UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarter ended: June 30, 1999 Commission File Number: 1-8147
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MEDIQ Incorporated
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(Exact name of registrant as specified in its charter)
Delaware 51-0219413
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One MEDIQ Plaza, Pennsauken, New Jersey 08110
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 662-3200
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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 ____
---
As of August 9, 1999, there were outstanding 1,119,048 shares of Common Stock,
par value $.01.
1
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MEDIQ INCORPORATED AND SUBSIDIARIES
Quarter Ended June 30, 1999
INDEX
Page
Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations- 4
Three and Nine Months Ended June 30, 1999 and 1998
(Unaudited)
Condensed Consolidated Balance Sheets- 5
June 30, 1999 (Unaudited) and
September 30, 1998
Condensed Consolidated Statements of Cash Flows- 6
Nine Months Ended June 30, 1999 and 1998
(Unaudited)
Notes to Condensed Consolidated Financial 7 - 9
Statements (Unaudited)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10 - 14
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 6. Exhibits and Reports on Form 8-K 15
2
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MEDIQ INCORPORATED AND SUBSIDIARIES
Quarter Ended June 30, 1999
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
3
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Rental $ 41,602 $ 33,706 $ 128,743 $ 103,700
Sales 12,848 6,692 28,925 20,671
Other 4,005 2,543 9,311 7,549
--------- --------- --------- ---------
58,455 42,941 166,979 131,920
Costs and Expenses:
Cost of sales 10,197 5,455 22,589 16,725
Operating 17,823 14,415 48,117 42,864
Selling 7,062 3,912 20,128 11,469
General and administrative 6,005 5,186 18,380 14,534
Merger charges -- 34,204 -- 34,567
Depreciation and amortization 11,301 15,064 31,600 31,650
--------- --------- --------- ---------
52,388 78,236 140,814 151,809
--------- --------- --------- ---------
Operating Income (Loss) 6,067 (35,295) 26,165 (19,889)
Other (Charges) and Credits:
Interest expense (13,956) (7,098) (40,768) (14,333)
Other-net 72 235 465 714
--------- --------- --------- ---------
Loss from Continuing Operations before
Income Taxes and Extraordinary Item (7,817) (42,158) (14,138) (33,508)
Income Tax Benefit (1,626) (15,632) (3,784) (11,744)
--------- --------- --------- ---------
Loss before Extraordinary Item (6,191) (26,526) (10,354) (21,764)
Extraordinary Item - Early Retirement of Debt
(net of taxes) -- (4,098) -- (4,098)
--------- --------- --------- ---------
Net Loss (6,191) (30,624) (10,354) (25,862)
Dividends on Preferred Stock (4,802) (1,600) (13,900) (1,600)
--------- --------- --------- ---------
Net Loss Available for Common Shareholders $ (10,993) $ (32,224) $ (24,254) $ (27,462)
========= ========= ========= =========
Basic and Diluted Per Share Amount:
Continuing operations, net of preferred dividends $ (10.15) $ (1.68) $ (22.51) $ (1.03)
Extraordinary item -- (.25) -- (.18)
--------- --------- --------- ---------
Available for common shareholders $ (10.15) $ (1.93) $ (22.51) $ (1.21)
========= ========= ========= =========
Weighted Average Number of Common Shares Outstanding:
Basic and Diluted 1,083 16,702 1,077 22,650
========= ========= ========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
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MEDIQ INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
----------- ----------------
(Unaudited) (See note below)
Assets
<S> <C> <C>
Current Assets:
Cash $ -- $ 2,411
Accounts receivable (net of allowance of $9,370 and
$11,432, respectively) 75,148 52,659
Inventories 27,321 21,820
Other current assets 13,061 9,923
--------- ---------
Total Current Assets 115,530 86,813
Property, Plant and Equipment (net of accumulated depreciation
and amortization of $180,647 and $155,749, respectively) 111,040 103,917
Goodwill (net of accumulated amortization of $21,201
and $16,658, respectively) 153,200 91,121
Deferred Financing Costs (net of accumulated amortization
of $2,650 and $862, respectively) 19,523 20,013
Other Assets 10,354 7,354
--------- ---------
Total Assets $ 409,647 $ 309,218
========= =========
Liabilities and Stockholders' Deficiency
Current Liabilities:
Accounts payable $ 20,631 $ 14,152
Accrued expenses 16,535 20,569
Other current liabilities 1,147 281
Current portion of long term debt 8,273 2,037
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Total Current Liabilities 46,586 37,039
Senior Debt 371,335 277,490
Subordinated Debt 190,514 190,514
Deferred Income Taxes 11,861 14,019
Other Liabilities 5,055 2,472
Mandatorily Redeemable Preferred Stock 131,676 113,037
Stockholders' Deficiency (347,380) (325,353)
--------- ---------
Total Liabilities and Stockholders' Deficiency $ 409,647 $ 309,218
========= =========
</TABLE>
Note: The balance sheet at September 30, 1998 has been condensed from the
audited financial statements at that date.
See Notes to Condensed Consolidated Financial Statements
5
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MEDIQ INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended June 30,
1999 1998
--------- ---------
<S> <C> <C>
Cash Flows From Operating Activities
Net loss $ (10,354) $ (25,862)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities 18,514 23,943
--------- ---------
Net cash provided by (used in) operating activities 8,160 (1,919)
Cash Flows From Investing Activities
Purchases of equipment (18,254) (17,909)
Acquisitions (82,947) (11,032)
Collection of notes receivable -- 2,250
Other 328 654
--------- ---------
Net cash used in investing activities (100,873) (26,037)
Cash Flows From Financing Activities
Borrowings 93,000 151,499
Debt repayments (1,400) (133,872)
Deferred financing fees (1,298) (20,056)
Issuance of subordinated notes -- 190,000
Issuance of common and preferred stocks -- 148,235
Issuance of units -- 75,000
Repurchases of common and preferred stocks -- (377,416)
Other -- 130
--------- ---------
Net cash provided by financing activities 90,302 33,520
--------- ---------
(Decrease) increase in cash (2,411) 5,564
Cash:
Beginning balance 2,411 3,639
--------- ---------
Ending balance $ -- $ 9,203
========= =========
Noncash investing and financing activity:
Capital stock issued in an acquisition $ 10,000 --
=========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
6
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MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A - Condensed Consolidated Financial Statements
The condensed consolidated balance sheet as of June 30, 1999 and the condensed
consolidated statements of operations and cash flows for the three and nine
months ended June 30, 1999 and 1998 have been prepared by the Company, without
audit. In the opinion of management, all adjustments (consisting only of normal,
recurring adjustments) necessary to present fairly the financial position,
results of operations and cash flows at June 30, 1999 and for all periods
presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These condensed consolidated financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's September 30, 1998 Annual Report on Form 10-K.
The results of operations for the period ended June 30, 1999 are not necessarily
indicative of the operating results for the full year.
Certain reclassifications have been made to conform prior year balances to the
current year presentation.
Note B - Inventory
The components of inventory were as follow:
June 30, September 30,
1999 1998
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(in thousands)
Raw materials $ 1,587 $ 2,791
Finished goods 25,734 19,029
-------- --------
$ 27,321 $ 21,820
======== ========
Note C - Per Share Amounts
Warrants to purchase shares of the Company's Common Stock were excluded from the
computation of per share amounts for the three and nine months ended June 30,
1999 and 1998 because they were antidilutive in each period. At June 30, 1999
and 1998, the total number of shares of Common Stock underlying the warrants was
91,209. Options to purchase shares of the Company's Common Stock were also
excluded from the computation of per share amounts for the three and nine months
ended June 30, 1999 because they were antidilutive. The number of options
outstanding at June 30, 1999 was 51,853. No options were outstanding at June 30,
1998. The disparity in per share amounts for the respective periods presented in
the Condensed Consolidated Statements of Operations is attributable to the
Company's recapitalization that occurred in May 1998.
Note D - Long Term Debt
In May 1999, MEDIQ/PRN Life Support Services, Inc. ("MEDIQ/PRN"), a wholly owned
subsidiary of the Company, amended its $325.0 million credit agreement with
Banque Nationale de Paris ("BNP") by reducing the borrowing capacity under the
acquisition facility from $75.0 million to $50.0 million and establishing a
subfacility B under the revolving credit facility with a borrowing capacity of
$25.0 million. Borrowings under subfacility B bear interest at a floating rate
based upon, at MEDIQ/PRN's option, (i) the higher of the prime rate of BNP or
the Federal funds effective rate plus 0.5%, plus a margin of 1.0% or (ii) the
London Interbank Offered Rate, plus a margin of 2.25%. Principal amounts
outstanding on November 30, 1999 under subfacility B will amortize quarterly
starting March 31, 2000 in increasing increments as scheduled in the modified
credit agreement. Any remaining principal
7
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Note D - Long Term Debt (continued)
balance is due on the facility's termination date of June 30, 2004. Other terms
and conditions of subfacility B are generally the same as those existing for the
acquisition and revolving credit facilities. MEDIQ/PRN was charged a fee of
approximately $1.0 million to effect the amendment to the credit agreement. This
fee is being amortized over the remaining term of the facilities of
approximately five years.
In June 1999, MEDIQ/PRN borrowed $22.2 million available under the $50.0 million
acquisition facility, $25.0 million under subfacility B and approximately $2.5
million under the revolving credit facility to fund the cash portion of the
acquisition of HTD Corporation ("HTD"). (see Note E)
Note E - Acquisition
On June 15, 1999, the Company, through MEDIQ/PRN, acquired all of the issued and
outstanding common stock of HTD and certain of its subsidiaries pursuant to an
Agreement and Plan of Merger dated June 14, 1999. Total consideration paid by
the Company was approximately $59.7 million, comprising $49.7 million in cash
and $10.0 million aggregate value of capital stock of the Company. The capital
stock of the Company issued consisted of 44,225 shares of Common Stock, 513,548
shares of Series A 13.0% Cumulative Compounding Preferred Stock ("Series A"),
143,303 shares of Series B 13.25% Cumulative Compounding Perpetual Preferred
Stock ("Series B") and 264,438 shares of Series C 13.5% Cumulative Compounding
Preferred Stock ("Series C"). HTD specialized in sales of disposable products,
rentals of movable medical equipment and biomedical repair services to the acute
care, alternate care and home care marketplaces. Following the acquisition, HTD
was merged into MEDIQ/PRN. Contemporaneously with the Company's acquisition of
HTD, HTD sold to an unrelated third party its subsidiaries not acquired by the
Company.
The acquisition of HTD was accounted for by the purchase method and,
accordingly, the cost of the acquisition was allocated to the assets acquired
and liabilities assumed based on their estimated fair values on May 28, 1999,
the effective date of the acquisition for accounting purposes. Accordingly,
operations of HTD were included in the Company's results of operations effective
May 28, 1999. The excess of the cost over the estimated fair values of net
assets acquired of $41.5 million was recorded as goodwill amortizable on a
straight line basis over 20 years. The following pro forma financial information
presents the consolidated results of operations of the Company as if the
acquisition had occurred on October 1 of the respective periods presented. This
unaudited pro forma information is presented for comparative purposes only and
does not necessarily reflect the results of operations of the Company had the
acquisition existed on the prescribed dates.
Nine Months Ended June 30,
1999 1998
-------- --------
unaudited
(in thousands, except per share amounts)
Revenues $214,955 $173,230
Loss before extraordinary item (9,528) (23,840)
Per share amount (8.51) (1.05)
Net loss (9,528) (27,938)
Per share amount (8.51) (1.23)
The initial allocation of the cost of the HTD acquisition and the associated
goodwill was estimated based on information currently available. The final
allocation of the acquisition cost is contingent upon determinations and
valuations not yet completed. The Company is unable to predict at this time
whether any adjustments that may occur will have a material effect on the
allocation.
8
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Note F - Capital Stock
After the issuance of capital stock in connection with the acquisition of HTD,
the number of shares of capital stock outstanding at June 30, 1999 are: Common
Stock - 1,119,048; Series A Preferred Stock - 8,336,310; Series B Preferred
Stock - 3,146,302; and Series C Preferred Stock - 3,264,438. The number of
shares outstanding for Series A Preferred Stock has been adjusted in a minor
amount to reflect fractional shares upon future exchanges of pre merger capital
stock connected with the Company's merger in May 1998.
Issued and outstanding warrants in the amount of 140,885 for the purchase of
91,209 shares of the Company's Common Stock became exercisable on May 30, 1999.
Note G - Income Taxes
The estimated annual effective income tax rate for fiscal 1999 was 26.8% at June
30, 1999. This rate is lower than the overall statutory rate for the Company of
40.0% due to estimated nondeductible costs associated with the Company's
acquisitions and valuation allowances against net operating losses available for
state income taxes. These items lower the tax benefit associated with the
expected annual tax loss. The annual effective rate was adjusted in the third
quarter from the rate estimated at March 31, 1999 as a result of adjustments in
the third quarter for the estimated impacts of increased nondeductible goodwill
and other costs related to acquisitions made in fiscal 1999.
9
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion addresses the financial condition of the Company as of
June 30, 1999 and results of operations for the three and nine months ended June
30, 1999 and 1998. This discussion should be read in conjunction with the
financial statements included elsewhere herein and the Management's Discussion
and Analysis and Financial Statement sections of the Company's Annual Report on
Form 10-K for the year ended September 30, 1998.
The following information contains forward looking statements, within the
meaning of the Private Securities Litigation Reform Act of 1995, that are
subject to risks and uncertainties. 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. Readers are cautioned
not to place undue reliance on these forward looking statements, which speak
only as of the date of this report.
Seasonality
In the past, the Company's rentals have been somewhat seasonal, with demand
historically peaking during periods of increased hospital census, which
generally occur in the winter months during the Company's second fiscal quarter.
Results of Operations
Fiscal 1999 Compared to Fiscal 1998
Changes for the current year periods are with respect to the corresponding prior
year periods unless otherwise indicated.
Total revenues increased in the third quarter of fiscal 1999 by $15.5 million,
or 36.1%, to $58.5 million, and increased in the nine months ended June 30, 1999
by $35.1 million, or 26.6%, to $167.0 million. The increased revenues in each
period reflect increases in all of the Company's revenue segments - rental,
sales and other. The increase in rental revenue resulted from the Company's
acquisitions in the last year. The increase in sales and other revenues resulted
from both internal growth and the Company's acquisitions. The Company's
acquisitions accounted for approximately $13.1 million and $31.0 million of the
total revenue increase in the third quarter and nine months periods,
respectively, while internal growth accounted for approximately $2.4 million and
$4.1 million, respectively.
The Company's acquisitions prior to HTD focused on expanding the Company's
rental revenues, principally support surfaces. The acquisition of HTD focused on
expanding the parts and disposables business while also contributing to
increases in rental and biomedical repair (other) revenues. The Company
anticipates that the HTD acquisition will provide incremental annual revenues of
approximately $60.0 million and that the three other acquisitions made by the
Company in fiscal 1999 will provide incremental annual revenues of approximately
$11.0 million. However, there is no assurance that such annual revenues from any
of these acquisitions will materialize.
It is not practicable for the Company to fully remove the effects of
acquisitions when analyzing revenues because customer bases of the Company and
businesses acquired are largely common and because of the effects of product
migration by customers that often follows acquisitions.
Total costs and expenses, exclusive of depreciation and amortization and
applicable nonrecurring items, increased in the third quarter fiscal 1999 by
$12.1 million, or 41.8%, to $41.1 million, and increased in the nine months
fiscal 1999 by $26.6 million, or 31.1%, to $112.2 million. Included in the
current year periods is a $2.0 million additional bad debt charge related to the
aging of support surfaces receivables. Also included in the current nine months
period is a reduction of expense from a recovery of $3.0 million for a
settlement of disputed items related to an acquisition that had been reserved
for by the Company in the last fiscal year. Included in the prior year periods
are nonrecurring merger charges of $34.2
10
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Results of Operations (continued)
million and $34.6 million, respectively. The increases, as adjusted, in the
current year periods were broad based and associated with the increased
operational requirements of the Company as a result of actual and anticipated
growth in business. The increase in Cost of Sales in each current year period
correlates with the increase in Sales in each respective period. Sales margin
was 20.6% and 21.9% in the third quarter and nine months of fiscal 1999,
respectively, compared to 18.5% and 19.1% in the respective prior year periods.
The changes in the current year periods were primarily attributable to changes
in the product mix of parts and disposables and equipment. Selling expenses in
the third quarter fiscal 1999 increased $3.2 million, or 80.5%, to $7.1 million,
and in the nine months fiscal 1999 increased $8.7 million, or 75.5%, to $20.1
million. The increase in each period was due to increased rental/sales support
related to the Company's expanding operations for support surfaces rentals and
parts and disposables. The Company recently reduced the number of sales
personnel in its support surfaces business as a result of the leveling in the
growth curve of support surfaces. The total of operating expenses and general
and administrative expenses, exclusive of the applicable settlement recovery,
increased in the third quarter fiscal 1999 by $4.2 million, or 21.6%, to $23.8
million, and increased in the nine months fiscal 1999 by $12.1 million, or
21.1%, to $69.5 million. These increases, as adjusted, were primarily due to:
(i) the additional bad debt charge; (ii) increased infrastructure costs
associated with larger and expanded operational requirements connected with the
actual and anticipated growth in the business; (iii) increased equipment service
requirements associated with a larger and expanded product fleet and (iv)
management fees resulting from the Company's merger.
Depreciation and amortization, exclusive of the depreciation reserve in the
amount of $6.0 million to write down certain under utilized equipment to net
realizable values recorded in the third quarter of the prior year, increased in
the third quarter fiscal 1999 by $2.2 million, or 24.7%, to $11.3 million, and
increased in the nine months fiscal 1999 by $6.0 million, or 23.2%, to $31.6
million. These increases, as adjusted, resulted from additional depreciable
equipment purchased and obtained in acquisitions and increased goodwill
associated with the Company's acquisitions since May 1998.
Operating margin for the nine months fiscal 1999, exclusive of applicable
nonrecurring items, was 13.9% compared to 15.7% for the corresponding prior year
period. The decrease was primarily due to the additional bad debt charge,
increased infrastructure costs in support of the actual and anticipated growth
in business and depreciation and amortization in the current period exceeding
increased revenues in the same period. Operating margin for the third quarter
fiscal 1999 was 10.4% compared to 11.4% for the corresponding prior year period,
exclusive of nonrecurring items. This decrease reflects the additional bad debt
charge offset in part by the higher margins on the rentals of support surfaces,
such rentals having increased as a percentage of total revenues in the current
period business mix.
Earnings before interest, taxes, depreciation, amortization and other charges
and credits ("EBITDA"), exclusive of applicable nonrecurring items, were $17.4
million and $54.8 million in the third quarter and nine months of fiscal 1999,
respectively, compared to $14.0 million and $46.3 million in the respective
corresponding prior year periods. Although EBITDA is a widely accepted financial
indicator of a company's ability to service indebtedness, it should not be
considered as an alternative to income from operations or to cash flows from
operating activities, and should not be construed as an indication of a
company's performance or as a measure of liquidity.
Interest expense was $14.0 million and $40.8 million in the third quarter and
nine months of fiscal 1999, respectively, compared to $7.1 million and $14.3
million in the respective corresponding prior year periods. The increases in the
current year periods were principally due to the amount of time the
substantially higher level of debt incurred in connection with the Company's
recapitalization and an acquisition in May 1998 was outstanding during each
period, and the additional debt undertaken in fiscal 1999 to fund acquisitions.
The cash portion of this interest expense was $10.6 million and $30.8 million
for the third quarter and nine months of fiscal 1999, respectively. The
remaining interest expense primarily represented noncash accretion of the
Company's 13% Senior Discount Debentures and amortization of deferred debt
issuance costs.
The estimated annual effective income tax rate associated with the loss from
continuing operations for the nine months fiscal 1999 was 26.8%. This rate is
lower than the overall statutory rate of 40.0% for the Company due to estimated
nondeductible
11
<PAGE>
Results of Operations (continued)
costs associated with the Company's acquisitions and valuation allowances
against net operating losses available for state income taxes. The effective
rate for the nine months fiscal 1999 is estimated to be more reflective of the
expected annual effective tax rate for all of fiscal 1999. This rate was
adjusted in the third quarter from the estimated annual effective rate for the
six months fiscal 1999 due to adjustments for the estimated impacts of increased
nondeductible goodwill and other costs related to acquisitions made in fiscal
1999.
Accreted but unpaid dividends on preferred stock for the current year periods
were $4.8 million and $13.9 million, respectively, compared to $1.6 million in
each of the corresponding prior year periods. The variance was due to the amount
of time the related preferred stock issued in May 1998 was outstanding in each
period.
For the nine months fiscal 1999, there was a loss available to common
shareholders of $24.3 million. Due to the amount of cash and noncash interest
and noncash preferred stock dividend requirements, combined with noncash
depreciation and amortization, it is likely that the Company will continue to
report a net loss available to common shareholders in the foreseeable future.
The disparity in the weighted average number of common shares used in the
earnings per share computations in each period primarily resulted from the
Company's merger and recapitalization in May 1998.
Liquidity and Capital Resources
Net cash provided by operating activities in the nine months fiscal 1999 was
$8.2 million, compared to net cash used in operating activities of $1.9 million
in the corresponding prior year period. Included in the nine months fiscal 1999
is a $3.0 million cash settlement recovery. Included in the nine months fiscal
1998 are cash payments related to merger and acquisition expenses totaling
approximately $34.3 million. Adjusting for these nonrecurring cash items, cash
provided by operating activities in the nine months fiscal 1999 decreased by
$27.2 million from the corresponding prior year period. This variance was
principally due to interest payments in the current year substantially exceeding
those in the prior year due to the considerably greater amounts of indebtedness
outstanding since May 1998. Also contributing to the reduced level of net cash
from operations during the current year when compared to the prior year was an
increase in working capital requirements principally related to an increase in
accounts receivable.
The Company used its acquisition loan facility to fund $50.0 million of
acquisitions and its revolving credit facilities to fund $43.0 million of
acquisitions, certain purchases of equipment and general corporate purposes. At
June 30, 1999, borrowings outstanding under the acquisition and revolving credit
facilities were $50.0 million and $43.0 million, respectively. At June 30, 1999,
borrowings under the acquisition loan facility equaled the maximum amount
available for the facility. Availability under the revolving credit facility at
June 30, 1999 was approximately $15.0 million.
The variable rate of interest on the term loan facility at June 30, 1999 was
effectively 8.06% compared to 7.88% at March 31, 1999 and 8.50% at September 30,
1998. The term loan rate of 8.06% is fixed until December 10, 1999. The weighted
average variable rate of interest on the revolving credit facility during the
third quarter fiscal 1999 was 7.70%, and the combined rate at June 30, 1999 was
7.77% compared to 7.57% at March 31, 1999 and 9.00% at September 30, 1998. The
weighted average variable rate of interest on the acquisition loan facility
during the third quarter fiscal 1999 was 7.40%, and the combined rate at June
30, 1999 was 7.42% compared to 7.31% at March 31, 1999. The changes in the rates
of interest at the period ended dates indicated above reflect the movement in
short term market rates of interest. All of the above noted rates of interest
include applicable margins.
MEDIQ/PRN modified its $325.0 million credit agreement with BNP. This
modification reduced the borrowing capacity under the acquisition loan facility
from $75.0 million to $50.0 million and established a subfacility B under the
revolving credit facility with a borrowing capacity and availability of $25.0
million. MEDIQ/PRN utilized all of the $25.0 million borrowing capacity under
subfacility B to fund the HTD acquisition. MEDIQ/PRN was charged a fee of
approximately $1.0 million by BNP to effect the modification. Borrowings
outstanding under subfacility B are subject to variable rates of
12
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Liquidity and Capital Resources (continued)
interest. Principal amounts outstanding on November 30, 1999 under subfacility B
will amortize quarterly starting March 31, 2000 in increasing increments as
scheduled in the modified credit agreement. Any remaining principal balance is
due on the facility's termination date of June 30, 2004.
The Company expects to grow both internally and through acquisitions and,
therefore, continues to investigate potential acquisition opportunities. It is
likely that the Company, to consummate any future significant acquisitions, will
incur additional indebtedness, thereby adding to the existing debt service
requirements. The Company expects that ensuing cash flows generated from any
acquisitions consummated will be sufficient to cover additional debt service,
that total Company leverage will decrease and that the acquisitions will provide
additional shareholder value. However, no assurance can be given that any
acquisitions will be consummated, or if consummated will meet the Company's
expectations.
Year 2000
The Company continues to evaluate the risks associated with its operations as a
result of Year 2000 compliance issues. The Company has evaluated these risks on
three levels: internal and existing computer programs and applications; rental
equipment and customers and suppliers. In evaluating these risks, the Company
considered the material implications of each of these items on its operations on
and subsequent to January 1, 2000. The Company's internal business information
systems have been analyzed for Year 2000 compliance and the Company believes
that these systems are Year 2000 compliant. The Company commenced testing of the
compliance readiness of the internal business information systems in January
1999, and will continue testing on an ongoing basis. 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
resolution of this Year 2000 issue will not have a material adverse effect on
the Company's operations or results of operations.
A significant portion of the Company's revenues and operating income is directly
related to the Company's ability to rent its equipment. Should a material
portion of such equipment not be Year 2000 compliant and, therefore, not
suitable for its designed purpose, there could be a material adverse effect on
the Company's results of operations. The Company believes that support surfaces
rental equipment that has been manufactured by the Company is fully Year 2000
compliant. The Company has been conducting formal communications with the
equipment manufacturers for products the Company maintains in its inventory to
determine the extent to which the Company's purchased rental equipment may be
vulnerable to Year 2000 issues. To date, approximately 97% of the equipment
manufacturers have responded to the Company's requests. As of June 30, 1999,
based on the responses received from manufacturers of the related equipment,
approximately 87% of the Company's rental fleet is fully Year 2000 compliant, as
represented by the manufacturers. The Company has relied on representations made
by the manufacturers. An internal evaluation of Year 2000 compliance was made on
some of the equipment for which the Company could not locate the manufacturers.
This evaluation concluded that an additional 4% of the rental fleet is Year 2000
compliant, making 91% the total amount of rental equipment that is Year 2000
compliant. For manufacturers that have not yet responded, the Company has a
formal follow up plan that is currently being executed. The Company expects to
complete the evaluation process of its rental fleet by September 30, 1999. To
date, based on responses from the equipment manufacturers and its internal
evaluation, the Company believes it would need to spend approximately $4.0
million to bring its entire rental fleet into Year 2000 compliance. The Company
may decide not to modify its entire rental fleet. Such decision will be based on
yet to be determined anticipated utilization of compliant equipment. This
determination would impact the amount expended on modifications and the timing
of completion thereof. Currently, the Company is not able to estimate the costs
associated with Year 2000 issues for rental equipment whose manufacturers have
not yet replied. Percentages and anticipated timetables mentioned above have
been adjusted from those contained in previous disclosures to conform to the
pace of compliance efforts of certain suppliers to the Company and as a result
of other compliance efforts performed thus far, and due to additional equipment
obtained by the Company in recent acquisitions. The status of
13
<PAGE>
Year 2000 (continued)
compliance is subject to further adjustment in accordance with future changing
circumstances that cannot now be reliably known or anticipated.
Although the Company has significant relationships with certain of its customers
and suppliers, the Company has determined that no one individual customer or
supplier could create a material adverse effect for the Company as a result of
not being Year 2000 compliant. However, should a number of individual customers
and/or suppliers be noncompliant, there could be a material adverse effect on
the Company's operations and results of operations. The Company cannot predict
the extent or dollar amount, if any, of such effect.
Should a material portion of the Company's rental fleet not be Year 2000
compliant and, therefore, not suitable for its designed purpose, an interruption
in or a failure of certain normal business activities or operations could occur.
There can be no assurance that the systems of other companies on which the
Company relies will be Year 2000 compliant and, therefore, not have a material
adverse effect on the Company. The Company cannot predict the extent or dollar
amount, if any, of such effect.
The cost of compliance and the date on which the compliance will be completed
are based on estimates, which were derived utilizing numerous assumptions of
future events including the continued availability of certain resources and
other factors. However, there can be no assurance that these estimates will be
achieved. Actual results could differ materially from the projections. Specific
factors that might cause a material change include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to obtain
all necessary components or upgrade parts and similar uncertainties.
The Company has investigated developing contingency plans for dealing with worst
case scenarios regarding its rental fleet and overall operations. With respect
to its equipment rentals, the Company believes that it is not necessary or
practical to implement contingency measures; however, the Company will make
available all of its Year 2000 compliant equipment to customers that desire to
have sufficient back up units on hand for their own contingency plans.
Concerning its internal systems, the Company performs ongoing testing of these
and believes them to be Year 2000 compliant, so the Company believes that a
contingency plan for their operation is not necessary. With respect to other
operational aspects, the Company believes that developing a contingency plan for
a worst case scenario is not feasible, and based on representations made by
external service providers to the Company (for example, electricity and
telecommunications), circumstances creating such an event are considered by the
Company to be remote. Nevertheless, the absence of a contingency plan could have
a material adverse effect on the Company's operations.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no changes during the three and nine months ended June 30, 1999 in
the way the Company manages its interest rate risk. Also, there were no material
amounts associated with the Company's interest rate swap and collar instruments
during the nine months fiscal 1999.
14
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
Quarter Ended June 30, 1999
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As reported in the Company's most recent Form 10-K, the Company filed a
complaint against Siemens Medical Systems, Inc. ("Siemens") in connection with
Siemens' attempted termination of a distribution agreement between the parties.
Siemens filed a motion to dismiss the complaint, which was denied. Discovery has
not yet commenced.
On July 8, 1999, SizeWise Rentals, Inc. ("SizeWise") filed a suit against the
Company in the United States District Court, District of Kansas. The suit is in
connection with the purported termination by SizeWise of a rental arrangement
with the Company due to an alleged breach of the arrangement by the Company. The
complaint seeks a declaratory judgment and damages. The Company believes that
the allegations in the complaint are without merit and intends to vigorously
defend this case. Based on the information currently available, the Company
believes that resolution of the suit will not have a material adverse effect on
the operations or financial condition of the Company.
Item 2. Changes in Securities
On June 15, 1999, the Company issued (i) 44,225 shares of Common Stock, par
value $.01 per share, (ii) 513,548 shares of Series A 13.0% Cumulative
Compounding Preferred Stock, par value $.01 per share, (iii) 146,303 shares of
Series B 13.25% Cumulative Compounding Perpetual Preferred Stock, par value $.01
per share, and (iv) 264,438 shares of Series C 13.5% Cumulative Compounding
Preferred Stock, par value $.01 per share to PENMAN Private Equity and Mezzanine
Fund, L.P. ("PENMAN"). The shares of the Company were issued in a private
placement pursuant to Section 4(2) of the Securities Act of 1933 in exchange for
1,218,763 shares of common stock of HTD owned by PENMAN in connection with the
acquisition of HTD by the Company through MEDIQ/PRN.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule appears on page 17.
(b) Reports on Form 8-K
The Company filed the following report on Form 8-K during the quarter ended
June 30, 1999:
Date of Earliest Event Requiring a Report: June 15, 1999
Date of Filing: June 28, 1999
Items Reported: Item 2 and Item 7
Subject: Acquisition of HTD by MEDIQ/PRN.
15
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
Quarter Ended June 30, 1999
SIGNATURE
Pursuant to the requirements 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.
MEDIQ Incorporated
------------------
(Registrant)
August 16, 1999 /s/ Jay M. Kaplan
- --------------- -----------------
(Date) Jay M. Kaplan
Senior Vice President-Finance,
Treasurer and Chief Financial Officer
16
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