Stockholders' Deficiency
Current Liabilities:
Accounts payable.......................................... $ 20,631 $ 14,152
Accrued expenses.......................................... 16,535 20,569
Other current liabilities................................. 1,147 281
Current portion of long term debt......................... 8,273 2,037
--------- ---------
Total Current Liabilities............................. 46,586 37,039
Senior Debt................................................. 371,335 277,490
Subordinated Debt........................................... 190,514 190,514
Deferred Income Taxes....................................... 11,861 14,019
Other Liabilities........................................... 5,055 2,472
Mandatorily Redeemable Preferred Stock...................... 131,676 113,037
Stockholders' Deficiency.................................... (347,380) (325,353)
--------- ---------
Total Liabilities and Stockholders' Deficiency.............. $ 409,647 $ 309,218
========= =========
</TABLE>
NOTE: THE BALANCE SHEET AT SEPTEMBER 30, 1998 HAS BEEN CONDENSED FROM THE
AUDITED FINANCIAL STATEMENTS AT THAT DATE.
See Notes to Condensed Consolidated Financial Statements
F-29
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Cash Flows From Operating Activities
Net loss.................................................... $(10,354) $(25,862)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities............................ 18,514 23,943
-------- --------
Net cash provided by (used in) operating activities......... 8,160 (1,919)
Cash Flows From Investing Activities
Purchases of equipment...................................... (18,254) (17,909)
Acquisitions................................................ (82,947) (11,032)
Collection of notes receivable.............................. -- 2,250
Other....................................................... 328 654
-------- --------
Net cash used in investing activities....................... (100,873) (26,037)
Cash Flows From Financing Activities
Borrowings.................................................. 93,000 151,499
Debt repayments............................................. (1,400) (133,872)
Deferred financing fees..................................... (1,298) (20,056)
Issuance of subordinated notes.............................. -- 190,000
Issuance of common and preferred stocks..................... -- 148,235
Issuance of units........................................... -- 75,000
Repurchases of common and preferred stocks.................. -- (377,416)
Other....................................................... -- 130
-------- --------
Net cash provided by financing activities................... 90,302 33,520
-------- --------
(Decrease) increase in cash................................. (2,411) 5,564
Cash:
Beginning balance......................................... 2,411 3,639
-------- --------
Ending balance............................................ $ -- $ 9,203
======== ========
Noncash investing and financing activity:
Capital stock issued in an acquisition.................... $ 10,000 --
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
F-30
<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, 1999 and the
condensed consolidated statements of operations and cash flows for the three and
nine months ended June 30, 1999 and 1998 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, 1999 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, 1998 Annual Report on
Form 10-K. The results of operations for the period ended June 30, 1999 are not
necessarily indicative of the operating results for the full year.
Certain reclassifications have been made to conform prior year balances to
the current year presentation.
NOTE B--INVENTORY
The components of inventory were as follow:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1999 1998
-------- -------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials......................................... $ 1,587 $ 2,791
Finished goods........................................ 25,734 19,029
------- -------
$27,321 $21,820
======= =======
</TABLE>
NOTE C--PER SHARE AMOUNTS
The Warrants were excluded from the computation of per share amounts for the
three and nine months ended June 30, 1999 and 1998 because they were
antidilutive in each period. At June 30, 1999 and 1998, the total number of
shares of Common Stock underlying the Warrants was 91,209. Options to purchase
shares of the Company's Common Stock were also excluded from the computation of
per share amounts for the three and nine months ended June 30, 1999 because they
were antidilutive. The number of options outstanding at June 30, 1999 was
51,853. No options were outstanding at June 30, 1998. The disparity in per share
amounts for the respective periods presented in the Condensed Consolidated
Statements of Operations is attributable to the Company's recapitalization that
occurred in May 1998.
NOTE D--LONG TERM DEBT
In May 1999, MEDIQ/PRN amended the New Credit Facility with Banque Nationale
de Paris ("BNP") by reducing the borrowing capacity under the Acquisition
Facility from $75.0 million to $50.0 million and establishing a Subfacility B
under the Revolving Credit Facility with a borrowing capacity of $25.0 million.
Borrowings under Subfacility B 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 a margin of 1.0% or (ii) the London
Interbank Offered Rate, plus a margin of 2.25%. Principal amounts
F-31
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE D--LONG TERM DEBT (CONTINUED)
outstanding on November 30, 1999 under Subfacility B will amortize quarterly
starting March 31, 2000 in increasing increments as scheduled in the modified
New Credit Facility. Any remaining principal balance is due on the facility's
termination date of June 30, 2004. Other terms and conditions of Subfacility B
are generally the same as those existing for the Acquisition and Revolving
Credit facilities. MEDIQ/PRN was charged a fee of approximately $1.0 million to
effect the amendment to the New Credit Facility. This fee is being amortized
over the remaining term of the facilities of approximately five years.
In June 1999, MEDIQ/PRN borrowed $22.2 million available under the
$50.0 million Acquisition Facility, $25.0 million under Subfacility B and
approximately $2.5 million under the Revolving Credit Facility to fund the cash
portion of the HTD Acquisition. (see Note E)
NOTE E--ACQUISITION
On June 15, 1999, the Company, through MEDIQ/PRN, acquired all of the issued
and outstanding common stock of HTD and certain of its subsidiaries pursuant to
an Agreement and Plan of Merger dated June 14, 1999. Total consideration paid by
the Company was approximately $59.7 million, comprising $49.7 million in cash
and $10.0 million aggregate value of capital stock of the Company. The capital
stock of the Company issued consisted of 44,225 shares of Common Stock, 513,548
shares of Series A Preferred Stock, 146,303 shares of Series B Preferred Stock
and 264,438 shares of Series C Preferred Stock. HTD specialized in sales of
disposable products, rentals of movable medical equipment and biomedical repair
services to the acute care, alternate care and home care marketplaces. Following
the acquisition, HTD was merged into MEDIQ/PRN. Contemporaneously with the
Company's acquisition of HTD, HTD sold to an unrelated third party its
subsidiaries not acquired by the Company.
The HTD Acquisition was accounted for by the purchase method and,
accordingly, the cost of the acquisition was allocated to the assets acquired
and liabilities assumed based on their estimated fair values on May 28, 1999,
the effective date of the acquisition for accounting purposes. Accordingly,
operations of HTD were included in the Company's results of operations effective
May 28, 1999. The excess of the cost over the estimated fair values of net
assets acquired of $41.5 million was recorded as goodwill amortizable on a
straight line basis over 20 years. The following pro forma financial information
presents the consolidated results of operations of the Company as if the
acquisition had occurred on October 1 of the respective periods presented. This
unaudited pro forma information is presented for comparative purposes only and
does not necessarily reflect the results of operations of the Company had the
acquisition existed on the prescribed dates.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
---------------------
1999 1998
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Revenues................................................ $214,955 $173,230
Loss before extraordinary item.......................... (9,528) (23,840)
Per share amount........................................ (8.51) (1.05)
Net loss................................................ (9,528) (27,938)
Per share amount........................................ (8.51) (1.23)
</TABLE>
F-32
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE E--ACQUISITION (CONTINUED)
The initial allocation of the cost of the HTD Acquisition and the associated
goodwill was estimated based on information currently available. The final
allocation of the acquisition cost is contingent upon determinations and
valuations not yet completed. The Company is unable to predict at this time
whether any adjustments that may occur will have a material effect on the
allocation.
NOTE F--CAPITAL STOCK
After the issuance of capital stock in connection with the HTD Acquisition,
the number of shares of capital stock outstanding at June 30, 1999 are: Common
Stock--1,119,048; Series A Preferred Stock--8,336,310; Series B Preferred
Stock--3,146,302; and Series C Preferred Stock--3,264,438. The number of shares
outstanding for Series A Preferred Stock has been adjusted in a minor amount to
reflect fractional shares upon future exchanges of pre merger capital stock
connected with the Merger.
Issued and outstanding Warrants in the amount of 140,885 for the purchase of
91,209 shares of the Company's Common Stock became exercisable on May 30, 1999.
NOTE G--INCOME TAXES
The estimated annual effective income tax rate for fiscal 1999 was 26.8% at
June 30, 1999. This rate is lower than the overall statutory rate for the
Company of 40.0% due to estimated nondeductible costs associated with the
Company's acquisitions and valuation allowances against net operating losses
available for state income taxes. These items lower the tax benefit associated
with the expected annual tax loss. The annual effective rate was adjusted in the
third quarter from the rate estimated at March 31, 1999 as a result of
adjustments in the third quarter for the estimated impacts of increased
nondeductible goodwill and other costs related to acquisitions made in fiscal
1999.
F-33
<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-34
<PAGE>
CH MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET ASSETS
<TABLE>
<CAPTION>
AUGUST 31,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
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 AND NET ASSETS:
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
----------- -----------
$18,839,250 $13,725,137
=========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-35
<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-36
<PAGE>
CH MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
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-37
<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.
F-38
<PAGE>
CH MEDICAL, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
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--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-39
<PAGE>
CH MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
AUGUST 31,
-----------------------
1997 1996
---------- ----------
<S> <C> <C>
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,
------------------------
1997 1996
----------- ----------
<S> <C> <C>
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-40
<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,
----------------------------------
1997 1996 1995
-------- ---------- ----------
<S> <C> <C> <C>
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-41
<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,
------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Interest................................. $ 226,900 $ 84,100 $ 35,600
========== ========== ==========
Income taxes............................. $1,500,000 $1,921,000 $1,040,000
========== ========== ==========
</TABLE>
F-42
<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 AND NET ASSETS
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
-----------
$18,928,318
===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-43
<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-44
<PAGE>
CH MEDICAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FEBRUARY 28,
-----------------------
1998 1997
--------- -----------
<S> <C> <C>
Operating Activities:
Net Income................................................ $ 566,201 $ 601,720
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation............................................ 887,951 874,783
Allowance for Bad Debts................................. 440,000 --
Changes in operating assets and liabilities:
Accounts receivable--trade.............................. 101,596 (1,929,099)
Accounts receivable--other.............................. (508,627) 1,000
Inventories............................................. (797,505) (159,858)
Other assets............................................ (18,796) (7,508)
Accounts payable........................................ 248,126 893,132
Accrued expenses........................................ (250,425) (158,118)
Other liabilities......................................... (374,891) --
Notes payable--other...................................... (39,000) --
--------- -----------
Cash provided by operating activities....................... 254,630 116,052
--------- -----------
Cash Used in Investing Activities:
Capital expenditures...................................... (54,481) (1,503,256)
--------- -----------
Financing Activities:
Net borrowing under notes payable--officer................ (222,706) 167,037
Net borrowings under revolving line of credit............. (33,661) 1,149,437
--------- -----------
Cash provided by (used in) financing activities............. (256,367) 1,316,474
--------- -----------
Net decrease in cash and cash equivalents................... (56,218) (70,730)
Cash and cash equivalents at beginning of year.............. 307,080 297,473
--------- -----------
Cash and cash equivalent at end of period................... $ 250,862 $ 226,743
========= ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-45
<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-46
<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-47
<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-48
<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-49
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To HTD Corporation and Subsidiaries:
We have audited the accompanying combined statement of net assets of HTD
Corporation (a Delaware corporation) and Subsidiaries excluding the acute care
division (see Notes 1 and 11) as of December 31, 1998 and the related combined
statements of operations, changes in net assets, and cash flows for the year
then ended. These combined financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
combined financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
As further described in Note 11, these financial statements have been
prepared pursuant to the Purchase Agreement between HTD Corporation and
Subsidiaries and MEDIQ/PRN Life Support Services, Inc., and is not intended to
be a complete presentation of HTD Corporation and Subsidiaries' financial
statements.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined net assets of HTD Corporation and
Subsidiaries excluding the acute care division as of December 31, 1998 and the
results of their combined operations and their combined cash flows for the year
then ended, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Birmingham, Alabama
July 29, 1999
F-50
<PAGE>
HTD CORPORATION AND SUBSIDIARIES, EXCLUDING THE ACUTE CARE DIVISION
COMBINED STATEMENT OF NET ASSETS
(SEE NOTE 11)
AS OF DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 154,024
Accounts receivable, less allowance for doubtful accounts
of $325,410............................................. 12,001,754
Inventory, net............................................ 4,947,623
Prepaid expenses and other current assets................. 530,595
Deferred income taxes..................................... 1,150,521
Refundable income taxes................................... 629,815
-----------
Total current assets.................................. 19,414,332
PROPERTY AND EQUIPMENT, NET................................. 655,992
RENTAL EQUIPMENT, NET....................................... 11,108,831
INTANGIBLE ASSETS, NET...................................... 18,252,669
OTHER NONCURRENT ASSETS..................................... 974,940
-----------
Total assets.......................................... $50,406,764
===========
LIABILITIES AND NET ASSETS
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 500,000
Current maturities of capital lease obligations........... 455,556
Accounts payable.......................................... 7,184,416
Accrued expenses.......................................... 2,326,024
-----------
Total current liabilities............................. 10,465,996
REVOLVING CREDIT LINE....................................... 8,062,164
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, NET OF CURRENT
MATURITIES................................................ 14,128,325
STOCK REPURCHASE OBLIGATION................................. 3,000,005
DEFERRED INCOME TAXES....................................... 1,411,513
OTHER LONG-TERM LIABILITIES................................. 629,534
-----------
Total liabilities..................................... 37,697,537
COMMITMENTS AND CONTINGENCIES (NOTE 10)
NET ASSETS.................................................. 12,709,227
-----------
Total liabilities and net assets...................... $50,406,764
===========
</TABLE>
The accompanying notes are an integral part of this combined statement of net
assets.
F-51
<PAGE>
HTD CORPORATION AND SUBSIDIARIES, EXCLUDING THE ACUTE CARE DIVISION
COMBINED STATEMENT OF OPERATIONS
(SEE NOTE 11)
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
REVENUES.................................................... $42,720,548
COST OF REVENUES............................................ 29,818,443
-----------
Gross profit.............................................. 12,902,105
-----------
OPERATING EXPENSES:
Selling................................................... 2,341,176
General and administrative................................ 6,531,901
Depreciation and amortization............................. 2,072,582
-----------
10,945,659
-----------
Income from operations.................................... 1,956,446
OTHER INCOME (EXPENSE):
Interest income........................................... 862,591
Interest expense.......................................... (1,038,189)
Other..................................................... 693,416
-----------
Income before provision for income taxes.................. 2,474,264
PROVISION FOR INCOME TAXES.................................. 1,244,416
-----------
Net income................................................ $ 1,229,848
===========
</TABLE>
The accompanying notes are an integral part of this combined financial
statement.
F-52
<PAGE>
HTD CORPORATION AND SUBSIDIARIES, EXCLUDING THE ACUTE CARE DIVISION
COMBINED STATEMENT OF CHANGES IN NET ASSETS
(SEE NOTE 11)
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
NET ASSETS, JANUARY 1, 1998 $ (2,575,400)
Net income.................................................. 1,229,848
Net proceeds from private placement of common stock......... 10,791,737
Issuance of common stock for acquisitions................... 14,567,524
Investment in acute care division carved out................ (11,304,482)
------------
NET ASSETS, DECEMBER 31, 1998............................... $ 12,709,227
============
</TABLE>
The accompanying notes are an integral part of this combined financial
statement.
F-53
<PAGE>
HTD CORPORATION AND SUBSIDIARIES, EXCLUDING THE ACUTE CARE DIVISION
COMBINED STATEMENT OF CASH FLOWS
(SEE NOTE 11)
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income,............................................... $ 1,229,848
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization........................... 2,072,582
Loss on disposal of property and equipment and rental
equipment............................................. 4,605
Provision for doubtful accounts......................... 53,866
Provision for obsolete inventory........................ 144,234
Amortization of debt issuance costs..................... 113,883
Stock compensation expense.............................. 378,495
Deferred income tax provision........................... 109,182
Increase (decrease) in operating cash flows, net of
effects from purchase of subsidiaries, resulting from:
Accounts receivable................................. (3,016,401)
Inventory........................................... (298,827)
Prepaid expenses and other current assets........... 448,220
Refundable income taxes............................. (629,815)
Other noncurrent assets............................. 151,304
Accounts payable and accrued expenses............... (2,021,228)
Other long-term liabilities......................... 58,534
------------
Net cash used in operating activities................... (1,201,518)
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in acute care division carved out.............. (11,304,482)
Purchase of subsidiaries, net of cash received............ (5,067,770)
Additions to property and equipment and rental
equipment............................................... (3,478,224)
Proceeds from disposals of property and equipment and
rental equipment........................................ 148,285
------------
Net cash used in investing activities................... (19,702,191)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt and capital lease
obligations............................................. (7,173,370)
Borrowings on long-term debt.............................. 18,364,271
Debt issuance costs paid.................................. (908,823)
Net proceeds from private placement of common stock....... 10,791,737
Repurchase of common stock................................ (135,082)
------------
Net cash provided by financing activities............... 20,938,733
------------
INCREASE IN CASH AND CASH EQUIVALENTS....................... 35,024
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 119,000
------------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 154,024
============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest.................................................. $ 907,454
============
Income taxes.............................................. $ 599,300
============
</TABLE>
The accompanying notes are an integral part of this combined financial
statement.
F-54
<PAGE>
HTD CORPORATION AND SUBSIDIARIES, EXCLUDING THE ACUTE CARE DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998
1. BUSINESS AND ORGANIZATION
HTD Corporation (the "Company") was founded in April 1997 to create a
national contract sales and distribution company providing specialty medical
products to the hospital and alternate-site health care markets (including
sub-acute care facilities, home care companies, and specialty physician groups).
As discussed in Note 3, effective May 1, 1998, the Company acquired Triad
Holdings, Inc. ("THI"), Healthcare Technology Delivery, Inc. ("HTD"), MegaTech
Medical, Inc. ("MegaTech"), and Bimeco, Inc. ("Bimeco") together with their
respective subsidiaries. During 1998, the Company also acquired Omni
Medical, Inc. ("Omni Medical").
THI, the successor to a business founded in 1981 and headquartered in Laguna
Hills, California, represents manufacturers with product coverage principally in
the infusion therapy market. THI sells its products to alternate-site health
care providers throughout the United States from its distribution centers.
HTD, the successor to a business founded in 1977 and headquartered in
Bessemer, Alabama, represents manufacturers with product coverage in the
surgical, anesthesiology, critical care, and cardiovascular/vascular markets.
HTD sells its products primarily to hospitals in the Southeastern United States.
MegaTech was founded in 1976 and maintains its headquarters in Baltimore,
Maryland. It represents manufacturers with product coverage in the surgical and
critical care markets. MegaTech sells its products principally to hospitals in
the Northeastern United States.
Bimeco maintains its headquarters in Largo, Florida. Bimeco is a distributor
of medical equipment and related supplies. Bimeco's product line services
hospitals as well as other health care markets.
Omni Medical was founded in 1986 and maintains its headquarters in Redmond,
Washington. It represents manufacturers with product coverage in the financial,
anesthesiology, and critical care markets. Omni Medical sells its products
primarily to hospitals in the Northwestern United States.
As further discussed in Note 11, the Company was acquired by MEDIQ/PRN Life
Support Services, Inc. ("MEDIQ/PRN") on June 15, 1999. Excluded from the
accompanying financial statement presentation are the accounts of HTD, MegaTech,
Omni Medical, and the acute care operations of Bimeco, all of which form the
acute care division which was not acquired by MEDIQ/PRN. Such division was sold
to a third party unrelated to MEDIQ/PRN and the Company simultaneously with the
MEDIQ/ PRN transaction described in Note 11. The accompanying combined financial
statements do not reflect an allocation of the MEDIQ/PRN purchase price.
Reference to the Company hereafter is the Company excluding the acute care
division.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying combined financial statements have been prepared on the
accrual basis of accounting and include the accounts of the Company and its
subsidiaries, excluding the acute care division as described in Note 1. All
significant intercompany amounts and transactions have been eliminated in
combination.
F-55
<PAGE>
HTD CORPORATION AND SUBSIDIARIES, EXCLUDING THE ACUTE CARE DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures 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.
REVENUES AND EXPENSES
The Company's revenues are primarily derived from sales of medical products
and supplies under distribution agreements with various manufacturers and the
renting of infusion pumps and other equipment under cancelable and noncancelable
operating leases. Revenues are recorded at the time of shipment of products or
performance of services. Revenues from the rental of infusion pumps and other
equipment under cancelable and noncancelable operating leases are recognized as
earned. Biomedical, commission, and installation revenues are recognized as the
services are provided. Cost of revenues consists primarily of product costs, net
of rebates, and freight charges. Selling expenses consist primarily of sales
commissions, salaries of sales managers, travel and entertainment expenses,
trade show expenses, and automobile allowances. General and administrative
expenses consist primarily of executive compensation and related benefits,
administrative salaries and benefits, office rent and utilities, communication
expenses, and professional fees.
CASH AND CASH EQUIVALENTS
For the purposes of the accompanying statement of net assets and statement
of cash flows, the Company considers all investments with original maturities of
three months or less to be cash equivalents.
INVENTORY
Inventories consist primarily of medical supplies and equipment.
Inventories, net of allowances of approximately $452,000, are valued at the
lower of cost or market. Cost is determined using the first-in, first-out
method. At December 31, 1998, management believes the Company had incurred no
material impairments to the carrying values of its inventories, other than
impairments for which provisions had been made.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the applicable lease or the estimated useful life of the applicable asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments that extend the useful
lives of existing equipment are capitalized and depreciated. On retirement or
disposition of property and equipment, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
recognized in the statement of operations.
F-56
<PAGE>
HTD CORPORATION AND SUBSIDIARIES, EXCLUDING THE ACUTE CARE DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS
Intangible assets originated in connection with the 1998 acquisitions (see
Note 3). Intangible assets are amortized on a straight-line basis over the
following applicable amortization periods:
<TABLE>
<S> <C>
Goodwill.................................................... 40 years
Covenants not to compete.................................... 3-5 years
Patents..................................................... 17 years
</TABLE>
LONG-LIVED ASSETS
The Company continually evaluates whether events and circumstances have
occurred that indicate that the remaining balance of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used in the operations of the Company may be impaired and not be recoverable. In
performing this evaluation, the Company uses an estimate of the related cash
flows expected to result from the use of the asset and its eventual disposition.
When this evaluation indicates the asset has been impaired, the Company will
measure such impairment based on the asset's fair value and the amount of such
impairment is charged to earnings.
OTHER NONCURRENT ASSETS
Other noncurrent assets include deferred debt issuance costs of
approximately $909,000. This amount is being amortized over a period
approximating the term of the related debt of approximately seven years.
DEFERRED RENT
Certain of the Company's facilities leases include scheduled rent increases
and free rent periods. For financial reporting purposes, rent expense is
recognized on a straight-line basis over the lease term. The difference between
rent paid pursuant to the lease agreements and rent expense recognized for
financial reporting purposes has been reported as deferred rent, and is included
in other long-term liabilities in the accompanying combined statement of net
assets.
INCOME TAXES
The Company applies the liability method of accounting for income taxes.
Under this method, deferred income taxes are recorded based on differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are received or settled.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, trade receivables, trade payables, and debt instruments. The
carrying amounts of those instruments reported in the accompanying combined
statement of net assets are considered to estimate their respective fair values
due to the short-term nature of such financial instruments and the current
interest rate environment. The
F-57
<PAGE>
HTD CORPORATION AND SUBSIDIARIES, EXCLUDING THE ACUTE CARE DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
carrying amounts of the Company's long-term debt and capital lease obligations
reported in the accompanying combined statement of net assets are considered to
approximate their respective fair values as these long-term instruments'
interest rates approximate market rates at December 31, 1998.
CONCENTRATIONS OF CREDIT RISK
In the normal course of business, the Company extends credit to its
customers, which are primarily alternate-site health care providers. The Company
regularly reviews its accounts receivable and makes provision for potentially
uncollectible balances. At December 31, 1998, management believes the Company
had incurred no material impairments to the carrying values of its accounts
receivable, other than uncollectible amounts for which provisions had been made.
3. PRIVATE PLACEMENT AND BUSINESS COMBINATIONS
On May 1, 1998, the Company (i) completed a private placement of 1,437,500
shares of the Company's common stock, at $8.00 per share and (ii) acquired in
separate transactions (the "Acquisitions") four other companies (the "Founding
Companies") for a total of $9.9 million in cash and 3,485,052 shares of common
stock, of which 260,870 shares may be put to the Company during the 60-day
period immediately following the first anniversary date of the closing of the
Acquisitions in exchange for a $3.0 million subordinated promissory note of the
Company. Since the shares may be put to the Company, such shares have been
reported as Stock Repurchase Obligation in the accompanying combined statement
of net assets.
The total purchase price of the Acquisitions, as it relates to the net
assets subsequently sold to MEDIQ/PRN, consisted of $5.2 million in cash and the
issuance of the Company's common stock totaling $14.6 million. The total
purchase price exceeded the fair value of net assets acquired by $18.4 million.
The Acquisitions were accounted for under the purchase method of accounting;
thus the combined financial statements reflect the operations of the Founding
Companies from the date of the acquisition, exclusive of the acute care division
for purposes of this presentation. For financial statement presentation
purposes, HTD, one of the Founding Companies, in combination with the Company,
has been identified as the accounting acquirer. Assuming the transaction had
been consummated at January 1, 1998, the combined results of operations,
excluding the acute care division, on a pro forma basis for the year ended
December 31, 1998 would have been as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
-----------
<S> <C>
Revenues.................................................... $60,337,966
Net income.................................................. 1,759,994
</TABLE>
F-58
<PAGE>
HTD CORPORATION AND SUBSIDIARIES, EXCLUDING THE ACUTE CARE DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1998
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1998 consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
IN YEARS AMOUNT
------------ --------
<S> <C> <C>
Office equipment....................................... 5 $325,053
Machinery and equipment................................ 5 270,508
Furniture and fixtures................................. 5-7 196,396
Leasehold improvements................................. 10 195,523
--------
987,480
Less accumulated depreciation and amortization......... 331,488
--------
$655,992
========
</TABLE>
5. RENTAL EQUIPMENT
Rental equipment at December 31, 1998 consists primarily of infusion pumps,
which are depreciated over seven years:
<TABLE>
<S> <C>
Rental equipment............................................ $12,515,478
Less accumulated depreciation............................... 1,406,647
-----------
$11,108,831
===========
</TABLE>
6. INTANGIBLE ASSETS
Intangible assets at December 31, 1998 consist of the following:
<TABLE>
<S> <C>
Goodwill.................................................... $18,375,709
Covenant not to compete..................................... 170,000
Patents..................................................... 41,407
-----------
18,587,116
Less accumulated amortization............................... 334,447
-----------
$18,252,669
===========
</TABLE>
7. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
During July 1998, the Company entered into a credit agreement with a
financial institution consisting of a term loan, revolving credit line, and an
acquisition credit facility. The $15 million revolving credit line expires on
December 31, 2004 and bears interest at various rates ranging from 7.4% to 7.8%
at December 31, 1998. Such rates are based on the leverage ratio of the Company
and, at the Company's option, LIBOR or the Prime rate plus an applicable margin.
At December 31, 1998, $4.0 million of the revolving credit line was at 7.4%,
$1.8 million was at 7.5%, and $2.3 million was at 7.8%. Amounts outstanding
under the revolving credit line amounted to approximately $8.1 million at
December 31, 1998.
F-59
<PAGE>
HTD CORPORATION AND SUBSIDIARIES, EXCLUDING THE ACUTE CARE DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1998
7. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
Availability under the revolving credit line at December 31, 1998 was
approximately $6.9 million. The weighted average interest rate on these
borrowings during 1998 was 7.5%. These borrowings are secured by the Company's
assets and guaranteed by the subsidiaries. The Company's long-term debt and
capital lease obligations at December 31, 1998 consist of the following:
<TABLE>
<S> <C>
Term note payable, due in quarterly payments plus interest
at the Bank's base rate plus an applicable margin rate
(7.44% at December 31, 1998) through December 31, 2004,
secured by the Company's assets and guaranteed by the
subsidiaries.............................................. $11,750,000
Acquisition loan, due in fourteen scheduled installments
commencing on September 30, 2001, bearing interest at a
base rate plus an applicable margin rate (7.75% at
December 31, 1998), secured by the Company's assets and
guaranteed by the subsidiaries............................ 1,320,000
Note payable due in a lump sum payment on April 30, 2005
with no interest, unsecured............................... 2,025,000
Discount on note payable.................................... (763,820)
Capital lease obligations, interest at various rates, due in
monthly installments through April 2000................... 752,701
-----------
Total long-term debt...................................... 15,083,881
Less current maturities..................................... 955,556
-----------
Total..................................................... $14,128,325
===========
</TABLE>
The loan agreements contain various restrictive covenants generally common
to such loan agreements which, among other things, require the Company to
maintain minimum levels of equity and debt coverage ratios. At December 31,
1998, the Company was in compliance with the financial covenants. As of
December 31, 1998, future minimum lease payments under capital lease obligations
and maturities of debt are as follows:
<TABLE>
<CAPTION>
CAPITAL
LEASES DEBT
-------- -----------
<S> <C> <C>
1999................................................. $493,534 $ 500,000
2000................................................. 322,463 1,000,000
2001................................................. 0 1,750,000
2002................................................. 0 3,695,000
2003................................................. 0 2,875,000
Thereafter........................................... 0 5,275,000
-------- -----------
Total minimum lease payments and maturities.......... 815,997 $15,095,000
===========
Less amounts representing interest................... 63,296
--------
Present value of minimum lease payments.............. $752,701
========
</TABLE>
F-60
<PAGE>
HTD CORPORATION AND SUBSIDIARIES, EXCLUDING THE ACUTE CARE DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1998
8. EQUIPMENT RENTALS TO CUSTOMERS
As discussed in Note 2, the Company rents biomedical equipment to various
customers under noncancelable operating leases. Aggregate future minimum rentals
to be received under noncancelable leases in effect at December 31, 1998 are as
follows:
Year ending December 31,
<TABLE>
<S> <C>
1999........................................................ $34,435
2000........................................................ 21,964
2001........................................................ 17,384
-------
$73,783
=======
</TABLE>
9. INCOME TAXES
The provision for federal and state income taxes at December 31, 1998
follows:
<TABLE>
<S> <C>
Federal:
Current................................................... $ 989,691
Deferred.................................................. 95,184
----------
1,084,875
----------
State:
Current................................................... 145,543
Deferred.................................................. 13,998
----------
159,541
----------
$1,244,416
==========
</TABLE>
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34% to income before
income taxes as follows:
<TABLE>
<S> <C>
Provision at the statutory rate............................. $ 841,250
Increase resulting from:
State income tax, net of federal benefit.................... 105,297
Amortization................................................ 125,915
Other....................................................... 171,954
----------
$1,244,416
==========
</TABLE>
F-61
<PAGE>
HTD CORPORATION AND SUBSIDIARIES, EXCLUDING THE ACUTE CARE DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1998
9. INCOME TAXES (CONTINUED)
The tax effects of temporary differences representing deferred tax assets
and liabilities result primarily from the following at December 31, 1998:
<TABLE>
<S> <C>
Deferred tax benefits:
Accrued expenses.......................................... $ 688,873
Inventory................................................. 242,791
Allowance for doubtful accounts........................... 151,391
Deferred rent............................................. 67,466
---------
1,150,521
---------
Deferred tax liabilities:
Depreciation.............................................. 1,318,393
Other..................................................... 93,120
---------
1,411,513
---------
Net deferred tax liabilities................................ $ 260,992
=========
</TABLE>
At December 31, 1998, the Company had net operating loss carryforwards
totalling approximately $3 million. The Company provided a valuation allowance
equal to the deferred tax asset arising from the net operating loss
carryforwards as future realization is uncertain.
10. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases space for its warehouses and corporate office from third
parties. Rent expense under these arrangements totaled approximately $1 million
for the year ended December 31, 1998. The leases require the Company to pay
taxes, maintenance, insurance, and certain other operating costs of the leased
property.
Future minimum lease payments required under noncancelable operating leases
that have initial or remaining noncancelable lease terms in excess of one year
at December 31, 1998 are as follows:
Year ending December 31,
<TABLE>
<S> <C>
1999........................................................ $1,062,808
2000........................................................ 855,696
2001........................................................ 775,028
2002........................................................ 411,658
2003........................................................ 148,921
----------
$3,254,111
==========
</TABLE>
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation, and a
general umbrella policy. The Company has
F-62
<PAGE>
HTD CORPORATION AND SUBSIDIARIES, EXCLUDING THE ACUTE CARE DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1998
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
not incurred significant claims or losses under any of its insurance policies.
The sale, distribution, rental, and repair of medical products involve a risk of
product liability claims. The Company maintains product liability insurance
coverage in amounts that it considers adequate.
SALES TAX CONSIDERATIONS
Various states are increasingly seeking to impose sales or use taxes on
interstate sales made into their state by out-of-state companies. Complex legal
issues arise in these areas relating to, among other things, the required nexus
of a business with a particular state, which may permit the state to require a
business to collect such taxes. Although the Company believes that it has
adequately provided for sales taxes on its sales, there can be no assurance as
to the effect of actions state tax authorities may take on the Company's
combined financial condition or the combined results of its operations.
LITIGATION
The Company is a party to certain legal proceedings arising in the ordinary
course of business. Management believes the outcome of such legal proceedings
will not have a material adverse effect on the Company's combined financial
condition or combined results of operations.
11. SUBSEQUENT EVENT (UNAUDITED)
On June 15, 1999, all of the Company's issued and outstanding common stock
along with THI and its subsidiaries representing the nonacute care business were
acquired by MEDIQ/PRN pursuant to an Agreement and Plan of Merger dated
June 14, 1999. Total consideration paid by MEDIQ/PRN was approximately
$59.7 million, comprising $49.7 million in cash and $10.0 million aggregate
value of capital stock of MEDIQ Incorporated, the parent company of MEDIQ/PRN.
Following the acquisition, the Company, THI, and THI's subisidiaries were merged
into MEDIQ/PRN. Contemporaneously with MEDIQ/PRN's acquisition of the Company,
the Company sold to a third party unrelated to MEDIQ/PRN and the Company its
subsidiaries representing the acute care division not acquired by MEDIQ/PRN for
a purchase price of $17 million.
In contemplation of the MEDIQ/PRN transaction, Bimeco's assets, liabilities,
and operations related to its nonacute care business were transferred to THI in
a nonmonetary transfer effective June 14, 1999.
F-63
<PAGE>
HTD CORPORATION AND SUBSIDIARIES, EXCLUDING THE ACUTE CARE DIVISION
CONDENSED COMBINED STATEMENTS OF NET ASSETS
(SEE NOTE 2)
<TABLE>
<CAPTION>
APRIL 30, DECEMBER 31,
1999 1998
----------- ----------------
(UNAUDITED) (SEE NOTE BELOW)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 961,716 $ 154,024
Accounts receivable, less allowance of $337,226 and
$325,410, respectively.................................. 11,987,973 12,001,754
Inventory, net............................................ 4,436,886 4,947,623
Prepaid expenses and other current assets................. 1,657,026 2,310,931
----------- -----------
Total current assets.................................. 19,043,601 19,414,332
PROPERTY AND EQUIPMENT (including Rental), net of
accumulated depreciation and amortization of $2,806,356
and $1,738,095, respectively.............................. 11,849,954 11,764,823
INTANGIBLE ASSETS, net of accumulated amortization of
$593,185 and $334,447, respectively....................... 17,993,931 18,252,669
OTHER NONCURRENT ASSETS..................................... 890,207 974,940
----------- -----------
Total assets.......................................... $49,777,693 $50,406,764
=========== ===========
LIABILITIES AND NET ASSETS
CURRENT LIABILITIES:
Current maturities of long-term debt and capital lease
obligations............................................. $ 821,333 $ 955,556
Accounts payable.......................................... 5,396,478 7,184,416
Accrued expenses.......................................... 2,851,059 2,326,024
----------- -----------
Total current liabilities............................. 9,068,870 10,465,996
REVOLVING CREDIT LINE....................................... 9,571,387 8,062,164
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, net of current
maturities................................................ 14,019,863 14,128,325
STOCK REPURCHASE OBLIGATION................................. 3,000,005 3,000,005
OTHER LONG-TERM LIABILITIES................................. 2,036,023 2,041,047
----------- -----------
Total liabilities..................................... 37,696,148 37,697,537
NET ASSETS.................................................. 12,081,545 12,709,227
----------- -----------
Total liabilities and net assets...................... $49,777,693 $50,406,764
=========== ===========
</TABLE>
Note: The statement of net assets at December 31, 1998 has been condensed from
the audited financial statements at that date.
The accompanying notes are an integral part of this condensed combined statement
of net assets.
F-64
<PAGE>
HTD CORPORATION AND SUBSIDIARIES, EXCLUDING THE ACUTE CARE DIVISION
COMBINED STATEMENT OF OPERATIONS
(SEE NOTE 2)
FOR THE FOUR MONTHS ENDED APRIL 30, 1999
(UNAUDITED)
<TABLE>
<S> <C>
REVENUES.................................................... $23,797,711
COST OF REVENUES............................................ 16,532,815
-----------
Gross profit.............................................. 7,264,896
OPERATING EXPENSES:
Selling................................................... 787,763
General and administrative................................ 2,680,141
Depreciation and amortization............................. 1,326,999
-----------
4,794,903
Income from operations.................................... 2,469,993
OTHER INCOME (EXPENSE):
Interest income........................................... 26,971
Interest expense.......................................... (680,647)
Other..................................................... (142,293)
-----------
Income before provision for income taxes.................. 1,674,024
PROVISION FOR INCOME TAXES.................................. 781,503
-----------
Net income................................................ $ 892,521
===========
</TABLE>
The accompanying notes are an integral part of this combined financial
statement.
F-65
<PAGE>
HTD CORPORATION AND SUBSIDIARIES, EXCLUDING THE ACUTE CARE DIVISION
CONDENSED COMBINED STATEMENT OF CASH FLOWS
(SEE NOTE 2)
FOR THE FOUR MONTHS ENDED APRIL 30, 1999
(UNAUDITED)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 892,521
Adjustments to reconcile net income to net cash provided
by operating activities, net............................ 1,354,055
-----------
Net cash provided by operating activities............... 2,246,576
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (1,153,392)
-----------
Net cash used in investing activities................... (1,153,392)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt and capital lease
obligations............................................. (454,472)
Borrowings on long-term debt.............................. 179,960
Net borrowings on revolving credit line................... 1,509,223
Other..................................................... (1,520,203)
-----------
Net cash used in financing activities................... (285,492)
-----------
INCREASE IN CASH............................................ 807,692
CASH AND CASH EQUIVALENTS, beginning of period.............. 154,024
-----------
CASH AND CASH EQUIVALENTS, end of period.................... $ 961,716
===========
</TABLE>
The accompanying notes are an integral part of this condensed combined financial
statement.
F-66
<PAGE>
HTD CORPORATION AND SUBSIDIARIES, EXCLUDING THE ACUTE CARE DIVISION
NOTES TO CONDENSED AND COMBINED FINANCIAL STATEMENTS
FOR THE FOUR MONTHS ENDED APRIL 30, 1999
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
As further discussed in Note 2, HTD Corporation (the "Company") along with
its wholly owned subsidiary Triad Holdings, Inc. ("Triad") and its subsidiaries
were acquired by MEDIQ/PRN Life Support Services, Inc. ("MEDIQ/PRN") on
June 15, 1999. MEDIQ/PRN is a wholly owned subsidiary of MEDIQ Incorporated
("MEDIQ"). The net assets acquired by MEDIQ/PRN represented the Company's
nonacute care business, which principally consisted of sales of disposable
products, rentals of moveable medical equipment, and biomedical repair services.
The other subsidiaries of the Company--Healthcare Technology Delivery, Inc.,
MegaTech Medical, Inc., Bimeco, Inc. ("Bimeco"), and Omni
Medical, Inc.--represented the acute care division and were sold to a third
party unrelated to MEDIQ/PRN and the Company simultaneously with the MEDIQ/PRN
transaction as further described in Note 2. The combined financial statements
presented herein are on a carved out basis that represent only the nonacute care
business of the Company acquired by MEDIQ/PRN. The accompanying combined
financial statements do not reflect an allocation of the MEDIQ/PRN purchase
price.
The condensed combined statement of net assets as of April 30, 1999 and the
combined statement of operations and condensed combined statement of cash flows
for the four months ended April 30, 1999 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 net assets,
results of operations, and cash flows presented have been made. In preparing the
financial statements presented on a carved out basis, the Company made certain
estimates and allocations deemed reasonable under the circumstances.
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 combined financial statements
should be read in conjunction with the audited financial statements and notes
thereto of the Company and Triad included elsewhere herein.
The statements of operations and cash flows of the Company presented herein
do not include the corresponding period of the prior fiscal year because such a
comparison is not meaningful. During the four months ended April 30, 1998, the
Company was a holding company without any significant assets or operations. The
Company's nonacute care business, subsequently acquired by MEDIQ/PRN as
discussed above and further in Note 2, was not formed until May 1, 1998 with the
Company's acquisition of Triad and Bimeco. Triad was a significant acquiree of
the Company during the year ended December 31, 1998. Triad's results of
operations and cash flows for the four months ended April 30, 1998 represent the
principal predecessor nonacute care business of the Company. Readers are
directed to the separate financial statements of Triad for the four months ended
April 30, 1998 included elsewhere herein.
2. SUBSEQUENT EVENT
On June 15, 1999, all of the Company's issued and outstanding common stock
along with Triad and its subsidiaries representing the nonacute care business
were acquired by MEDIQ/PRN pursuant to an Agreement and Plan of Merger dated
June 14, 1999. Total consideration paid by MEDIQ/PRN was approximately
$59.7 million, comprising $49.7 million in cash and $10.0 million aggregate
value of capital stock of MEDIQ. Following the acquisition, the Company and
Triad and its subsidiaries were merged into MEDIQ/PRN. Contemporaneously with
MEDIQ/PRN's acquisition of the Company, the Company sold to
F-67
<PAGE>
HTD CORPORATION AND SUBSIDIARIES, EXCLUDING THE ACUTE CARE DIVISION
NOTES TO CONDENSED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE FOUR MONTHS ENDED APRIL 30, 1999
(UNAUDITED)
2. SUBSEQUENT EVENT (CONTINUED)
a third party unrelated to MEDIQ/PRN and the Company its subsidiaries
representing the acute care division not acquired by MEDIQ/PRN as listed in
Note 1 for a purchase price of $17 million.
In contemplation of the MEDIQ/PRN transaction, Bimeco's assets, liabilities,
and operations related to its nonacute care business were transferred to Triad
in a nonmonetary transfer effective June 14, 1999.
F-68
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Triad Holdings, Inc. and Subsidiaries:
We have audited the accompanying consolidated statements of operations,
changes in net assets, and cash flows for the four months ended April 30, 1998
of Triad Holdings, Inc. (a Delaware corporation) and Subsidiaries. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of their consolidated
operations and their consolidated cash flows for the four months ended
April 30, 1998 of Triad Holdings, Inc. and Subsidiaries in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
Birmingham, Alabama
July 29, 1999
F-69
<PAGE>
TRIAD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE FOUR MONTHS ENDED APRIL 30, 1998
<TABLE>
<S> <C>
REVENUES.................................................... $15,535,062
COST OF REVENUES............................................ 11,519,922
-----------
Gross profit.............................................. 4,015,140
-----------
OPERATING EXPENSES:
Selling................................................... 1,217,032
General and administrative................................ 2,129,852
Depreciation and amortization............................. 491,239
-----------
3,838,123
-----------
Income from operations.................................... 177,017
OTHER INCOME (EXPENSE):
Interest income........................................... 28,296
Interest expense.......................................... (201,546)
Other, net................................................ (227,289)
-----------
Loss before credit for income taxes....................... (223,522)
CREDIT FOR INCOME TAXES..................................... (64,800)
-----------
Net loss.................................................. $ (158,722)
===========
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
F-70
<PAGE>
TRIAD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS
FOR THE FOUR MONTHS ENDED APRIL 30, 1998
<TABLE>
<CAPTION>
COMMON STOCK
------------------------------------------- TOTAL
CLASS A CLASS B ADDITIONAL STOCK-
-------------------- -------------------- PAID-IN RETAINED HOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- -------- --------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE
DECEMBER 31, 1997........... 1,362,190 $13,621 1,054,345 $10,543 $6,627,987 $1,222,033 $7,874,184
Stock options exercised....... 0 0 11,134 111 16,630 0 16,741
Net loss...................... 0 0 0 0 0 (158,722) (158,722)
--------- ------- --------- ------- ---------- ---------- ----------
BALANCE, APRIL 30, 1998....... 1,362,190 $13,621 1,065,479 $10,654 $6,644,617 $1,063,311 $7,732,203
========= ======= ========= ======= ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
F-71
<PAGE>
TRIAD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE FOUR MONTHS ENDED APRIL 30, 1998
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $ (158,722)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization............................. 491,239
Gain on disposal of property and equipment and rental
equipment............................................... (11,129)
Provision for doubtful accounts........................... 20,000
Increase (decrease) in operating cash flows resulting
from:
Accounts receivable..................................... (227,621)
Inventories............................................. (504,661)
Prepaid expenses and other current assets............... 480,918
Other noncurrent assets................................. (2,263)
Accounts payable and accrued expenses................... 1,598,440
Other long-term liabilities............................. (176)
----------
Net cash provided by operating activities............. 1,686,025
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment and rental equipment.... (699,926)
Proceeds from disposals of property and equipment and rental
equipment................................................. 68,574
----------
Net cash used in investing activities................. (631,352)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on long-term debt................................ 486,900
Principal payments on long-term debt and capital lease
obligations............................................... (527,814)
Net repayment of line of credit............................. (1,101,287)
Payments on notes payable to stockholder.................... (8,628)
Proceeds from exercise of stock options..................... 16,741
----------
Net cash used in financing activities................. (1,134,088)
----------
DECREASE IN CASH AND CASH EQUIVALENTS....................... (79,415)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 229,445
----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 150,030
==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest.............................................. $ 201,546
==========
Income taxes.......................................... $ 0
==========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Rental equipment acquired under capital lease
arrangements........................................ $ 455,359
==========
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
F-72
<PAGE>
TRIAD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FOUR MONTHS ENDED APRIL 30, 1998
1. BUSINESS AND ORGANIZATION
Triad Holdings, Inc. (the "Company") conducts business through its operating
subsidiaries, Triad Medical, Inc. ("TMI"), which was incorporated in June 1980,
and Triad Infusion Products, Inc. ("TIPI"), which was incorporated in
October 1996. The Company is primarily engaged in the contract sale and
distribution of medical supplies, devices, drugs, and durable equipment to home
infusion health care providers throughout the United States. Additionally, the
Company rents and services infusion pumps and leases biomedical equipment. The
Company became a wholly owned subsidiary of HTD Corporation subsequent to
April 30, 1998. (See Note 7)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared on the
accrual basis of accounting and include the accounts of the Company and its
subsidiaries as described in Note 1. All significant intercompany amounts and
transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
REVENUES AND EXPENSES
The Company's revenues are primarily derived from sales of medical products
and supplies under distribution agreements with various manufacturers and the
renting of infusion pumps and other equipment under cancelable and noncancelable
operating leases. Revenues are recorded at the time of shipment of products or
performance of services. Revenues from the rental of infusion pumps and other
equipment under cancelable and noncancelable operating leases are recognized as
earned. Biomedical, commission, and installation revenues are recognized as the
services are provided. Cost of revenues consists primarily of product costs, net
of rebates, and freight charges. Selling expenses consist primarily of sales
commissions, salaries of sales managers, travel and entertainment expenses,
trade show expenses, and automobile allowances. General and administrative
expenses consist primarily of executive compensation and related benefits,
administrative salaries and benefits, office rent and utilities, communication
expenses, and professional fees.
CASH AND CASH EQUIVALENTS
The Company considers all investments with original maturities of three
months or less to be cash or cash equivalents.
PROPERTY AND EQUIPMENT
Expenditures for repairs and maintenance are charged to expense when
incurred. On retirement or disposition of property and equipment, the cost and
related accumulated depreciation are removed from the accounts and any resulting
gain or loss is recognized in the statement of operations.
F-73
<PAGE>
TRIAD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE FOUR MONTHS ENDED APRIL 30, 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED RENT
Certain of the Company's facilities leases include scheduled rent increases
and free rent periods. For financial reporting purposes, rent expense is
recognized on a straight-line basis over the lease term.
INCOME TAXES
The Company applies the liability method of accounting for income taxes.
Under this method, deferred income taxes are recorded based on differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are received or settled.
STOCK-BASED COMPENSATION
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 123, the Company accounts for stock option grants in accordance with
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees, and has adopted the "disclosure only" alternative allowed under
SFAS No. 123.
CONCENTRATIONS OF CREDIT RISK
In the normal course of business, the Company extends credit to its
customers which are primarily home infusion health care providers. The Company
regularly reviews its accounts receivable and makes provision for potentially
uncollectible balances. At December 31, 1998, management believes the Company
had incurred no material impairments to the carrying values of its accounts
receivable, other than uncollectible amounts for which provisions had been made.
3. INCOME TAXES
The credit for federal and state income taxes is as follows:
<TABLE>
<S> <C>
Federal:
Current................................................... $(55,080)
Deferred.................................................. 0
--------
(55,080)
--------
State:
Current................................................... (9,720)
Deferred.................................................. 0
--------
(9,720)
--------
$(64,800)
========
</TABLE>
The actual income tax credit differs from the income tax credit computed by
applying the U.S. federal statutory corporate tax rate of 34% to income before
income taxes because of state taxes and other miscellaneous items.
F-74
<PAGE>
TRIAD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE FOUR MONTHS ENDED APRIL 30, 1998
4. SIGNIFICANT SUPPLIERS
Purchases from two vendors accounted for 40% of total purchases in the
four-month period ended April 30, 1998. Although there are a limited number of
suppliers, management believes that other suppliers could provide similar
products on comparable terms. A change in suppliers, however, could cause a
delay in product sales and a possible loss in revenues, which could affect
operating results adversely.
5. STOCKHOLDERS' EQUITY
COMMON STOCK CLASSES
At April 30, 1998 and December 31, 1997, the Company had two classes of
Common Stock: Class A convertible Common Stock (Class A Common Stock) and
Class B Common Stock.
Holders of shares of Class A Common Stock may convert their shares into
Class B Common Stock on a share-for-share basis at any time. The Class A Common
Stock will be automatically converted into shares of Class B Common Stock upon
the consummation of a qualified public offering that occurs before May 2000, or
after May 2000 but only if the current holders of shares of Class A Common Stock
shall have previously distributed their Class A Common Stock to certain third
parties. Should the Company meet certain profitability objectives, the holders
of shares of Class A Common Stock will be required to return 106,465 of the
previously issued shares back to the Company.
Holders of shares of Class A Common Stock vote as a class with the holders
of shares of Class B Common Stock on the basis of one vote per share. Holders of
shares of Class A Common Stock are entitled to dividends or other distributions
declared or paid on each share of Class A Common Stock when and in the same
amount as any dividend or other distribution is declared or paid on each share
of Class B Common Stock.
STOCKHOLDERS' AGREEMENT
Under an agreement between the Company and the holders of Class B Common
Stock, (i) the Company's prior written consent is required for certain transfers
and assignments of shares of Class B Common Stock, (ii) the Company has a right
of first refusal on any sales of Class B Common Stock, and (iii) if a holder of
shares of Class B Common Stock dies, the Company is obligated to repurchase the
deceased holder's shares of Class B Common Stock for the greater of the
estimated fair value of the shares, as determined annually by the Company's
board of directors, or the insurance proceeds received by the Company on the
death of the holder.
STOCK OPTIONS
A 1992 Company stock option plan (the "Plan") provides for the grant of
options to purchase shares of the Company's common stock to employees, officers,
consultants, and directors of the Company. The timing of exercise for individual
option grants is at the discretion of the Plan's administrator. Each option
expires no later than 10 years after the date the option is granted (five years
if the option is granted to a 10% stockholder) and generally vests over a
three-year period.
An option granted to an employee will expire (i) one year after the
employee's employment by the Company terminates because of death or a permanent
disability or (ii) 90 days after the employee's termination of employment for
any other reason.
F-75
<PAGE>
TRIAD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE FOUR MONTHS ENDED APRIL 30, 1998
5. STOCKHOLDERS' EQUITY (CONTINUED)
Market price is generally calculated by taking a factor of earnings before
interest, taxes, depreciation, and amortization. As the exercise price on the
date of grant equaled the market price, no compensation expense is recognized in
the consolidated financial statements pursuant to APB Opinion No. 25. Stock
option activity under the Plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED
SHARES AVERAGE
SUBJECT TO EXERCISE EXERCISE
OPTIONS PRICE PRICE
---------- ------------------ --------
<S> <C> <C> <C>
Balance, December 31, 1997.................................. 151,624 $ 1.50--$8.64 $5.42
Exercised................................................... 11,134 1.50-- 5.51 1.51
Cancelled/forfeited......................................... 2,500 5.51 5.51
-------
Balance, April 30, 1998..................................... 137,990 $ 1.50--$8.64 $5.73
=======
</TABLE>
At April 30, 1998, options to purchase 32,490 shares of common stock at a
weighted average price of $4.31 per share were exercisable. The weighted average
remaining contractual life for all options outstanding at April 30, 1998 is
8.1 years.
Pursuant to SFAS 123, the fair value of each option granted to employees and
directors is estimated using the Black-Scholes option-pricing model on the date
of grant using assumptions for: (i) dividend yield, (ii) volatility factor,
(iii) weighted-average risk-free interest rate, and (iv) expected life of
option.
As discussed in Note 2, the Company has elected the "disclosure only"
alternative allowed under SFAS No. 123. Accordingly, the Company is required to
disclose pro forma net income (loss) over the vesting period of the options.
However, the pro forma effect for the four months ended April 30, 1998 is
immaterial.
6. COMMITMENTS AND CONTINGENCIES
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation, and a
general umbrella policy. The Company has not incurred significant claims of
losses under any of its insurance policies.
The sale, distribution, rental, and repair of medical products involve a
risk of product liability claims. The Company maintains product liability
insurance coverage in amounts that it considers adequate.
SALES TAX CONSIDERATIONS
Various states are increasingly seeking to impose sales or use taxes on
interstate sales made into their states by out-of-state companies. Complex legal
issues arise in these areas relating to, among other things, the required nexus
of a business with a particular state, which may permit the state to require a
business to collect such taxes. Although the Company believes that it has
adequately provided for sales taxes on its sales, there can be no assurance as
to the effect of actions state tax authorities may take on the Company's
consolidated financial condition or the consolidated results of operations.
F-76
<PAGE>
TRIAD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE FOUR MONTHS ENDED APRIL 30, 1998
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LITIGATION
The Company is party to certain legal proceedings arising in the ordinary
course of business. Management believes the outcome of such legal proceedings
will not have a material adverse effect on the Company's consolidated financial
position or consolidated results of operations.
7. SUBSEQUENT EVENT (UNAUDITED)
On May 1, 1998, all of the Company's issued and outstanding common stock was
acquired by HTD Corporation. Total consideration paid by HTD Corporation was
$13.2 million, comprising $3.0 million in cash and $10.2 million aggregate value
of the capital stock of HTD Corporation.
On June 15, 1999, all of the issued and outstanding common stock of HTD
Corporation, the Company, and the Company's subsidiaries were acquired by
MEDIQ/PRN Life Support Services, Inc. ("MEDIQ/PRN") pursuant to an Agreement and
Plan of Merger dated June 14, 1999. Total consideration paid by MEDIQ/PRN was
approximately $59.7 million, comprising $49.7 million in cash and $10.0 million
aggregate value of capital stock of MEDIQ Incorporated, the parent company of
MEDIQ/PRN. Following the acquisition, HTD Corporation along with the Company and
its subsidiaries were merged into MEDIQ/ PRN.
In contemplation of the MEDIQ/PRN transaction, the assets, liabilities, and
operations of Bimeco, Inc., a wholly owned subsidiary of HTD Corporation,
related to its nonacute care business were transferred to the Company in a
nonmonetary transfer effective June 14, 1999.
F-77
<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.......................... 12
The Transactions...................... 20
Use of Proceeds....................... 23
Market Information and Dividends...... 24
Capitalization........................ 25
Pro Forma Condensed Consolidated
Statements of Operations............ 26
Selected Consolidated Historical
Financial Information............... 34
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 37
Business.............................. 47
Management............................ 62
Ownership of Capital Stock............ 67
Description of Capital Stock.......... 70
Certain Relationships and Related
Transactions........................ 75
Description of Certain Indebtedness... 76
Description of the Warrants........... 81
Plan of Distribution.................. 85
Notice to Canadian Residents.......... 86
Certain U.S. Federal Income Tax
Considerations...................... 87
Legal Matters......................... 91
Experts............................... 91
Index to Financial Statements......... F-1
</TABLE>
UNTIL (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.
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 costs were incurred in the initial registration of the
Warrants:
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 222
Accounting Fees............................................. $ 45,538
Printing and Engraving Expenses............................. $131,832
Legal Fees and Expenses (other than blue sky)............... $ 64,410
Underwriters Fees and Expenses.............................. $ 31,530
Miscellaneous Expense....................................... $ 1,029
--------
Total................................................... $274,561
========
</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 0.6474 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 that became effective on October 21, 1998 with respect to an exchange
of the Old Debentures for registered debentures having substantially identical
terms (the "New Debentures"). All but $20.0 million of the Old Debentures were
exchanged for registered debentures. The $20.0 million of Old Debentures
remained unregistered at October 1, 1999 . This Post Effective Amendment is
filed to update the initial registration of the Warrants and the shares of
Common Stock issuable upon exercise of the Warrants that became effective on
October 22, 1998.
On September 3, 1998, Holdings sold 74,823 shares of Common Stock to Thomas
E. Carroll, Jay M. Kaplan and certain other persons for aggregate proceeds of
$748,230. 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.
In June 1999, Holdings issued (i) 44,225 shares of Common Stock,
(ii) 513,548 shares of Series A Preferred Stock, (iii) 146,303 shares of
Series B Preferred Stock and (iv) 264,438 shares of Series C Preferred Stock to
PENMAN. The shares of Holdings were issued in a private placement pursuant to
Section 4(2) of the Securities Act in exchange for 1,218,763 shares of common
stock of HTD owned by PENMAN in connection with the HTD Acquisition.
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)*
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
2.4 Rollover Agreement dated January 14, 1998 by and among
Holdings, MQ and the Rotko Entities (incorporated by
reference to Annex G of the Proxy Statement/Prospectus
included in Form S-4 Registration Statement originally filed
by Holdings on February 13, 1998, as amended, File No.
333-46233)*
2.5 Agreement and Plan of Merger dated July 23, 1996 among
Holdings, Cardinal Health, Inc., Panther Merger Corp. and
PCI Services, Inc. (incorporated by reference to Exhibit 2.1
to Schedule 13D filed by Cardinal Health, Inc. on July 29,
1996, File No. 5-42666)*
2.6 Amended and Restated Stock Purchase Agreement dated November
20, 1996 among Holdings, MEDIQ Investment Services, Inc. and
NutraMax Products, Inc. (incorporated by reference to
Exhibit 2(a) to Annual Report on Form 10-K filed by NutraMax
Products, Inc. for the fiscal year ended September 28, 1996,
File No. 0-18671)*
2.7 Affiliate Letter to Cardinal Health, Inc. from Holdings
dated August 16, 1996 (incorporated by reference to Exhibit
4 to Current Report on Form 8-K filed by Holdings on October
21, 1996, File No. 1-08147)*
2.8 Stock Purchase Agreement dated November 13, 1997 among
Holdings, MEDIQ Investment Services, Inc. and InnoServ
Technologies, Inc. (incorporated by reference to Exhibit 2.8
to Annual Report on Form 10-K filed by Holdings for the
fiscal year ended September 30, 1997, File No. 1-08147)*
2.9 Asset Purchase Agreement dated November 6, 1996 among
Holdings, MEDIQ Mobile X-Ray Services, Inc. and Symphony
Diagnostic Services No. 1, Inc. (incorporated by reference
to Exhibit 2.5 to Annual Report on Form 10-K filed by
Holdings for the fiscal year ended September 30, 1996, File
No. 1-08147)*
2.10 Asset Purchase Agreement dated as of April 24, 1998 among
MEDIQ/PRN, CH Medical, Inc. and the other parties named
therein (incorporated by reference to Exhibit 2 to Current
Report on Form 8-K filed by Holdings on April 28, 1998, File
No. 1-08147)*
2.11 Agreement and Plan of Merger dated June 14, 1999 among
Holdings, MEDIQ/PRN, HTD and other parties name therein
(incorporated by reference to Exhibit 2 to Current Report on
Form 8-K filed by MEDIQ/PRN on June 28, 1999, File No.
1-11286)*
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)*
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
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)*
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)*
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
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)*
10.6 1998 MEDIQ Stock Option Plan dated October 1, 1998
(incorporated by reference to Exhibit 10.5 to Annual Report
on Form 10-K filed by Holdings for the fiscal year ended
September 30, 1998, File No. 1-08147)*
11.1 Statement of Per Share Amounts
12.1 Statement of Ratios of Earnings to Fixed Charges
12.2 Statements of Ratios of Adjusted EBITDA to Interest Expense
and Debt to Adjusted EBITDA
21.1 Subsidiaries of Holdings
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
23.4 Consent of Arthur Andersen LLP
24.1 Power of Attorney (included on signature page)*
27.1 Financial Data Schedule for the periods ended September 30,
1998 and June 30, 1999*
</TABLE>
- ------------------------
* Previously filed.
(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,
II-5
<PAGE>
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-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Post-Effective Amendment No. 1 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 1st day
of November, 1999.
<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
Post-Effective Amendment No. 1 to the Registration Statement has been signed
below by the following persons in the capacities indicated on November 1, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ THOMAS E. CARROLL
------------------------------------------- President, Chief Executive Officer and
Thomas E. Carroll Director (Principal Executive Officer)
/s/ JAY M. KAPLAN Senior Vice President--Finance, Treasurer and
------------------------------------------- Chief Financial Officer (Principal
Jay M. Kaplan Accounting Officer)
/s/ BRUCE C. BRUCKMANN
------------------------------------------- Director
Bruce C. Bruckmann
/s/ STEPHEN C. SHERRILL
------------------------------------------- Director
Stephen C. Sherrill
/s/ ROBERT T. THOMPSON
------------------------------------------- Director
Robert T. Thompson
</TABLE>
<TABLE>
<S> <C>
*By: /s/ JAY M. KAPLAN
--------------------------------------
Jay M. Kaplan
Attorney-in-fact
</TABLE>
II-7
<PAGE>
INDEPENDENT AUDITORS' REPORT ON THE SUPPLEMENTAL SCHEDULE
Board of Directors 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 for 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
Philadelphia, Pennsylvania
December 30, 1998
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
COL A COL B COL C COL D COL E
----- ----- ------------------------------ ----- -----
ADDITIONS
------------------------------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND CHARGED TO END OF
DESCRIPTION OF PERIOD EXPENSES OTHER ACCOUNTS(1) DEDUCTIONS(2) PERIOD
- ----------- ---------- ---------- ----------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Year ended September 30, 1998:
Allowance for doubtful
accounts.................... $4,077 7,912 2,482 3,039 $11,432
=======
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
=======
</TABLE>
- ------------------------
(1) Primarily represents allowances for doubtful accounts related to
acquisitions.
(2) Represents accounts directly written-off, net of recoveries.
<PAGE>
EXHIBIT 11.1
MEDIQ INCORPORATED
STATEMENT OF PER SHARE AMOUNTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED SEPTEMBER 30, ENDED JUNE 30,
---------------------------------------------------- PRO FORMA --------------------
1994 1995 1996 1997 1998 1998 1998 1999
-------- -------- -------- -------- -------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BASIC AND DILUTED PER SHARE
AMOUNTS
Loss from continuing
operations, after tax........ $(8,254) $(3,346) $(6,178) $(2,241) $(29,071) $(49,118) $(21,764) $(10,354)
Weighted average number of
common shares outstanding.... 24,034 24,173 24,578 25,297 17,205 1,119 22,650 1,077
Per share...................... $(0.34) $(0.14) $(0.25) $(0.09) $(1.69) $(43.89) $(0.96) $(9.61)
======= ======= ======= ======= ======== ======== ======== =========
<CAPTION>
PRO FORMA
LTM PERIOD ENDED
JUNE 30, 1999
-----------------
<S> <C>
BASIC AND DILUTED PER SHARE
AMOUNTS
Loss from continuing
operations, after tax........ $(19,419)
Weighted average number of
common shares outstanding.... 1,119
Per share...................... $(17.35)
========
</TABLE>
<PAGE>
EXHIBIT 12.1
MEDIQ INCORPORATED
STATEMENT OF RATIOS OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED PRO FORMA
FISCAL YEAR ENDED SEPTEMBER 30, JUNE 30, LTM PERIOD
---------------------------------------------------- ------------------- ENDED
1994 1995 1996 1997 1998 1998 1999 JUNE 30, 1999
-------- -------- -------- -------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Pretax income (loss) from
continuing operations... $(12,600) $(3,658) $(6,556) $ 2,893 $(41,526) $(33,508) $(14,138) $(20,695)
-------- ------- ------- ------- -------- -------- -------- --------
Fixed charges:
Interest expense........ 21,335 29,241 27,307 19,107 27,894 14,333 40,768 59,805
Rent expense interest
factor................ 1,716 1,771 1,719 1,836 1,914 1,254 1,438 2,098
-------- ------- ------- ------- -------- -------- -------- --------
23,051 31,012 29,026 20,943 29,808 15,587 42,206 61,903
-------- ------- ------- ------- -------- -------- -------- --------
Earnings (losses) as
adjusted................ $ 10,451 $27,354 $22,470 $23,836 $(11,718) $(17,921) $ 28,068 $ 41,208
======== ======= ======= ======= ======== ======== ======== ========
Fixed charges per above... $ 23,051 $31,012 $29,026 $20,943 $ 29,808 $ 15,587 $ 42,206 $ 61,903
======== ======= ======= ======= ======== ======== ======== ========
Ratio of earnings to fixed
charges................. 0.4534 0.8820 0.7741 1.1381 (0.3931) (1.1497) 0.6650 0.6657
======== ======= ======= ======= ======== ======== ======== ========
Fixed charges in excess of
earnings (losses) (a)... $ 12,600 $ 3,658 $ 6,556 N/A $ 41,526 33,508 $ 14,138 $ 20,695
======== ======= ======= ======= ======== ======== ======== ========
</TABLE>
- ------------------------
(a) Fiscal 1996 includes a restructuring charge of $2.2 million. Fiscal 1998,
nine months ended June 30, 1998 and the pro forma LTM Period include merger
and acquisition charges of $35.0 million, $34.5 million and $.5 million,
respectively. Fiscal 1998 and nine months ended June 30, 1998 also include a
$6.0 million additional depreciation reserve charge. Fiscal 1998 and the pro
forma LTM Period include a $3.4 million charge related to acquired
receivables. Nine months ended June 30, 1999 and the pro forma LTM Period
include a reduction in expense of $3.0 million regarding a cash settlement
of disputed items related to an acquisition and a $2.0 million additional
bad debt charge.
<PAGE>
EXHIBIT 12.2
MEDIQ INCORPORATED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
LTM PERIOD ENDED
JUNE 30, 1999
----------------
<S> <C>
STATEMENT OF RATIO OF ADJUSTED EBITDA TO ADJUSTED INTEREST EXPENSE
EBITDA...................................................... $ 78,284
Nonrecurring charges:
Settlement of disputed items related to an acquisition.... (3,000)
Merger and acquisition charges............................ 454
Write off of acquired receivables......................... 3,396
--------
Adjusted EBITDA............................................. $ 79,134
========
Interest expense............................................ $ 59,805
Less non-cash interest expense:
Accreted interest on Debentures........................... 10,256
Amortization of deferred financing fees................... 2,579
Other 630
--------
Adjusted interest expense................................... $ 46,400
========
Ratio of adjusted EBITDA to adjusted interest expense....... 1.69
========
STATEMENT OF RATIO OF DEBT TO ADJUSTED EBITDA
Total debt.................................................. $570,122
Adjusted EBITDA per above................................... $ 79,134
Ratio of debt to adjusted EBITDA............................ 7.20
========
</TABLE>
<PAGE>
EXHIBIT 21.1
Set forth below is a list of MEDIQ Incorporated's subsidiaries as of
October 1, 1999, with their respective states of incorporation, names under
which they do business and the percentage of their voting securities owned by
the Company as of such date.
<TABLE>
<CAPTION>
STATE OF PERCENTAGE OF
NAME INCORPORATION OWNERSHIP
- ---- --------------- -------------
<S> <C> <C>
MEDIQ/PRN Life Support Services, Inc........................ DE 100
American Cardiovascular Imaging Labs, Inc.(1)............... PA 100
MDTC Haddon, Inc.(2)........................................ DE 100
MEDIQ Diagnostic Centers, Inc.(4)........................... DE 100
MEDIQ Diagnostic Centers-I, Inc.(2)......................... DE 100
MEDIQ Imaging Services, Inc.(3)............................. DE 100
MEDIQ Investment Services, Inc.(3).......................... DE 100
MEDIQ Management Services, Inc.(3).......................... DE 100
MEDIQ Mobile X-Ray Services, Inc.(3)........................ DE 100
MEDIQ/PRN Canada, Inc.(3)................................... Ontario, Canada 100
Value-Med Products, Inc.(3)................................. NJ 100
</TABLE>
- ------------------------
(1) Subsidiary of MEDIQ, Imaging Services, Inc.
(2) Subsidiary of MEDIQ Diagnostic Centers, Inc.
(3) Subsidiary of MEDIQ/PRN Life Support Services, Inc.
(4) Subsidiary of MEDIQ Management Services, Inc.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 1 to Registration
Statement No. 333-58933 of MEDIQ Incorporated on Form S-1 of our report dated
December 30, 1998, appearing in the Prospectus, which is a part of this
Registration Statement, and of our report dated December 30, 1998 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
November 1, 1999
<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 Post-Effective Amendment No. 1 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.
/s/ BDO SEIDMAN, LLP
Dallas, Texas
October 29, 1999
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
Post-Effective Amendment No. 1 to Registration Statement File No. 333-58933.
/s/ ARTHUR ANDERSEN LLP
Birmingham, Alabama
October 29, 1999
