UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended: September 30, 1998 Commission File Number: 1-8147
MEDIQ Incorporated
(Exact name of registrant as specified in its charter)
Delaware 51-0219413
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One MEDIQ Plaza, Pennsauken, New Jersey 08110
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 662-3200
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- ------------------- ---------------------
7.50% Exchangeable Subordinated Debentures due 2003 American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
- -------------------
Series A 13.0% Cumulative Compounding Preferred Stock, None
Par Value $.01
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such requirements
for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---
The number of shares outstanding of each of the registrant's classes of stock as
of December 7, 1998:
<TABLE>
<CAPTION>
Class
-----
<S> <C>
Common Stock, Par Value $.01 1,074,823 Shares
Series A 13.0% Cumulative Compounding Preferred Stock, Par Value $.01 7,823,506 Shares
Series B 13.25% Cumulative Compounding Perpetual Preferred Stock,
Par Value $.01 2,999,999 Shares
Series C 13.5% Cumulative Compounding Preferred Stock, Par Value $.01 3,000,000 Shares
</TABLE>
There is no public market for the Company's Common Stock, and as such, there is
no practicable manner to obtain an aggregate market valuation.
Documents Incorporated by Reference
-----------------------------------
Certain portions of the registrant's definitive Proxy Statement for its Annual
Meeting of Stockholders (which is expected to be filed with the Commission not
later than 120 days after the end of the registrant's last fiscal year) are
incorporated by reference into Part III of this report.
Exhibit Index appears on page 53.
<PAGE>
Some of the information presented in this Form 10-K constitutes forward
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. Although the Company believes that its expectations are
based on reasonable assumptions within the bounds of its knowledge of its
business and operations, there can be no assurance that actual results will not
differ materially from its expectations. For additional information concerning
important factors, risks and uncertainties which may cause the Company's actual
results to differ materially from expectations and underlying assumptions, refer
to the reports filed by the Company with the Securities and Exchange Commission.
PART I
ITEM 1. BUSINESS
Organization
Merger, Restructuring, Refinancing and Recapitalization. Pursuant to the
terms of an Agreement and Plan of Merger dated January 14, 1998, as amended,
between MEDIQ Incorporated (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. Prior to or simultaneously 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.
The aggregate consideration paid in connection with the Merger was
approximately $390.8 million, which included $20.0 million of Series A 13.0%
Cumulative Compounding Preferred Stock, par value $.01 per share ("Series A
Preferred Stock") of the Surviving Corporation. In addition, in connection with
the Merger (i) certain premerger controlling stockholders of the Company (the
"Rotko Entities") converted a portion of their preferred equity in the Company
into $14.5 million of common and preferred equity of the Surviving Corporation,
(ii) certain management personnel of the Company and certain other persons
invested $4.2 million in common and preferred equity of the Surviving
Corporation and (iii) BRS, certain individuals and entities affiliated with BRS
and certain funds affiliated with Ferrer Freeman Thompson & Co., LLC and Galen
Partners, III L.P. purchased $109.5 million of common and preferred equity of
MQ.
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 Preferred Stock of the Surviving Corporation, except that the Rotko
Entities 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.
As a result of the Merger, each share of capital stock of MQ issued and
outstanding immediately prior to the Merger was converted into and represented
the same number of shares of the same class and series of capital stock of the
Surviving Corporation.
Simultaneously with the Merger, a refinancing was undertaken in which (i)
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, (ii) MEDIQ/PRN entered into a
2
<PAGE>
new senior secured credit facility amounting to $325.0 million, (iii) MEDIQ/PRN
sold $190.0 million principal amount of senior subordinated notes and (iv) all
indebtedness of the Company except approximately $10.1 million of the 7.50%
Exchangeable Subordinated Debentures due 2003 and $2.0 million of MEDIQ/PRN's
capital leases was repaid.
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.
For accounting purposes the Merger was treated as a recapitalization. The
historical basis of the Company's assets and liabilities was not affected.
General
The Company, through its wholly owned subsidiary MEDIQ/PRN, operates the
largest critical care, life support and other movable medical equipment
("Medical Equipment") rental business in the United States. Through its national
distribution network, the Company serves more than 5,000 hospitals, alternate
care and home care providers, nursing homes and other health care providers
nationwide. The Company rents over 650 different types of Medical Equipment,
including adult and infant ventilators, adult, infant, neonatal and fetal
monitors, infusion and suction pumps, incubators, infant warmers, pulse
oximeters, sequential compression devices and oxygen concentrators. In addition,
the Company rents therapeutic support surfaces, overlays and mattresses
("Support Surfaces").
In addition to its core rental business, the Company sells a variety of
disposable products, accessories and repair parts ("Parts and Disposables") to
its customers primarily for use with the types of Medical Equipment and Support
Surfaces that it rents. Additionally, the Company provides several outsourcing
services ("Outsourcing Services") to health care providers. The Company's
Outsourcing Services and sales of Parts and Disposables complement the Company's
core rental business, as they enable the Company to generate incremental
revenues within an existing customer relationship and leverage the Company's
extensive distribution network and broad customer base.
The Company believes that rentals of Medical Equipment and Support Surfaces
and outsourcing of non-core functions of hospitals and other health care
providers have benefited from certain industry trends. In recent years,
hospitals have faced increasing pressure to reduce operating costs and capital
expenditures, while continuing to offer state-of-the-art health care. Equipment
rental programs can be more cost effective for health care providers than the
purchase or lease of Medical Equipment and Support Surfaces 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,
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.
Rentals. The Company rents its Medical Equipment and Support Surfaces
inventory to customers through 101 branch locations in major metropolitan areas
nationwide. Such locations operate 24 hours a day, 365 days a year, with
deliveries of patient ready equipment typically made to customers within two
hours of a request. The Company's customers receive a full range of rental and
related services, including equipment delivery, inspection, maintenance, repair
and documentation. The acquisition by the Company of SpectraCair in September
1997, CH Industries in May 1998 and National Patient Care in June 1998 broadened
its equipment rental product lines to include rentals of Support Surfaces. See
"Acquisitions and Disposals" for additional information on these acquisitions.
In addition to standard rentals, the Company has entered into several
revenue share arrangements with original equipment manufacturers ("OEMs") in
which the Company rents Medical Equipment and Support Surfaces and sells
disposable products produced by the OEMs to the Company's customers. Because the
OEMs own the equipment and/or disposable products, such arrangements permit the
Company to generate additional revenues without any additional capital or
inventory investments.
3
<PAGE>
Parts and Disposables. The Company sells a variety of Parts and Disposables
to its customers, primarily for use with the types of Medical Equipment and
Support Surfaces it rents. The sales of such Parts and Disposables complement
the Company's Medical Equipment and Support Surfaces rental business. The
Company distributes products to its customers to enable them to fill smaller
turnaround needs more quickly and to smaller health care providers who do not
meet minimum order requirements of major medical supply distributors. The
Company currently supplies disposable products through a leased, centralized
distribution center located in Salt Lake City, Utah, through a Company operated
facility in Pennsauken, New Jersey and in certain instances from branch office
locations. The Company also sells repair parts to its customers for the repair
of their owned equipment.
Outsourcing Services. To address the needs of hospitals and other health
care providers to better manage their assets and increase profits, the Company
offers customers the following Outsourcing Services: (i) a Comprehensive Asset
Management Program ("CAMP") which analyzes the critical care equipment activity
of a customer and provides a variety of logistics and outsourcing services
designed to manage, track and service the customer's movable medical equipment;
(ii) a biomedical service which provides inventories, safety inspections,
preventive maintenance and repairs for most critical care equipment; (iii) a
logistics and distribution service to assist equipment manufacturers in reducing
their distribution costs through utilization of the Company's nationwide branch
office network; (iv) a medical gas supply program designed to complement the
Company's respiratory equipment rentals and provide "one stop" service to health
care providers in a fragmented market; and (v) a health care consulting and
management service designed to assist the Company's customers in the management
of their businesses.
The Company was incorporated under the laws of the State of Delaware in
1977. The principal executive offices of the Company are located at One MEDIQ
Plaza, Pennsauken, New Jersey 08110, and its telephone number is (609) 662-3200.
Acquisitions and Disposals
On May 29, 1998, the Company purchased specified assets and rights from CH
Industries, Inc. ("CHI"), certain of its subsidiaries (including CH Medical,
Inc.) and certain other parties related to the manufacture, sale and rental of
specialty beds and Support Surfaces (the "CH Medical Business"). The purchase
price was $48.5 million in cash (subject to adjustment based on closing net
asset covenants), including related costs and expenses, and assumption of
certain obligations related to the CH Medical Business. 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
surfaces, with approximately 75 business locations nationwide. 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. Its product offerings included 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.
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, and contingent consideration of up to $2.8 million payable over
the next two years if certain revenue targets are achieved. NPC was a provider
of air support therapy rental equipment including frameless and framed
integrated bed systems.
In November 1997, the Company sold to InnoServ Technologies ("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.
4
<PAGE>
Industry Overview
The United States health care system includes a variety of health care
providers such as acute care hospitals, nursing homes, surgicenters, sub-acute
care facilities, specialty clinics and home health care providers. These 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 favor the purchase option in meeting a substantial portion of their
movable medical equipment needs. However, the Company believes that a variety of
trends favor a rental alternative to purchase or lease, including the
substantial cost containment pressures under which health care providers
currently operate.
The cost containment pressures on 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 health care providers actual equipment costs. The Company believes
that the current reform efforts will focus on cost containment in health care
and may reduce levels of reimbursement by Medicare as well as other third party
payors. The Company believes 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.
As a result of these cost containment pressures, the Company believes that
health care providers will increasingly seek to reduce their capital
expenditures, including expenditures on movable medical equipment. Because the
Medicare system is, to an increasing extent, reimbursing health care providers
at fixed rates unrelated to actual capital costs, hospitals and other health
care providers have an incentive to manage their capital costs more efficiently.
Providers may better manage their capital costs by replacing fixed capital costs
with variable operating costs. In the case of movable medical equipment, these
fixed costs include equipment acquisition costs and the substantial costs
associated with servicings necessary to maintain the equipment. Consequently,
many entities may elect to rent equipment, rather than incur the substantial
capital related costs associated with owning or leasing equipment for which they
may not be reimbursed during non use periods.
Medical Equipment and Support Surfaces Rentals
The Company operates the largest Medical Equipment rental business in the
United States, serving more than 5,000 hospitals, alternate care and home care
providers, nursing homes and other health care providers nationwide. The Company
believes it 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.
The Company rents its inventory to customers through 101 branch office
locations in major metropolitan areas nationwide. This extensive geographic
presence enables the Company to service national chains as well as local and
regional facilities. The Company's locations operate 24 hours a day, 365 days a
year, with deliveries of patient ready equipment typically made to customers
within two hours of a request. The Company's customers receive a full range of
rental and related support services, including equipment delivery, inspection,
maintenance, repair and documentation, from the Company's staff of experienced
biomedical technicians and customer service representatives.
5
<PAGE>
Convenient Service. Medical Equipment and Support Surfaces inventories are
maintained at each Company location. The Company utilizes a centralized order
entry and dispatching system. Most orders nationwide are received by telephone
at the Company's Pennsauken, New Jersey headquarters, and scheduling and routing
of equipment delivery is made from this site. Upon return, equipment is
inspected, cleaned and tested at the branch location before being designated as
available for rental. Routine service and repair work is performed at each local
branch office. If major service or repair is necessary, the equipment is shipped
to one of the Company's two repair facilities in Pennsauken, New Jersey and
Santa Fe Springs, California. The Company's state-of-the-art information and
inventory systems have the capacity to track essential activities, including
equipment availability, training, repair and maintenance, delivery and pickup,
pre-delivery inspections, major inspections and call backs.
Diverse Product Offering. The Company's inventory includes equipment used
in respiratory care, emergency, neonatal intensive care, medical and surgical
intensive care, central supply and sterile processing and distribution,
biomedical engineering, surgery, labor and delivery, and anesthesia/recovery.
The Company rents over 650 types of equipment and believes it offers the most
complete selection of Medical Equipment for rent in the country. The following
is a list of the principal types of Medical Equipment available:
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 Infusion Pumps
Devices Telemetry Units
Suction Units
In addition to the above, the Company also provides Support Surfaces on a
rental basis to health care providers through its MEDIQ/FST division. MEDIQ/FST
purchases and supplies Support Surfaces that are installed on top of standard
hospital beds. MEDIQ/FST's products are utilized in the treatment of bedridden
patients where 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 be expensive. The Company believes
that MEDIQ/FST's products match the clinical efficacy of the specialized beds at
substantially lower prices. MEDIQ/FST has recently expanded its product line to
include additional specialized products designed for obese patients
(bariatrics), specialized seating products and passive restraint systems. As
health care providers 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.
OEM Partnerships. In addition to standard Medical Equipment and Support
Surfaces rentals, the Company has entered into several revenue share
arrangements with OEMs in which the Company rents movable medical equipment and
sells disposable products produced by the OEMs to the Company's customers. The
Company pays the OEMs a fee based upon a percentage of the amount billed to the
customer. Under such arrangements, because the OEMs own the equipment and/or the
disposable products, the Company is able to generate additional revenues without
any additional capital or inventory investments.
6
<PAGE>
Sales of Parts and Disposables
The Company sells a variety of Parts and Disposables to its customers
primarily for use with the types of Medical Equipment and Support Surfaces it
rents. The sales of such Parts and Disposables complement the Company's rental
business. The Company distributes products to its existing rental customers to
enable them to fill smaller turnaround needs more quickly and to smaller health
care providers that do not meet minimum order requirements of major medical
supply distributors. The Company currently supplies disposable products
primarily through the Salt Lake City, Utah and Pennsauken, New Jersey locations.
The Company maintains a base level of disposable products inventory at each
branch office to provide immediate delivery of certain products on an emergency
basis. The Company also sells repair parts to customers for the repair of their
owned equipment. This enables the Company to generate incremental revenues
within an existing customer relationship. To support the growth of its Parts and
Disposables business, the Company has a sales and marketing operation
incorporating telephone sales, direct mail and trade publication advertising.
Outsourcing Services
To enable health care providers to better manage their assets and increase
profitability, the Company offers a range of Outsourcing Services. Each
Outsourcing Service leverages the Company's extensive distribution network and
broad customer base. These services include (i) CAMP, which analyzes the
critical care equipment activity of a customer and provides a variety of
consulting services designed to manage, track and service the customer's movable
medical equipment, (ii) a biomedical service which provides inventories, safety
inspections, preventive maintenance and repairs for most critical care equipment
through a team of experienced biomedical technicians, (iii) a logistics and
distribution service to assist equipment manufacturers in reducing their
distribution costs through utilization of the Company's nationwide branch office
network, (iv) a medical gas supply program designed to complement the Company's
respiratory equipment rentals and (v) a health care consulting and management
service designed to assist the Company's customers in the management of their
businesses.
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.
CAMP focuses on increasing the utilization of hospital owned assets. Under
CAMP, the Company's asset management team and the customer determine benchmarks
and goals to be met. The Company thereafter conducts quarterly business reviews
to assess progress and provides the customer with detailed documentation
regarding equipment utilization trends, thereby greatly aiding in capital budget
planning. CAMP customers 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 an
increase in captured patient charges. Even with a highly capitated payer mix, a
portion of this revenue may be recovered by the customer for other uses.
Additionally, CAMP provides hospital customers with clear cost data which can
assist in negotiations with managed care contracts.
The Company also offers its CAMP Plus logistics program that provides
similar management services for multi site health care networks to manage,
service and transport movable patient care equipment. A proprietary bar code
based asset management system provides customers optimum utilization of owned
equipment. This system provides information used to track equipment, capture
lost patient charges, control inventory and equipment migration, reduce the need
for supplemental rentals and manage overall capital planning. The Company also
has programs in 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.
7
<PAGE>
Biomedical Services. The Company performs inventories, safety inspections,
preventative maintenance and repairs for most brands and models of Medical
Equipment and Support Surfaces owned by the Company, health care organizations
and other third parties through a team of experienced biomedical technicians.
Service and repairs can be performed on site. Pick up and delivery is also
available for servicing at any of the Company's branch locations or two major
service centers.
Other Services. The Company offers a logistics and distribution service to
health care providers and equipment manufacturers to reduce their distribution
costs through utilization of the Company's national branch office network.
The Company also offers a medical gas administrative management service to
health care providers to enable such providers to centralize the purchasing
function for bulk liquid oxygen, portable and semiportable 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 pay 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 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 in integrating the Company's product offerings,
extracting synergies from complementary businesses and maximizing utilization of
the Company's 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 Pennsauken, New Jersey and Santa Fe
Springs, California facilities.
Customers
The Company's customer base is composed of proprietary national and
regional hospital chains ("National Providers"), group purchasing organizations
("GPOs") and acute and non-acute health 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. For fiscal 1998,
no single account represented 10% or more of total revenues.
National Provider contracts generally require that associated individual
hospitals 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 from a particular supplier to the GPO, and many health care providers are
members of more than one GPO.
8
<PAGE>
Competition
The movable medical equipment rental industry is highly competitive and
the Company, which operates throughout the United States, encounters competition
in all locations in which it operates. Competition is generated from (i)
national, regional and local medical equipment rental and leasing companies and
medical equipment distributors which rent medical equipment to health care
providers, (ii) medical equipment manufacturers which sell medical equipment
directly to health care providers and which the Company believes generate the
strongest competition and (iii) general leasing and financing companies and
financial institutions, such as banks, which finance the acquisition of medical
equipment by health care providers. The Company believes that key factors
influencing the decision in selecting 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.
Suppliers
The Company acquires substantially all of its Medical Equipment, Support
Surfaces and Parts and Disposables from approximately 100 suppliers. The Company
has entered into two long term agreements to purchase approximately $14.5
million of equipment and parts and disposable products over the next fiscal
year. 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.
The Company is currently in dispute with one of the vendors with whom it
has a significant long term agreement. The vendor wishes to terminate the
agreement, but the Company intends to vigorously defend its rights under the
agreement. Although the Company does not know the ultimate outcome of such
dispute, the Company believes any such resolution will not have a material
adverse effect on the Company's results of operations. (See Footnote K to the
Consolidated Financial Statements included elsewhere herein.)
Segments
The Company operates primarily in one business segment. The Company rents
Medical Equipment and Support Surfaces and distributes a variety of disposable
products, accessories and repair parts used with the equipment and surfaces it
rents. In fiscal 1998, this segment represented more than 90% of the Company's
consolidated revenues and assets.
Employees
As of September 30, 1998 there were 1,271 employees. None of the Company's
employees are subject to a collective bargaining agreement. The Company believes
that its relations with employees are satisfactory.
Governmental Regulation
The Company's businesses are subject to Federal, state and local laws,
rules and regulations relating to the operation of such businesses.
The Company's customers are subject to documentation and safety reporting
standards with respect to the medical equipment they use, including standards
established by the following organizations and laws: the Joint Commission on
Accreditation of Healthcare Organizations, the Association for Advancement of
Medical Instrumentation and the Safe Medical Devices Act of 1990.
9
<PAGE>
Some states and municipalities also have similar standards and laws. The
Company's CAMP programs help customers meet documentation and reporting needs
under these standards and laws. As a provider of services related to these
needs, the Company may be subject to liability for violating, directly or
indirectly, these standards and laws.
Manufacturers and certain providers of the Company's Medical Equipment and
Support Surfaces are subject to regulation by agencies and organizations such as
the Food and Drug Administration ("FDA"), Underwriters Laboratories, the
National Fire Protection Association and the Canadian Standards Association. The
FDA regulates companies which manufacture, prepare, propagate, compound or
process medical devices. Device manufacturers must comply with registration and
labeling regulations, submit premarket notifications or obtain premarketing
approvals, comply with medical device reporting, tracking and post market
surveillance regulations and device good manufacturing practices ("GMPs") and
are subject to FDA inspection. The GMP regulations specify the minimum standards
for the manufacture, packing, storage and installation of medical devices, and
impose certain record keeping requirements. The FDA currently does not regulate
as device manufacturers the Company or organizations which provide similar
services as the Company. However, any company which services, repairs or
reconditions medical devices could be subject to regulatory action by the FDA if
its activities cause the devices to become adulterated or mislabeled. In
addition, no assurance can be given that in the future the FDA will not regulate
as device manufacturers companies such as the Company, which acquire ownership
of devices, recondition or rebuild such devices and rent them to customers or
which service, repair or recondition devices owned by others. The foregoing laws
and regulations that are directly applicable to manufacturers of medical
equipment became applicable to the Company upon acquisition of CH Medical. In
November 1998, the Company closed the manufacturing facility and operation it
acquired from CH Medical and now purchases the products from an independent
third party.
Federal laws 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. Noncompliance
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.
The Company's business may be significantly affected by, and the success of
its growth strategies may depend 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.
10
<PAGE>
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 nonhazardous substances. As the owner and operator of real property, the
Company could become subject to liability under certain environmental laws for
the cleanup of contaminated properties relating to current or historical
operations. The Company is not aware of any such threatened or pending cleanup
liabilities, and believes that it complies with all applicable environmental
laws.
Seasonality
The Company's business is seasonal with demand historically peaking during
periods of increased hospital census, which generally occurs in the winter
months during the Company's second fiscal quarter.
ITEM 2. PROPERTIES
The Company's principal facility, containing 116,400 square feet, 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 also performed at this facility as well as at
a 18,700 square foot leased maintenance facility located in Santa Fe Springs,
California. The Company operates through 101 branch office locations in major
metropolitan areas nationwide. Eighty-eight of these sites contain office and
warehouse space and are leased by the Company. The remaining 13 office locations
are operated by independent distributors. None of the leases are with parties
affiliated with the Company. The Company believes that the properties owned and
leased by it are adequate for its operations.
ITEM 3. LEGAL PROCEEDINGS
On January 15, 1998, Crandon Capital Partners, a stockholder of the
Company, sued the Company and each of the Company's directors in Delaware
Chancery Court, alleging breaches of fiduciary duties in connection with the
approval of the Merger by the directors of the Company and the related
transactions. The complaint purports to be a class action complaint and
plaintiff seeks to recover compensatory damages. Based on information currently
available, the Company believes that this claim is without merit and that the
resolution thereof will not have material adverse effect on the operations or
financial condition of the Company.
In 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.
On October 16, 1998 the Company filed a complaint in the Superior Court of
New Jersey, Camden County against Siemens Medical Systems, Inc. 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. The litigation is in its preliminary stages.
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.
11
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter ended September 30, 1998.
12
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
No established public trading market exists for the Company's Common Stock.
As of December 7, 1998, there were 46 holders of record of the Company's Common
Stock.
The Company did not pay any dividends in fiscal 1998 or 1997. Terms of the
Senior Secured Credit Facility and the indentures related to the Company's
indebtedness limit the Company's ability to pay dividends with respect to any of
its capital stock. The Company does not anticipate paying dividends in the
foreseeable future. Accrued and unpaid dividends on any cumulative preferred
stock series are added to its liquidation value or reflected as long term
liabilities.
On September 3, 1998, 74,823 shares of Common Stock, par value $.01 were
sold to certain management personnel of the Company in a private placement
exempt from registration under Rule 506 of the Securities Act of 1933, as
amended. Aggregate proceeds of $.7 million received by the Company were used for
general corporate purposes.
13
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below has been derived
from the audited financial statements of the Company. This data is qualified in
its entirety by reference to, and should be read in conjunction with, the
Company's Consolidated Financial Statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations included elsewhere
herein.
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------------------------------------
1998 (1) 1997 1996 1995 (2) 1994
--------- --------- -------- --------- ---------
(in thousands, except per share amounts)
Summary Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Revenues $180,916 $155,960 $136,066 $132,241 $ 81,498
Operating (loss) income (18,704) 29,504 25,446 24,202 1,354
Interest expense (27,894) (19,107) (27,307) (29,241) (21,335)
Other income (charges) - net (3) 5,072 (7,504) (4,695) 1,381 7,381
(Loss) Income from continuing operations
before income taxes (41,526) 2,893 (6,556) (3,658) (12,600)
Loss from continuing operations (29,071) (2,241) (6,178) (3,346) (8,254)
Basic Per Common Share: (4)
Loss from continuing operations $ (2.05) $ (.09) $ (.25) $ (.14) $ (.34)
</TABLE>
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------------------------------
1998 (1) 1997 1996 1995 1994
-------- -------- --------- --------- ---------
(in thousands)
Summary Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Current assets $ 86,813 $ 69,751 $ 45,103 $ 44,436 $ 35,041
Investments in discontinued operations -- -- 64,967 70,162 99,911
Property, plant and equipment - net 103,917 113,589 122,706 132,823 149,051
Total assets 309,218 257,552 308,423 334,169 377,795
Current liabilities 37,039 40,019 45,614 64,685 59,610
Senior debt, net of current portion 277,490 128,131 192,461 136,949 162,436
Subordinated debt, net of current 190,514 10,055 41,229 81,907 103,388
Mandatorily redeemable preferred stock 113,037 -- -- -- --
Stockholders' equity (deficiency) (325,353) 48,603 17,445 31,517 36,280
</TABLE>
See Notes to Selected Consolidated Financial Data
14
<PAGE>
Notes to Selected Consolidated Financial Data
(1) On May 29, 1998, the Company effected a Merger accounted for as a
recapitalization. The historical basis of assets and liabilities were not
changed. In connection with the Merger, new capital stock was issued, debt
was refinanced and additional debt incurred to finance the Merger and
acquisition of the CH Medical Business. In addition, the Company's results
of operations and financial position reflect the incremental effects of the
acquisition of the CH Medical Business in May 1998 and National Patient
Care Systems, Inc. in June 1998. Operating loss includes nonrecurring
merger and acquisition expenses of $35.0 million.
(2) In September 1994, MEDIQ/PRN acquired the critical care and life support
rental equipment inventory of Kinetic Concepts, Inc. The purchase price,
which was primarily financed with long term debt, approximated $88 million,
including transaction costs and the assumption of certain capital lease
obligations.
(3) Fiscal 1998 includes a cash settlement on the fully reserved note
receivable from MHM Services, Inc. ("MHM") of $3 million, recognition of
discount on a note receivable with NutraMax Products, Inc. ("NutraMax") of
$1.1 million and interest income of $.9 million.
Fiscal 1997 includes an equity participation charge for the repurchase of
MEDIQ/PRN warrants of $11 million, a gain on the sale of Cardinal 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 million, a gain on the NutraMax
note receivable of $1.8 million and interest income of $2.1 million.
Fiscal 1996 includes a reserve on the note receivable from MHM of $6
million, a net gain on the sale of assets of $.6 million and interest
income of $1.5 million.
Fiscal 1995 includes a net loss on the sale of assets of $.4 million and
interest income of $1.5 million.
Fiscal 1994 includes a net gain on the sale of assets of $5.8 million and
interest income of $1.4 million.
(4) Cash dividends per common share were $.09 in 1994. Cash dividends were
not declared in any succeeding year.
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
MEDIQ Incorporated ("MEDIQ") is a holding company whose only substantial
asset is ownership of its wholly owned subsidiary MEDIQ/PRN Life Support
Services, Inc. ("MEDIQ/PRN"). Together these entities comprise the "Company".
MEDIQ/PRN and its wholly owned subsidiary MEDIQ Management Services, Inc. are
the operating companies. MEDIQ conducts no business other than in connection
with its ownership interest in MEDIQ/PRN, financial and related administrative
responsibilities concerning its capital stock and indebtedness and certain
general administrative responsibilities. MEDIQ is dependent on distributions
from MEDIQ/PRN to meet its cash flow needs.
On May 29, 1998, 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"), MQ was merged into the Company (the "Merger") with the
Company continuing as the surviving corporation (the "Surviving Corporation").
MQ was a Delaware corporation organized by Bruckmann, Rosser, Sherrill & Co.,
L.P. ("BRS") and certain other investors solely to effect the Merger. In the
Merger, holders of the Company's outstanding common stock, par value $1.00 per
share and preferred stock, par value $.50 per share received, in exchange for
each outstanding share of common stock or preferred stock (except for shares
held directly or indirectly by the Company or MQ, the Rolled Shares (as defined
below) and dissenting shares), $13.75 in cash and 0.075 of a share of a newly
created Series A 13.0% Cumulative Compounding Preferred Stock, par value $.01
per share (the "Series A Preferred Stock") of the Surviving Corporation. The
Series A Preferred Stock has a liquidation preference of $10.00 per share.
The aggregate consideration paid in connection with the Merger was
approximately $390.8 million, which amount included $20.0 million of Series A
Preferred Stock. In addition, in connection with the Merger (i) certain
controlling stockholders of the Company (the "Rotko Entities") converted
1,000,000 shares of their preferred equity (the "Rolled Shares") in the Company
into 1,340,219 shares of Series B 13.25% Cumulative Compounding Perpetual
Preferred Stock, par value $.01 per share ("Series B Preferred Stock") and
109,781 shares of Common Stock, par value $.01 per share ("Common Stock") of the
Surviving Corporation, (ii) certain members of the Company's management and
certain other persons invested approximately $4.2 million in common and
preferred equity of the Surviving Corporation and (iii) BRS, certain entities
and individuals affiliated with BRS and certain funds affiliated with Ferrer
Freeman Thompson & Co. LLC and Galen Partners III, L.P. purchased $109.5 million
of common and preferred equity of MQ. The transaction has been accounted for as
a recapitalization.
In connection with the Merger, (i) the Company contributed certain of its
assets and liabilities (including the capital stock of all of the subsidiaries
of the Company other than MEDIQ/PRN to MEDIQ/PRN, (ii) the Company sold 140,885
units ("Units"), each Unit consisting of one 13% Senior Discount Debenture due
2009 with a principal amount at maturity of $1,000 ("Debentures") and one
warrant to purchase 0.6474 of a share of Common Stock ("Warrants") for gross
proceeds aggregating $75.0 million, (iii) MEDIQ/PRN entered into a new $325.0
million Senior Secured Credit Facility, as amended, (the "New Credit Facility")
with a syndicate of banks, (iv) MEDIQ/PRN sold $190.0 million aggregate
principal amount of 11% Senior Subordinated Notes due 2008 (the "Notes") and (v)
all indebtedness of the Company except approximately $10.1 million of the
Company's 7.50% Exchangeable Subordinated Debentures due 2003 (the "Exchangeable
Debentures") and $2.0 million of MEDIQ/PRN's capital leases was repaid (the
"Refinancing").
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").
16
<PAGE>
On May 29, 1998, the Company purchased specified assets and rights of CH
Industries, Inc., certain of its 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 covenants),
including related costs and expenses, and the assumption of certain specified
obligations related to the CH Medical Business. The Company financed the
purchase price and related costs and expenses for the acquisition of the CH
Medical Business with the proceeds from Term Loans under the New Credit
Facility.
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, and contingent consideration of up to $2.8 million payable
over the next two years if certain revenue targets are achieved by NPC.
The Company intends to continue to seek to expand its business through
strategic acquisitions and partnerships. The Company believes that there
currently exist ample opportunities for other potential
acquisitions/partnerships. However, no assurance can be given that other
acquisitions/ partnerships will be consummated or that any consummated will be
successful. Moreover, such opportunities may not be available in the future.
The Company markets its products and services to a variety of health care
and related businesses, primarily acute and sub-acute healthcare providers,
nursing homes and home health care companies. In recent years, these industries
have undergone dramatic consolidation and change, which will likely continue.
Although the Company is seeking to emphasize its ability to provide cost
effective products and services to these health care institutions in response to
a perception that such institutions are outsourcing increasing amounts of their
operations, there can be no assurance that this strategy will be successful.
The health care industry is subject to extensive governmental regulation,
licensure and prescribed operating procedures. This industry continues to
receive significant public attention, and there have been renewed efforts for
increased governmental regulation or oversight into various aspects of the
industry. Continued acceptance of the Company's services and products by
customers will depend, to a very significant degree, upon whether these services
and products will be in compliance with applicable regulations or will assist
health care providers in complying with such regulations. The Company closely
monitors such regulations and designs services and products accordingly. A
substantial change in the level or substance of regulations, or the enactment of
new or more stringent regulations, could have a material adverse effect on the
Company.
There are widespread efforts to control health care costs in the United
States. As an example, The Balanced Budget Act of 1997 significantly reduces
Federal spending on Medicare and Medicaid over the next five years by reducing
annual payment updates to acute care hospitals, changing payment systems for
both skilled nursing facilities and home health care services from cost based to
prospective payment systems, eliminating annual payment updates for durable
medical equipment and allowing states greater flexibility in controlling
Medicaid costs at the state level. The Company cannot reliably predict the
timing of when, or the exact effect which, these or similar initiatives could
impact on the pricing and profitability of, or demand for, the Company's
products. Moreover, 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 the Company's customers make renting and purchasing
decisions, and could have a material adverse effect. The Company also believes
it is likely that efforts by governmental and private payors to contain costs
through managed care and other efforts and to reform health systems will
continue. There is no assurance that current or future initiatives will not have
a material adverse effect on the Company.
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
17
<PAGE>
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.
Results of Operations
Fiscal Year 1998 Compared with Fiscal Year 1997
Revenues were $180.9 million compared to $156.0 million, 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 solidly established the Company in the
therapeutic support surface rental 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
significant home care customers in the fourth quarter of fiscal 1997. The growth
in sales revenue related to increased volume in the sales of parts, disposables
and equipment, revenue share activities and 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 provided to SpectraCair by the Company as a result of its acquisition
in September 1997 and a reduction in consulting services, partially offset by
increased revenues from biomedical repair services and asset management
projects.
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.
The operating loss for fiscal 1998 of $18.7 million includes charges of
$35.0 million related to the Merger and the acquisition of the CH Medical
Business in May 1998, 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 to $25.7 million principally as a result of
investments in sales and operational personnel to facilitate the growth in
support surfaces, disposable sales and outsourcing activities and
18
<PAGE>
increased depreciation and amortization expenses related to capital equipment
purchases and the acquisitions.
EBITDA is defined as income from continuing operations before interest,
taxes, depreciation and amortization. EBITDA is presented because it is a widely
accepted financial indicator of a company's ability to service indebtedness in
the medical equipment rental industry. However, EBITDA should not be considered
as an alternative to income from operations or to cash flows from operating
activities (as determined in accordance with generally accepted accounting
principles) and should not be construed as an indication of a company's
operating performance or as a measure of liquidity.
Exclusive of the charges noted above, adjusted EBITDA increased $1.5
million to $61.4 million principally as a result of the items discussed above.
The adjusted EBITDA margin decreased to 34% from 38% 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.
Interest expense increased 46% to $27.9 million principally as a result of
the substantial increase in debt incurred in connection with the Merger 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 Services, Inc. ("MHM", formerly a
wholly owned subsidiary of the Company that was spun off to shareholders in
August 1993). 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 for the 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 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 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 effective tax rate was disproportionate compared to the
statutory rate as a result of the nondeductibility of certain goodwill
amortization and the nonrecognition 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 it 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.
As a result of the Refinancing which occurred related to the Merger and the
tender offer for the Exchangeable Debentures, the Company recognized 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.
19
<PAGE>
Fiscal Year 1997 Compared with Fiscal Year 1996
Revenues were $156.0 million compared to $136.1 million, an increase of
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. Increased sales of parts and disposables from additional volume
attributable to an expanded customer base, a wider variety of product offerings,
a new revenue share arrangement and the expansion of the distribution agreement
to include additional product lines also contributed to the overall sales
increase. The increase in other revenue was achieved principally through
outsourcing services due to an expanded customer base.
Operating income increased 7% to $29.5 million, compared to $27.6 million,
exclusive of a $2.2 million restructuring charge. The restructuring charge in
the prior year was incurred in connection with the downsizing of corporate
functions and consolidation of certain activities with the operations of
MEDIQ/PRN. The improvement in operating income was attributable to the increased
sales and reductions in corporate overhead of $.9 million related to the
downsizing of corporate functions. This improvement was partially offset by an
additional investment in personnel 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 equipment
rentals.
EBITDA increased $2.1 million to $59.9 million principally as a result of
the items discussed above. EBITDA margins decreased from 42% 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.
Interest expense decreased 30% to $19.1 million from $27.3 million
primarily as a result of substantial reductions of debt with the proceeds from
the sales of discontinued operations and lower interest rates associated with
the refinancing of the 11-1/8% Senior Secured Notes due 1999 on October 1, 1996.
In October 1996, the Company incurred a nonrecurring 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 Kinetic Concepts, Inc.
acquisition in 1994.
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 of MHM's financial
condition. The Company also wrote off $4.0 million ($2.4 million net of tax) of
deferred acquisition and financing costs associated with the terminated
acquisition of Universal Hospital Services, Inc.
The Company's effective tax rate was disproportionate compared to the
statutory rate as a result of the nondeductibility of the expense associated
with the repurchase of the MEDIQ/PRN warrants, goodwill amortization and
nonrecognition of certain operating losses and nonoperating gains for state
income tax purposes.
The Company recorded a reserve of $5 million in fiscal 1997 against its
investment in InnoServ in anticipation of the sale back to InnoServ of InnoServ
stock owned by the Company.
In May 1997, the Company sold the stock of Health Examinetics, Inc. to the
management of Health Examinetics for approximately $1.7 million, consisting of
$.1 million in cash and an interest
20
<PAGE>
bearing promissory note in the amount of $1.6 million. The sale resulted in an
after tax charge of $1 million, which was in addition to the estimated net loss
on the disposal of this company recorded in fiscal 1996.
In December 1996, the Company sold to NutraMax all of the common shares of
NutraMax owned by the Company. The Company received from NutraMax $19.9 million
in cash and an interest bearing promissory note in the amount of $16.4 million.
These common shares sold by the Company were placed in escrow in support of the
Company's Exchangeable Debentures. The note is payable when the shares are
delivered to NutraMax upon release from escrow. The NutraMax shares are released
from escrow upon the purchase or redemption of the Exchangeable Debentures. The
Company recognized an after tax gain of $4.8 million. From January through
September 1997, the Company repurchased $17.8 million of the Exchangeable
Debentures in the open market resulting in the release of 1,161,961 shares of
NutraMax common stock from escrow. The shares were delivered to NutraMax
resulting in cash payments on the note of $10.5 million and the realization of a
$1.8 million pretax gain as a result of recognizing a portion of the discount on
the note. This gain is reflected in Other-net within Other Charges and Credits
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 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. In July 1997,
the Company sold the IHS shares at an amount which approximated carrying value.
In October 1996, the Company received common shares of Cardinal Health,
Inc. ("Cardinal") in exchange for the Company's 46% ownership interest in PCI
Services, Inc. The Company recognized an after tax gain of $32.6 million. The
Company sold its Cardinal shares in January 1997 for $88.4 million.
Revenues and operating income from discontinued operations (excluding
equity investees) were $6.6 million and $.2 million, respectively, compared to
revenues and operating income of $36.8 million and $4.3 million, respectively.
As a result of the refinancing and the repurchases of the Company's 7.25%
Convertible Subordinated Debentures and repurchases of the Exchangeable
Debentures, the Company recognized an extraordinary charge of $13.4 million
($8.0 million net of taxes) resulting primarily from premiums incurred related
principally to the tender offer to purchase the $100 million 11-1/8% Senior
Secured Notes due 1999 and write off of related deferred charges.
Liquidity and Capital Resources
In 1998, cash used in operating activities was $.5 million, as
compared to cash provided by operating activities of $1.2 million in the prior
year. Included in 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 1998, and
consisted 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 presently anticipates capital expenditures of approximately
$20.0 million during fiscal 1999, primarily for Medical Equipment and Support
Surfaces. Also, the Company has entered into long term agreements with two
vendors to purchase approximately $14.5 million of certain products over the
next fiscal year.
Net cash provided by financing activities was $71.5 million for 1998 and
consisted primarily of borrowings of $464.3 million and issuances of capital
stock of $149.0 million to fund the Merger, the
21
<PAGE>
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.
The Company's principal capital requirements are to fund working capital
needs, meet required debt payments, fund capital expenditures and complete
planned maintenance and expansion. Management anticipates that MEDIQ/PRN's
operating cash flow, together with available borrowings under the New Credit
Facility, will be sufficient to meet its working capital, capital expenditure
and debt service requirements for the foreseeable future.
In order to finance a portion of the cash consideration paid pursuant to
the Merger, MEDIQ/PRN entered into a $325.0 million New Credit Facility that
replaced its former credit facility. The New Credit Facility consists of three
facilities: (i) an eight year senior secured $200.0 million term loan facility
(the "Term Loan Facility"); (ii) a six year revolving credit facility not to
exceed $50.0 million (the "Revolving Credit Facility"); and (iii) a six year
senior secured acquisition facility not to exceed $75.0 million (the
"Acquisition Facility"). Loans made under the Term Loan Facility are referred to
herein as "Term Loans", advances made under the Revolving Credit Facility are
referred herein as "Revolving Loans" and loans made under the Acquisition
Facility are referred to herein as "Acquisition Loans".
Borrowings under the New Credit Facility bear interest at a floating rate
based upon, at MEDIQ/PRN's option, (i) the higher of the prime rate of Banque
Nationale de Paris or the Federal funds effective rate plus 0.5% plus, in the
case of the Term Loans, a margin equal to 1.5%, and in the case of the Revolving
Loans and the Acquisition Loans, a margin equal to 1.0% or (ii) the London
Interbank Offered Rate ("LIBOR") plus, in the case of the Term Loans, a margin
equal to 2.75%, and in the case of the Revolving Loans and Acquisition Loans, a
margin equal to 2.25%. In addition, MEDIQ/PRN is required to pay commitment fees
equal to 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 certain performance goals.
As of September 30, 1998, there were no borrowings outstanding under the
Revolving Credit Facility or Acquisition Facility. All $200.0 million was
outstanding under the Term Loan Facility. Principally, all of the outstanding
balance under the Term Loan Facility bears interest at LIBOR plus 2.75%, or
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.
The Term Loans amortize on a quarterly basis commencing September 30, 1999.
Principal amounts outstanding under the Revolving Credit Facility are due and
payable in full at maturity. Principal amounts, if any, outstanding under the
Acquisition Facility on November 30, 1999 will amortize on a quarterly basis.
The Term Loans, Revolving Loans and Acquisition Loans are subject to mandatory
prepayments and reductions in the event of certain extraordinary transactions or
issuances of debt and equity by MEDIQ/PRN or any Facility Guarantor (as defined
in the Credit Agreement). Such loans are required to be prepaid with 75% of the
Excess Cash Flow (as defined in the Credit Agreement) of MEDIQ/PRN or, if the
Company's ratio of funded debt to pro forma EBITDA for the preceding twelve
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 Subordinated Notes and the Discount Debentures
(the "Indentures"), the availability under the Revolving Credit Facility and the
Acquisition Facility was limited to $29.8 million and $50.0 million,
respectively.
22
<PAGE>
The New Credit Facility contains representations and warranties, financial
and non-financial covenants, events of default and other provisions customary
for credit facilities of this type. MEDIQ/PRN paid certain syndication and
administration fees, reimbursed certain expenses and provided certain
indemnities, in each case which are customary for credit facilities of this
type.
In July 1998, the Company terminated its existing interest rate hedging
contracts at a cost of approximately $.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%.
The Notes in the aggregate principal amount of $190.0 million are unsecured
senior subordinated obligations of MEDIQ/PRN and mature on June 1, 2008. The
Notes bear interest at the rate of 11% per year, payable to holders of record at
the close of business on the May 15 or November 15 immediately preceding the
interest payment date on June 1 and December 1, commencing December 1, 1998.
Each Unit consists of a Debenture with a principal amount at maturity of
$1,000 and one Warrant. Each Warrant entitles the holder thereof to purchase
0.6474 shares of Common Stock from the Company at an exercise price of $0.01 per
share, subject to adjustment. The Warrants will initially entitle the holders
thereof to acquire, in the aggregate, 91,209 shares of Common Stock. The
Warrants were valued at $743,000 and are reflected as a component of
Stockholders' Equity.
The Debentures are unsecured senior obligations of the Company, limited to
$140.9 million aggregate principal amount at maturity, and will mature on June
1, 2009. No cash interest will accrue on the Debentures prior to June 1, 2003.
Cash interest will accrue on the Debentures at the rate of 13% per year from
June 1, 2003, or from the most recent date to which interest has been paid or
provided for, payable on June 1 and December 1, commencing December 1, 2003 to
holders of record at the close of business on the May 15 or November 15
immediately preceding the interest payment date.
The interest rates on the Notes and Debentures were subject to increase in
certain circumstances if the Company did not file a registration statement
providing for a registered exchange offer for the Notes and the Debentures or if
the registration statement was not declared effective on a timely basis or if
certain other conditions were not satisfied. The Company filed such registration
statements and completed such exchange offer in a timely manner in November
1998.
The Warrants may be exercised at any time after May 29, 1999; provided,
however, that holders of Warrants will be able to exercise their Warrants only
if a shelf registration statement relating to the Common Stock underlying the
Warrants is effective or the exercise of such warrants is exempt from the
registration requirements of the Securities Act, and such securities are
qualified for same 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. Upon commencement
of the exchange offer in October 1998, the Warrants began to trade separately
from the Debentures.
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. Pursuant to the terms of the Company's stock purchase agreement with
NutraMax, the
23
<PAGE>
Company returned the shares to NutraMax and received a $5.6 million cash payment
on its note receivable from NutraMax.
The New Credit Facility and the Indentures include significant operating
and financial restrictions, such as limits on the Company's ability to incur
indebtedness, create liens, sell assets, engage in mergers or consolidations,
make investments and capital expenditures and pay dividends. The Company has
substantial consolidated indebtedness. In addition, the Company expects to incur
additional indebtedness in connection with its post-Merger strategy of pursuing
strategic acquisitions and expanding through internal growth. Such high leverage
has important consequences for the Company, including the following: (a) the
Company's ability to obtain additional financing for such acquisitions, working
capital, capital expenditures or other purposes may be impaired or any such
financing may not be on terms favorable to the Company; (b) interest expense may
reduce the funds that would otherwise be available to the Company for its
operations and future business opportunities; (c) a substantial decrease in net
operating cash flows or an increase in expenses of the Company could make it
difficult for the Company to meet its debt service requirements or pay dividends
or force it to modify its operations; (d) substantial leverage may place the
Company at a competitive disadvantage and may make it more vulnerable to a
downturn in its business or the economy generally; (e) certain of such
indebtedness of the Company is at variable rates of interest, which causes the
Company to be vulnerable to increases in interest rates; (f) certain of such
indebtedness is secured by substantially all the assets of the Company and its
subsidiaries, possibly reducing its ability to obtain additional financing; and
(g) the Company may be hindered in its ability to adjust rapidly to changing
market conditions.
In connection with the Merger, the Company issued the Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock. The Series A
Preferred Stock and Series C Preferred Stock are mandatorily redeemable on
December 31, 2011 and 2012, respectively. Each series accrues dividends annually
at each series' respective rates. Dividends are payable only upon declaration by
the Board of Directors and only in accordance with the New Credit Facility and
the Indentures. Unpaid dividends accrue dividends annually at the same rate as
its respective preferred stock series.
Market Risk Sensitivity
In the fourth quarter of 1998 and in accordance with the terms of the New
Credit Agreement, 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 Merger, principally all of the Company's outstanding
debt 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 to the Company's Consolidated Financial Statements.
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.
24
<PAGE>
<TABLE>
<CAPTION>
Expected Fiscal Year of Maturity
(in thousands, except percentages)
Debt 1999 2000 2001 2002 2003 Thereafter Total FV
- ---- ------- -------- -------- -------- -------- ---------- -------- --------
<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 7.50% Exchangeable Debentures.
(b) Represents the Company's Notes and Debentures. The Debentures are reflected
at their respective face value of $140.9 million. At September 30, 1998,
the Company's 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. On the latest anniversary date, October 5,
1998, the three month LIBOR rate was 5.31%. The estimated cost to terminate this
swap is $2.9 million.
New Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standard ("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.
25
<PAGE>
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.
Year 2000
The Company continues to evaluate the risks associated with its operations
as a result of Year 2000 compliant issues. The Company has evaluated these risks
on three levels: internal and existing computer programs and applications;
Medical Equipment and Support Surface 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 are believed to be Year 2000 compliant.
The Company utilizes certain third party network equipment and software
products, which may or may not be Year 2000 compliant. While delays in the
implementation of the Year 2000 solutions for such systems which may not be Year
2000 compliant could adversely effect the Company's operations, at this time,
the Company believes that resolutions 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 Medical Equipment and
Support Surfaces. Should a material portion of such equipment not be Year 2000
compliant, there could be a material adverse effect on the Company's results of
operations. The Company has initiated 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. To date, approximately 95% of the equipment manufacturers have
responded to the Company's requests. For manufacturers that have not yet
responded, the Company has a formal follow up plan that is currently in process.
The Company expects to complete its evaluation process of its Medical Equipment
and Support Surface rental fleets by March 31, 1999. To date, based on responses
from the equipment manufacturers, the Company believes it will be required to
spend approximately $4.0 million to bring its entire rental fleet into Year 2000
compliance. The Company anticipates that all known modifications required to
make its entire rental fleet Year 2000 compliant will be completed by September
30, 1999. Currently, the Company is not able to estimate the costs associated
with Year 2000 issues for Medical Equipment and Support Surface products whose
manufacturers have not yet replied.
Although the Company has significant relationships with its customers and
suppliers, the Company has determined that no one individual customer or
supplier could create a material adverse effect as a result of being Year 2000
noncompliant. However, should a number of individual customers be noncompliant,
there could be a material adverse effect on the Company's operations and results
of operations.
Should a material portion of the Company's Medical Equipment and Support
Surface rental fleets fail to become Year 2000 compliant, an interruption in or
a failure of certain normal business activities or operations could occur. In
addition, there can be no assurance that the systems of other
26
<PAGE>
companies on which the Company relies will be timely converted to be Year 2000
compliant and, therefore, not have a material adverse effect on the Company.
The Company has not yet prepared any contingency plan for dealing with a
worst case scenario, but anticipates it will do so by the end of fiscal 1999.
The cost of compliance and the date on which the projects 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.
Once a significant portion of the Company's medical equipment and support
surface rental fleets are in compliance with Year 2000 issues, the Company
believes it has significantly reduced the possibility of significant
interruptions of normal operations.
The above discussion contains forward looking statements that are subject
to risks and uncertainties. Readers are cautioned not to place undue reliance on
these forward looking statements, which speak only as of the date of this
report. The Company undertakes no obligations to publicly release any revision
to these forward looking statements to reflect events or circumstances after the
date of this report.
27
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
Independent Auditors' Report 29
Consolidated Statements of Operations -
Three Years Ended September 30, 1998 30
Consolidated Balance Sheets - September 30, 1998 and 1997 31
Consolidated Statements of Stockholders' Equity (Deficiency) -
Three Years Ended September 30, 1998 32
Consolidated Statements of Cash Flows -
Three Years Ended September 30, 1998 33
Notes to Consolidated Financial Statements 34-51
28
<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 (deficiency), and
cash flows for each of the three years in the period ended September 30, 1998.
Our audits also include the financial statement schedule listed in the index at
Item 14(a)(2). These financial statements and the financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and the financial statement
schedule 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.
Also, in our opinion, the financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
December 30, 1998
29
<PAGE>
<TABLE>
<CAPTION>
MEDIQ INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
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
30
<PAGE>
<TABLE>
<CAPTION>
MEDIQ INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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
31
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(in thousands)
<TABLE>
<CAPTION>
Series B Cumulative
Compounding
Series A Perpetual
Preferred Stock Preferred Stock Common Stock
------------------- ------------------- ------------------- Capital in
Shares Shares Shares Excess of
Issued Amount Issued Amount Issued Amount Par Value
-------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance October 1, 1995 6,752 $ 3,376 19,127 $19,127 $22,124
Net loss
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
Net income
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
Net loss
Recapitalization (6,644) (3,322) 3,000 $ 30 (18,993) (20,057) 13,605
Issuance of warrants 743
Stock options exercised (25)
Dividends earned on
preferred stock
----- ------- ----- ----- ------- ------- -------
Balance September 30, 1998 -- $ -- 3,000 $ 30 1,075 $ 11 $41,450
===== ======= ===== ===== ======= ======= =======
</TABLE>
(Accumulated
Deficit)
Retained Treasury
Earnings Stock
------------ ----------
Balance October 1, 1995 $ (6,067) $ (7,043)
Net loss (15,704)
Conversion of preferred stock
to common stock
Stock options exercised 2,207
--------- --------
Balance September 30, 1996 (21,771) (4,836)
Net income 24,663
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 2,892 (4,806)
Net loss (31,554)
Recapitalization (332,033) 4,651
Issuance of warrants
Stock options exercised 155
Dividends earned on
preferred stock (6,149)
--------- --------
Balance September 30, 1998 $(366,844) $ --
========= ========
See Notes to Consolidated Financial Statements
32
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------
1998 1997 1996
-------- -------- ---------
<S> <C> <C> <C>
Cash Flows From Operating Activities (in thousands)
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
33
<PAGE>
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.
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.
34
<PAGE>
Note A - Summary of Significant Accounting Policies (Continued)
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 $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 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,
35
<PAGE>
Note B - Merger, Reorganization, Refinancing and Recapitalization (Continued)
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 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.
36
<PAGE>
Note C - Acquisitions (Continued)
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.
Year Ended September 30,
------------------------
1998 1997
-------- -------
(in thousands,
except per share amounts)
(Unaudited)
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
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.
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
37
<PAGE>
Note D - Dispositions (Continued)
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.
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.
38
<PAGE>
Note F - Inventory
September 30,
-----------------------------
1998 1997
-------- --------
(in thousands)
Raw materials $ 2,791 $ --
Finished goods 19,029 13,047
-------- --------
$ 21,820 $ 13,047
======== ========
Note G - Property, Plant and Equipment
September 30,
-----------------------------
1998 1997
-------- --------
(in thousands)
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
======== ========
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
September 30,
-----------------------------
1998 1997
-------- --------
(in thousands)
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
======= =======
Note I - Long Term Debt
September 30,
-----------------------------
1998 1997
-------- --------
(in thousands)
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
======== ========
September 30,
-----------------------------
1998 1997
-------- --------
(in thousands)
Subordinated debt:
11% senior subordinated notes due 2008 $190,000 $ --
7.50% exchangeable subordinated
debentures due 2003 514 10,055
-------- --------
$190,514 $ 10,055
======== ========
39
<PAGE>
Note I - Long Term Debt (Continued)
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 NewCredit Facility bear interest at a floating rate
based upon, at MEDIQ/PRN's option, (i) the higher of the prime rate of Banque
Nationale de Paris or the Federal funds effective rate plus 0.5% plus, in the
case of the Term Loans, a margin equal to 1.5%, and in the case of the Revolving
Loans and the Acquisition Loans, a margin equal to 1.0% or (ii) the London
Interbank Offered Rate ("LIBOR") plus, in the case of the Term Loans, a margin
equal to 2.75%, and in the case of the Revolving Loans and Acquisition Loans, a
margin equal to 2.25%. 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
40
<PAGE>
Note I - Long Term Debt (Continued)
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 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 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
41
<PAGE>
Note J - Financial Instruments (Continued)
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 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:
Capital Operating
Year Ending September 30, Leases Leases
- ------------------------- ------- ---------
(in thousands)
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
========
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.
42
<PAGE>
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, 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
43
<PAGE>
Note K - Commitments and Contingencies (Continued)
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.
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.
44
<PAGE>
Note L - Fair Value of Financial Instruments (Continued)
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
September 30,
-------------------------
1998 1997
-------- --------
(in thousands)
Mandatorily Redeemable Preferred Stock:
Series A 13.0% cumulative compounding $ 81,669 $ --
Series C 13.5% cumulative compounding 31,368 --
--------- --------
$ 113,037 $ --
========= ========
Preferred Stock in Stockholders'
Equity (Deficiency):
Series B 13.25% cumulative compounding
perpetual $ 30 $ --
Series A -- 3,322
--------- --------
$ 30 $ 3,322
========= ========
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,
45
<PAGE>
Note M - Preferred Stock (Continued)
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 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.
46
<PAGE>
Note N - Common Stock and Warrants (Continued)
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.
Note O - Income Taxes
Income tax (benefit) expense relating to continuing operations consisted
of:
Year Ended September 30,
------------------------------------------
1998 1997 1996
-------- -------- -------
(in thousands)
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)
======== ======== =======
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>
47
<PAGE>
Note O - Income Taxes (Continued)
Significant components of the Company's deferred tax assets and liabilities
were:
September 30,
------------------------
1998 1997
------- -------
Liabilities: (in thousands)
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
======= =======
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.
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.
48
<PAGE>
Note Q - Pension Plan (Continued)
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>
The actuarial assumptions used in determining net periodic pension costs
were:
Year Ended September 30,
-------------------------
1998 1997 1996
---- ---- ----
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%
49
<PAGE>
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)
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter
- ---- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 35,483 $ 42,566 $ 39,625 $ 38,286
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 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
50
<PAGE>
Note S - Business Segment Data (Continued)
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.
51
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
Incorporated by Reference
The information called for by Item 10 "Directors and Executive Officers of
the Registrant", Item 11 "Executive Compensation", Item 12 "Security Ownership
of Certain Beneficial Owners and Management" and Item 13 "Certain Relationships
and Related Transactions" is incorporated herein by reference to the Company's
definitive proxy statement for its Annual Meeting of Shareholders, which
definitive proxy statement is expected to be filed with the Commission not later
than 120 days after the end of the fiscal year to which this report relates.
52
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements and Supplementary Data
Page
----
Report of Independent Auditors 29
Consolidated Statement of Operations 30
Consolidated Balance Sheets 31
Consolidated Statements of Stockholders' Equity (Deficiency) 32
Consolidated Statements of Cash Flows 33
Notes to Consolidated Financial Statements 34-51
The response to this portion of Item 14 is submitted as a separate
section of this report.
(a)(2) Financial Statement Schedules
Included in Part IV of this report:
Schedule II - Valuation and Qualifying Accounts and Reserves
Other Schedules are omitted because they are not applicable.
(a)(3) Exhibits
<TABLE>
<CAPTION>
Exhibit Description Incorporation Reference
- ------- ----------- -----------------------
<S> <C> <C>
2.1 Agreement and Plan of Merger Exhibit 2.1 to Schedule 13D
among Cardinal Health, Inc., filed by Cardinal Health,
Panther Merger Corp., PCI Services, Inc. July 29, 1996.
Inc. and MEDIQ dated July 23, 1996.
2.2 Amended and restated Stock Purchase Exhibit 2(a) to Annual Report on Form 10-K
Agreement among MEDIQ, MEDIQ Investment filed by NutraMax Products, Inc. for the
Services, Inc. and NutraMax Products, fiscal year ended September 28, 1996.
Inc. dated November 20, 1996
2.3 Affiliate Letter to Cardinal Health, Exhibit 4 to Current Report on Form 8-K
Inc. from MEDIQ dated August 16, filed October 21, 1996.
1996.
2.4 Stock purchase agreement among MEDIQ, Exhibit 2.4 to Annual Report on Form 10-K
MEDIQ Investment Services, Inc. and filed on December 23, 1997.
InnoServ Technologies, Inc. dated
November 13, 1997.
2.5 Asset Purchase Agreement by and Exhibit 2.5 to Annual Report on
among MEDIQ Mobile X-Ray Services, Form 10-K filed on December 30, 1996.
Inc., MEDIQ and Symphony Diagnostic
Services No. 1, Inc. dated
November 6, 1996
2.6 Agreement and Plan of Merger between Annex A of the Proxy Statement/Prospectus
MQ Acquisition Corp and MEDIQ dated included in Registration Statement
January 14, 1998, as amended April 27, No. 333-46233 filed February 13, 1998.
1998
2.7 Stock Option Agreement among MEDIQ Annex E of the Proxy Statement/Prospectus
and the persons signatory thereto included in Form S-4 Registration Statement
dated January 14, 1998. No. 333-46233 filed February 13, 1998.
</TABLE>
53
<PAGE>
(a)(3) Exhibits (Continued)
<TABLE>
<CAPTION>
Exhibit Description Incorporation Reference
- ------- ----------- -----------------------
<S> <C> <C>
2.8 Stockholder Agreements between BRS Annex F of the Proxy Statement/Prospectus
and the Rotko Entities included in Form S-4 Registration Statement
No. 333-46233 filed February 13, 1998.
2.9 Rollover Agreement among MQ, the Annex G of the Proxy Statement/Prospectus
Rotko Entities and MEDIQ dated included in Form S-4 Registration Statement
January 14, 1998 No. 333-46233 filed February 13, 1998.
2.10 Asset Purchase Agreement among CH Exhibit 2 to Current Report on Form 8-K
Medical, Inc., MEDIQ/PRN Life Support filed April 28, 1998.
Services, Inc. and the other parties
Named therein dated April 24, 1998.
3.1 Certificate of Incorporation. Exhibit 3.1 to Form S-1 filed on July 13, 1998.
3.2 By-Laws. Exhibit 3.2 to Form S-1 filed on July 13, 1998.
4.1 Credit Agreement among MEDIQ/PRN Exhibit 4.3 to Current Report on
Life Support Services, Inc., the Form 8-K filed January 15, 1998.
Lender Parties party thereto, Banque
Nationale de Paris, NationsBank, N.A.
and Credit Suisse First Boston dated
May 29, 1998.
4.2 Indenture dated as of July 1, 1993 Exhibit 4.1 to S-2
between MEDIQ and First Union Bank, Registration Statement
N.A. (formerly First Fidelity Bank, No. 33-61724 originally filed
N.A.) for 7.50% Exchangeable on April 28, 1993, as amended.
Subordinated Debentures due 2003.
4.3 Form of 7.50% Exchangeable Exhibit 4.2 to S-2 Registration
Subordinated Debentures due 2003 Statement No. 33-61724 originally
filed on April 28, 1993 as amended
4.4 Indenture dated as of May 15, 1998 Exhibit 4.2 to Current Report on Form 8-K
among MEDIQ/PRN Life Support Services, filed on June 15, 1998.
Inc., the Subsidiary Guarantors and
United States Trust Company of New York
for 11% Senior Subordinated Notes due
2008, Form of Old Note and Form of New
Note.
4.5 Indenture dated as of May 15, 1998 Exhibit 4.1 to Current Report on Form 8-K
between MEDIQ and United States Trust filed on June 15, 1998.
Company of New York for 13% Senior
Discounted Debentures due 2009, Form of
Old Note and Form of New Note.
4.6 Warrant Agreement dated May 29, 1998 Exhibit 4.4 to Current Report on Form 8-K
between MEDIQ and United States Trust filed on June 15, 1998.
Company of New York and Form of Warrant.
4.7 Registration Rights Agreement dated Exhibit 4.5 to Current Report on Form 8-K
May 21, 1998 among MEDIQ, MEDIQ/PRN filed June 15,1998.
Life Support Services, Inc., Subsidiary
Guarantors, Credit Suisse First Boston,
NationsBanc Montgomery Securities LLC and
Banque Nationale de Paris.
</TABLE>
54
<PAGE>
(a)(3) Exhibits (Continued)
<TABLE>
<CAPTION>
Exhibit Description Incorporation Reference
- ------- ----------- -----------------------
<S> <C> <C>
4.8 Registration Rights Agreement dated as Exhibit 4.6 to Current Report on Form 8-K
of May 29, 1998 among MEDIQ, MEDIQ/PRN filed June 15, 1998.
Life Support Services, Inc., the
investors named therein and MQ
Acquisition Corporation.
4.9 Securities Purchase and Holders Exhibit 4.7 to Current Report on Form 8-K
Agreement dated as of May 29, 1998 filed June 15, 1998.
among MEDIQ, the investors named therein
and MQ Acquisition Corporation.
4.10 Asset Purchase Agreement dated June 26, Exhibit 4 to Quarterly Report on Form 10-Q
1998 among MEDIQ/PRN Life Support filed August 14, 1998.
Services, Inc., National Patient Care
Systems, Inc. and other parties
named therein.
10.1 MEDIQ Executive Security Plan Exhibit 10.6 to Annual Report on Form 10-K
filed on January 12, 1996.
10.2 Employment contract with Thomas E. Exhibit 10.9 to Annual Report on Form 10-K
Carroll dated as of April 27, 1995. filed on January 12, 1996.
10.2(a) Amendment No. 1 to Employment Exhibit 10.9(a) to Annual Report on
contract with Thomas E. Carroll Form 10-K filed on December 23, 1997.
dated as of November 14, 1997.
10.3 Employment contract with Jay M. Exhibit 10.10 to Annual Report on Form 10-K
Kaplan dated as of June 20, 1995. filed on January 12, 1996.
10.4 Letter Agreement dated January 14, Exhibit 2.7 to Current Report on Form 8-K
1998 between MEDIQ and Bruckmann, filed on January 21, 1998.
Rosser, Sherrill & Company, Inc.
10.5 1998 MEDIQ Incorporated Stock Option Filed herewith.
Plan adopted October 1, 1998.
11 Statement re: computation of per Not required.
share earnings.
21 Subsidiaries of the Registrant. Filed herewith.
23 Consent of Deloitte & Touche LLP Filed herewith.
27 Financial Data Schedule Filed herewith.
</TABLE>
(b) No reports on Form 8-K were filed during the quarter ended September 30,
1998.
55
<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
Description Balance at Charged to (1) Balance at
Beginning Costs and Charged to (2) End of
of Period Expenses Other Accounts Deductions 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.
56
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: January 4, 1999 MEDIQ Incorporated
/s/ Thomas E. Carroll
-------------------------------------
BY: Thomas E. Carroll
President and
Chief Executive Officer
/s/ Jay M. Kaplan
-------------------------------------
BY: Jay M. Kaplan
Senior Vice President - Finance,
Treasurer and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated:
Signature Title Date
--------- ----- ----
/s/ Thomas E. Carroll Director, Chief Executive January 4, 1999
- ------------------------ Officer and President
Thomas E. Carroll
/s/ Bruce C. Bruckmann Director January 4, 1999
- ------------------------
Bruce C. Bruckmann
/s/ Stephen C. Sherrill Director January 4, 1999
- ------------------------
Stephen C. Sherrill
/s/ Robert T. Thompson Director January 4, 1999
- ------------------------
Robert T. Thompson
/s/ L. John Wilkerson Director January 4, 1999
- ------------------------
L. John Wilkerson
/s/ Michael J. Rotko Director January 4, 1999
- ------------------------
Michael J. Rotko
57
1998 MEDIQ INCORPORATED
STOCK OPTION PLAN
Date Adopted: October 1, 1998
<PAGE>
1998 MEDIQ INCORPORATED
STOCK OPTION PLAN
1. Purpose of the Plan
The purpose of the Plan is to assist the Company, its Subsidiaries and
Affiliates in attracting and retaining valued employees by offering them a
greater stake in the Company's success and a closer identity with it, and to
encourage ownership of the Company's stock by such employees.
2. Definitions
2.1. "Affiliate" means any entity other than the Subsidiaries in which
the Company has a substantial direct or indirect equity interest, as determined
by the Board.
2.2. "Available Options" shall have the meaning ascribed to such term in
Section 5 of the Plan.
2.3. "Annual Available Options" shall have the meaning ascribed to such
term in Section 5 of the Plan.
2.4. "Board" means the Board of Directors of the Company.
2.5. "Code" means the Internal Revenue Code of 1986, as amended.
2.6. "Common Stock" means the Common Stock of the Company, par value
$.01 per share, or such other class or kind of shares or other securities
resulting from the application of Section 8.
2.7. "Company" means MEDIQ Incorporated, a Delaware corporation, or any
successor corporation.
2.8. "Consolidated EBITDA" means for any period, the sum of Consolidated
Net Income from continuing operations, before either discontinued operations or
extraordinary items, plus (a) net Consolidated Interest Expense (defined as
Consolidated Interest Expenses less interest income), (b) other non-operating
income and expenses, (c) all provision for Federal, state and other income taxes
for the Company and its Subsidiaries on a consolidated basis and (d)
depreciation, amortization and other non-cash charges for the Company and its
Subsidiaries on a consolidated basis. Interest income shall be included in
Consolidated EBITDA only to the extent it exceeds Consolidated Interest Expense.
Each element of Consolidated EBITDA shall be determined in accordance with GAAP
applied on a consistent basis.
<PAGE>
2.9. "Consolidated Interest Expense" means for any period, all interest
expense, including the amortization of debt discount and premium, the
amortization of deferred financing fees and the interest component under capital
leases for the Company and its Subsidiaries on a consolidated basis determined
in accordance with GAAP applied on a consistent basis.
2.10. "Consolidated Net Income" means for any period, the net income of
the Company and its Subsidiaries on a consolidated basis determined in
accordance with GAAP applied on a consistent basis.
2.11. "EBITDA Target" means the Consolidated EBITDA target established
by the Board for each of (i) the fiscal year 1999, (ii) the fiscal year 2000,
(iii) the fiscal year 2001, and (iv) the fiscal year 2002.
2.12. "Effective Date" shall have the meaning ascribed to such term in
Section 9 of the Plan.
2.13. "Effective Period" shall have the meaning ascribed to such term in
Section 9 of the Plan.
2.14. "Employee" means an officer or other key employee of the Company,
a Subsidiary or an Affiliate including a director who is such an employee.
2.15. "Enterprise Value" means Consolidated EBITDA before management
fees for a fiscal year multiplied by 8.18, less the actual debt and preferred
stock of the Company.
2.16. "Enterprise Value Target" means the target Enterprise Value
established by the Board for each of (i) the fiscal year 1999, (ii) the fiscal
year 2000, (iii) the fiscal year 2001 and (iv) the fiscal year 2002.
2.17. "Fair Market Value" means on any given date, the value per share
of the Common Stock as determined by the Board if the Common Stock is not traded
in a public market, and, if the Common Stock is traded in a public market, shall
be, if the Common Stock is listed on a national securities exchange or included
on the NASDAQ National Market, the last reported sale price thereof on such
date, or, if the Common Stock is listed on a national securities exchange but is
not traded or reported on such date, the last reported sale price on the last
preceding day on which the Common Stock was traded or reported, or if the Common
Stock is included on the NASDAQ National Market but is not traded or reported on
such date, the mean between the last reported "bid" and "asked" price thereof on
such date, as reported on NASDAQ National Market or, if not so reported, as
reported by the National Daily Quotation Bureau, Inc. or as reported in the
customary financial reporting service, as applicable and as the Board
determines.
-2-
<PAGE>
2.18. "GAAP" means Generally Accepted Accounting Principles applicable
in the United States.
2.19. "Grantee" means an Employee to whom an Option is granted.
2.20. "Holder" means a Grantee or a Permitted Transferee, as applicable.
2.21. "1934 Act" means the Securities Exchange Act of 1934, as amended.
2.22. "Option" means any stock option granted from time to time under
Section 6 or Section 7 of the Plan.
2.23. "Option Price" shall have the meaning ascribed thereto in Section
6 of the Plan.
2.24. "Permitted Transferee" means the spouse, parents, siblings,
children or grandchildren (in each case, natural or adopted) of a Grantee, any
trust for his or her benefit or the benefit of his or her spouse, parents,
siblings, children or grandchildren (in each case, natural or adopted), or any
corporation or partnership in which the direct and beneficial owner of all of
the equity interest in such corporation or partnership is such individual
Grantee or Permitted Transferee (or any trust for the benefit of such persons).
2.25. "Plan" means the 1998 MEDIQ Incorporated Stock Option Plan herein
set forth, as amended from time to time.
2.26. "Rule 16b-3" means Rule 16b-3, or any successor thereto,
promulgated by the Securities and Exchange Commission under the 1934 Act.
2.27. "Retirement" means retirement from the active employment of the
Company, a Subsidiary or an Affiliate pursuant to the relevant provisions of the
applicable pension plan of such entity or as otherwise determined by the Board.
2.28. "Revenue" means for any period, the net revenue of the Company on
a consolidated basis determined in accordance with GAAP applied on a consistent
basis.
2.29. "Revenue Target" means the Revenue target established by the Board
for each of (i) the fiscal year 1999, (ii) the fiscal year 2000, (iii) the
fiscal year 2001, and (iv) the fiscal year 2002.
2.30. "Significant Corporate Event" means: (i) an initial public
offering of the Common Stock; or (ii) a sale of the business of the Company to
any person, firm, entity or group which, together with its affiliates, prior to
such transaction, did not own more than 50% of the outstanding Common Stock.
-3-
<PAGE>
2.31. "Subsidiary" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company (or any subsequent
parent of the Company) if each of the corporations other than the last
corporation in the unbroken chain owns stock possessing 50% or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
3. Eligibility
Any Employee is eligible to receive Options.
4. Administration and Implementation of Plan
The Board is authorized, subject to the provisions of the Plan, from time
to time to (i) select Employees to receive awards under the Plan, (ii) determine
the type and amount of awards to be granted to participants, (iii) determine the
terms and conditions of such awards and the terms of agreements entered into
with participants, (iv) establish such rules and regulations and to appoint such
agents as it deems appropriate for the proper administration of the Plan, and
(v) make such determinations under, and such interpretations of, and to take
such steps in connection with, the Plan or the awards granted hereunder as it
deems necessary or advisable. Any questions of interpretation determined by the
Board shall be final and binding upon all persons. The Board may delegate any or
all of these powers to the Compensation Committee ("Committee") of the Board,
consisting of at least two directors, each of whom shall be "disinterested
persons" as defined in Rule 16b-3(c)(2)(i) promulgated by the U.S. Securities
and Exchange Commission ("SEC") under the 1934 Act, and each of whom shall also
be "outside directors" as defined in Treas. Reg. ss. 1.162-27(e)(3). In
particular, the Board shall delegate to the Committee all powers with respect to
the granting of awards that are intended to comply with the requirements of Rule
16b-3 of the 1934 Act and section 162(m) of the Code so that such awards will be
exempt from short-swing liability and from section 162(m) of the Code's annual
limit on the deduction of compensation.
5. Shares of Stock Subject to the Plan
Subject to adjustment as provided in Section 8, the total number of shares
of Common Stock with respect to which Options may be granted under the Plan
shall be 61,453 (the "Available Options"). Each year during the Effective Period
the total number of shares of Common Stock with respect to which Options may be
granted under the Plan shall be 15,363 (the "Annual Available Options").
5.1. The maximum number of shares of Common Stock with respect to which
Options may be granted to any Employee during the term of the Plan is 5,121
shares (the "Individual Limit"). Subject to Section 8, any Option that is
-4-
<PAGE>
canceled or repriced by the Committee shall count against the Individual Limit.
Notwithstanding the foregoing, the Individual Limit may be adjusted to reflect
the effect on Options of any transaction or event described in Section 8.
5.2. Any shares of Common Stock issued by the Company under the Plan
shall reduce the shares of Common Stock available for Options under the Plan and
shall be counted against the Individual Limit applicable to the individual to
whom the shares are issued. Any shares of Common Stock issued hereunder may
consist, in whole or in part, of authorized and unissued shares or treasury
shares of Common Stock. If any shares of Common Stock subject to any Option
granted hereunder are forfeited or such Option otherwise terminates without the
issuance of such shares or the payment of other consideration in lieu of such
shares, the shares subject to such Option, to the extent of any such forfeiture
or termination, shall again be available under the Plan.
6. Options
Options give the Holder the right to purchase a specified number of shares
of Common Stock from the Company for a specified time period at a fixed price.
Options granted to Grantees shall be non-qualified stock options and are not
intended to be and shall not be incentive stock options as defined in Section
422 of the Code. The grant of Options shall be subject to the following terms
and conditions:
6.1. Option Grants: Options shall be evidenced by Option agreements.
Such agreements shall be reasonably uniform and not inconsistent with the
requirements of the Plan, and may contain such other provisions in addition to
those required by this Article 6, as the Board shall deem advisable.
6.2. Option Price: The price of the shares of Common Stock under each
Option shall be determined by the Board, but shall be a price not less than 100
percent of the Fair Market Value of Common Stock at the date such Option is
granted, as determined by the Board (the "Option Price").
6.3. Term of Options: The Option agreements shall specify when an Option
may be exercisable and the terms and conditions applicable thereto. The term of
an Option shall in no event be greater than ten (10) years and no Option may be
exercisable sooner than six months from date of grant.
-5-
<PAGE>
6.4. Exercise of Options; Payment of Option Price: Options may be
exercised from time to time by giving written notice to the Company, or the
agent of the Company, specifying the number of shares to be purchased. The
notice of exercise shall be accompanied by payment in full of the Option Price
in cash or the Option Price may be paid in whole or in part through the transfer
to the Company of shares of Common Stock.
In the event such Option Price is paid in whole or in part with shares of
Common Stock, the portion of the Option Price so paid shall be equal to the Fair
Market Value, as of the date of exercise of the Option, of such shares or if the
date of exercise is not a trading day the Fair Market Value of the shares on the
immediately preceding trading day. The Company shall not issue or transfer
Common Stock upon exercise of an Option until the Option Price is fully paid.
6.5. Termination by Death: If a Grantee's employment by the Company, a
Subsidiary or Affiliate terminates by reason of death, any unexercised Option
granted to such Grantee (whether held by such Grantee or a subsequent Holder)
under this Section 6 may thereafter be exercised (to the extent such Option was
exercisable at the time of death or on such accelerated basis as the Board may
determine at or after grant) by, where appropriate, a subsequent Holder, if any,
or the Holder's transferee or legal representative, for a period of six (6)
months from the date of death or until the expiration of the stated term of the
Option, whichever period is shorter, or for such other period as the Board shall
determine.
6.6. Termination by Reason of Retirement or Disability: If a Grantee's
employment by the Company, a Subsidiary or Affiliate terminates by reason of
disability (as determined by the Board) or Retirement, any unexercised Option
granted to the Grantee (whether held by such Grantee or a subsequent Holder)
under this Section 6 may thereafter be exercised (to the extent it was
exercisable at the time of termination or on such accelerated basis as the Board
may determine at or after grant) by the Holder (or, where appropriate, the
Holder's transferee or legal representative), for a period of three (3) months
from the date of such termination of employment or until the expiration of the
stated term of the Option, whichever period is shorter, or for such other period
as the Board shall determine.
6.7. Other Termination: If a Grantee's employment by the Company,
Subsidiary or Affiliate terminates for any reason other than death, disability
or Retirement, all unexercised Options awarded to the Grantee (whether held by
such Grantee or a subsequent Holder) under this Section 6 shall terminate at the
end of the thirtieth day following the date of such termination of employment.
7. Award of Options.
7.1. If the Company meets or exceeds the Enterprise Value Target for any
year, previously granted Options will vest as follows:
(a) Between 0% and 33.3% of any outstanding but unvested Options
shall vest in any fiscal year before those Options expire beginning with the
-6-
<PAGE>
fiscal year ending September 30, 1999, in which the Company meets or exceeds 90%
of the Revenue Target for that year, on a linear basis such that, if, for
example, the Company achieves 95% of the Revenue Target, 16.65% of the Annual
Available Options will vest; and
(b) Options to acquire between 0% and 66.7% of any outstanding but
unvested Options shall vest in any fiscal year before those Options expire
beginning with the fiscal year ending September 30, 1999, in which the Company
meets or exceeds 90% of the EBITDA Target for that year, on a linear basis such
that, if, for example, the Company achieves 95% of the EBITDA Target, 33.35% of
the Annual Available Options will vest.
7.2. Any Options that do not vest in the year of grant shall remain
outstanding subject to vesting in any later year until they expire or terminate.
7.3. If at any time during the Effective Period a Significant Corporate
Event occurs, any unvested Options shall immediately vest as if the Enterprise
Value Target, the Revenue Target and the EBITDA Target had each been met for the
period including the Significant Corporate Event.
8. Adjustments upon Changes in Capitalization
In the event of a reorganization, recapitalization, stock split, reverse
stock-split, spin-off, split-off, split-up, stock dividend, issuance of stock
rights, combination of shares, merger, consolidation or any other change in the
corporate structure of the Company affecting Common Stock, or any distribution
to stockholders other than a cash dividend, the Board shall make appropriate
adjustment in the number and kind of shares authorized by the Plan and any
adjustments to outstanding Options as it determines appropriate. No fractional
shares of Common Stock shall be issued in connection with an Option hereunder
pursuant to such an adjustment. The Fair Market Value of any fractional shares
resulting from adjustments pursuant to this Section shall be paid in cash to the
Holder. If during the term of any Option granted hereunder the Company shall be
merged into or consolidated with or otherwise combined with or acquired by a
person or entity, or there is a divisive reorganization or a liquidation or
partial liquidation of the Company, then at the election of the Committee, the
Company may choose to take no action with regard to the Options granted under
the Plan or to take any of the following courses of action:
(a) Not less than 15 days nor more than 60 days prior to any such
transaction, all Holders shall be notified that their Options shall expire on
the 15th day after the date of such notice, in which event all Holders shall
have the right to exercise all of their Options prior to such new expiration
date; or
(b) take such other action as the Board shall determine to be
reasonable under the circumstances to permit the Holder to realize the value of
such Option (which value the Board may in its discretion determine equals the
excess of the fair market value of the consideration to be received in such
-7-
<PAGE>
merger, consolidation, combination, acquisition, reorganization or liquidation
had such Option been exercised immediately prior thereto, over the option price
of such Option), including without limitation paying cash to such Holder equal
to the value of the Option or requiring the acquiring corporation to grant
options or stock to such Holder having a value equal to the value of the Option.
Such Holder shall comply with any such action of the Board.
9. Effective Date, Termination and Amendment
The Plan, as amended, shall become effective on October 1, 1998 (the
"Effective Date"), subject to approval of its stockholders as well as the
approval, if necessary, of the stockholders of any Affiliate or Subsidiary. The
Plan shall remain in full force and effect until the earlier of ten (10) years
from the Effective Date, or the date the Plan is terminated by the Board (the
"Effective Period"). The Board shall have the power to amend, suspend or
terminate the Plan at any time.
Termination of the Plan pursuant to this Section 9 shall not affect Options
outstanding under the Plan at the time of termination.
10. Transferability
Except as provided below, Options may not be pledged, assigned or
transferred for any reason during the Holder's lifetime, and any attempt to do
so shall be void and the relevant Option shall be forfeited; provided, however
that Options may be pledged, assigned or transferred (i) at the discretion of
the Board, during the Grantee's lifetime by the Grantee to a Permitted
Transferee, (ii) at the discretion of the Board, by a Permitted Transferee to
another Permitted Transferee or (iii) as otherwise permitted by the Board;
provided, further, that any such transfer shall comply with all terms and
conditions established by the Board and any term, condition or restriction
contained in the agreement entered into with the Holder. Any transferee of the
Holder, shall, in all cases, be subject to the provisions of the agreement
between the Company and the Holder.
11. General Provisions
11.1. Nothing contained in the Plan, or any Option granted pursuant to
the Plan, shall confer upon any Employee any right with respect to continuance
of employment by the Company, a Subsidiary or Affiliate, nor interfere in any
way with the right of the Company, a Subsidiary or Affiliate to terminate the
employment of any Employee at any time. A Grantee shall have no right as a
stockholder with respect to any shares covered by such Grantee's Options until
the date of the issuance of a stock certificate to such Grantee for such shares.
11.2. For purposes of this Plan, transfer of employment between the
Company and its Subsidiaries and Affiliates shall not be deemed termination of
employment.
-8-
<PAGE>
11.3. Holders shall be responsible to make appropriate provision for all
taxes required to be withheld in connection with the grant of any Option and the
exercise thereof. Such responsibility shall extend to all applicable Federal,
state, local or foreign withholding taxes. Upon exercise of Options, the Company
shall, at the election of the Company, have the right to retain the number of
shares of Common Stock whose value equals the amount to be withheld in
satisfaction of the applicable withholding taxes. Agreements evidencing Options
shall contain appropriate provisions to effect withholding in this manner.
11.4. Without amending the Plan, Options may be granted to Employees who
are foreign nationals or employed outside the United States or both, on such
terms and conditions different from those specified in the Plan as may, in the
judgment of the Board, be necessary or desirable to further the purpose of the
Plan.
11.5. Upon exercise of an Option, the Holder shall be required to make
such representations and furnish such information as may, in the opinion of
counsel for the Company, be appropriate to permit the Company to issue or
transfer the shares of Common Stock in compliance with the provisions of
applicable federal or state securities laws. The Company, in its discretion, may
postpone the issuance and delivery of shares of Common Stock upon any exercise
of an Option, until completion of such registration or other qualification of
such shares under any federal or state laws, or stock exchange listing, as the
Company may consider appropriate. The Company is not obligated to register or
qualify the shares of Common Stock issued pursuant to Options under federal or
state securities laws and may refuse to issue such shares if neither
registration nor exemption therefrom is practical. The Board may require that
prior to the issuance or transfer of any shares of Common Stock upon exercise of
an Option, the recipient enter into a written agreement to comply with any
restrictions on subsequent disposition that the Board or the Company deems
necessary or advisable under any applicable federal and state securities laws.
Certificates representing the shares of Common Stock issued hereunder may be
legended to reflect such restrictions.
11.6. To the extent that Federal laws (such as the 1934 Act, the Code or
the Employee Retirement Income Security Act of 1974) do not otherwise control,
the Plan and all determinations made and actions taken pursuant hereto shall be
governed by the law of Delaware and construed accordingly.
11.7. The Board may amend any outstanding Options to the extent it deems
appropriate. Such amendment may be made by the Board without the consent of the
Holder, except in the case of amendments adverse to the Holder, in which case
the Holder's consent is required to any such amendment.
-9-
EXHIBIT 21
Subsidiaries of the Registrant
<PAGE>
EXHIBIT 21
Set forth below is a list of MEDIQ Incorporated's subsidiaries as of
December 7, 1998, 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
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.
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement
No. 33-61724 of MEDIQ Incorporated and subsidiaries on Form S-2 of our report
dated December 30, 1998, appearing in this Annual Report on Form 10-K of MEDIQ
Incorporated and subsidiaries for the year ended September 30, 1998.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
December 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
ART. 5 FOR FORM 10-K
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,411
<SECURITIES> 0
<RECEIVABLES> 64,091
<ALLOWANCES> 11,432
<INVENTORY> 21,820
<CURRENT-ASSETS> 86,813
<PP&E> 259,666
<DEPRECIATION> 155,749
<TOTAL-ASSETS> 309,218
<CURRENT-LIABILITIES> 37,039
<BONDS> 468,004
11
113,037
<COMMON> 30
<OTHER-SE> (325,394)
<TOTAL-LIABILITY-AND-EQUITY> 309,218
<SALES> 27,928
<TOTAL-REVENUES> 180,916
<CGS> 22,659
<TOTAL-COSTS> (199,620)
<OTHER-EXPENSES> (5,072)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,894
<INCOME-PRETAX> (41,526)
<INCOME-TAX> (12,455)
<INCOME-CONTINUING> (29,071)
<DISCONTINUED> 2,044
<EXTRAORDINARY> (4,527)
<CHANGES> 0
<NET-INCOME> (31,554)
<EPS-PRIMARY> (2.19)
<EPS-DILUTED> (2.19)
</TABLE>
