UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 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: (856) 662-3200
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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None
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 NO X
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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
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The number of shares outstanding of each of the registrant's classes of stock as
of May, 2000:
<TABLE>
Class
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<S> <C>
Common Stock, Par Value $.01 1,115,669 Shares
Series A 13.0% Cumulative Compounding Preferred Stock, Par Value $.01 8,336,310 Shares
Series B 13.25% Cumulative Compounding Perpetual Preferred Stock,
Par Value $.01 3,146,302 Shares
Series C 13.5% Cumulative Compounding Preferred Stock, Par Value $.01 3,264,438 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
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None
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Certain information in this Annual Report on Form 10-K, including but not
limited to the Management's Discussion and Analysis of Financial Condition and
Results of Operations, may constitute forward looking statements as such term is
defined in Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Certain forward looking statements can be
identified by the use of forward looking terminology such as "believes",
"expects", `may", "will", "should", "seeks", "approximately", "intends",
"plans", "estimates", "anticipates", or "hopeful", or the negative thereof or
other comparable terminology, or by discussions of strategy, plans, or
intentions. Forward looking statements involve risks and uncertainties which
could cause actual results to be materially different than those in the forward
looking statements. Readers are cautioned not to place undue reliance on these
forward looking statements, which speak only as of the filing date of this
report. The Company assumes no obligation to update such information.
PART I
ITEM 1. BUSINESS
Defaults on Indebtedness, Effect on Liquidity and Operations, and Going Concern
At the filing date of this report, MEDIQ/PRN Life Support Services, Inc., a
wholly owned subsidiary of MEDIQ Incorporated, was in default of a number of
covenants under its senior secured credit facility. Potential additional events
of default concerning financial covenants may exist as a result of the
restatement of fiscal 1999 quarterly financial information (discussed below).
The lenders to the credit facility have the right to accelerate payment of all
amounts outstanding under the facility as a result of these defaults. Although
the lenders have not yet exercised that right, there can be no assurance that
they will not do so in the future. The Company is in discussions with the
lenders to the credit facility to reach a formal agreement with respect to the
defaults and potential defaults.
As a result of the defaults, effective January 4, 2000 the Company began
paying interest on indebtedness outstanding under the credit facility at a
default rate of two percentage points above the rate otherwise applicable. Until
a formal agreement relating to the defaults and potential defaults is reached
with the lenders, the Company is unable to access the credit facility and must
fund its working capital needs through other sources of cash. Although the
Company has had adequate funds from working capital and operating activities to
fund operations including debt service and capital expenditures for the first
six months of fiscal 2000, the current cash forecast indicates additional
sources of cash will be required to meet future working capital needs, including
the funding of the June 2000 debt service payments aggregating approximately
$24.1 million, of which $10.5 million is for interest on MEDIQ/PRN's 11% Senior
Subordinated Notes due 2008. The Company is currently investigating alternative
sources of liquidity sufficient to meet working capital needs in a way that is
satisfactory to its lenders.
The indenture to the 11% notes permit the lenders under the senior credit
facility to elect to block the payment of amounts due and payable with respect
to the 11% notes for a period of up to 180 days. This payment blockage may occur
during a period of default under the credit facility in which the maturity of
debt outstanding thereunder may be accelerated. Pursuant to a letter dated May
25, 2000, the lenders to the credit facility have sent notice to the trustee for
the 11% notes and the Company to effect a payment blockage on the 11% notes such
that the semiannual interest payment of $10.5 million payable on June 1, 2000
was not made. Any nonpayment of interest on the 11% notes existing for more than
30 days would be an event of default under the indenture to the 11% notes. As
long as the maturity of the debt outstanding under the credit facility has not
been accelerated, payments with respect to the 11% notes may be continued after
the payment blockage period expires.
On June 12, 2000 and June 30, 2000, MEDIQ/PRN made $8.5 million in payments
under the credit facility. Such payments represented normal interest costs,
LIBOR/prime plus the applicable margin, but did not include default interest of
$1.8 million as required under the credit agreement. Non-payment of the default
interest constitutes a default under the credit facility. In addition, MEDIQ/PRN
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notified the lenders for the credit facility that the Company intended to defer
the principal payment of $3.3 million due June 30, 2000 to $1.1 million July 21,
2000; $1.1 million August 18, 2000; and $1.1 million September 15, 2000. Such
deferment constitutes a default under the credit facility.
The Company is in violation of covenants under the indentures governing
MEDIQ's 13% Senior Discount Debentures due 2009 and the 11% notes with respect
to timely filing of financial information for fiscal 1999 and fiscal 2000. Upon
the written notice from the trustees or holders of at least 25% of the
outstanding debt under either indenture that the Company is in default of these
covenants, the Company will have 30 days to cure the default. Failure to cure
the default would give rise to an event of default under the indentures. At the
filing date of this report, the Company has not received a notice of default
with respect to either indenture.
At the filing date of this report, all outstanding principal under the
credit facility and all indentures were considered to be current obligations
because of the default of the credit facility and the potential for cross
default under the indentures. The Company does not have sufficient current
assets nor does it presently have any other available sources of capital to
satisfy this current liability. In addition, the credit facility permits the
lenders thereunder the right to liquidate collateral under the security
agreement thereto to satisfy amounts outstanding under the facility. The credit
facility is secured by a first priority lien and security interests in
substantially all tangible and intangible assets of MEDIQ/PRN and its
subsidiaries.
The Company has incurred recurring losses from operations, has negative
working capital, and a significant shareholders deficiency. These conditions
plus the foregoing circumstances raise substantial doubt about the Company's
ability to continue as a going concern. The Company cannot predict at this time
what actions may be taken with respect to its continued existence.
The Company is in discussions with the lenders to the credit facility to
reach a formal agreement with respect to the defaults and potential defaults.
The Company cannot predict what such agreement may consist of and what effects
may ensue on the operations of the Company. Also, the Company is uncertain as to
what actions will be taken by the lenders to the credit facility if the defaults
are not cured.
In connection with the default under the credit facility, MEDIQ/PRN was
notified by the counterparty to one of its collar agreements in the notional
amount of $50.0 million that the agreement was terminated effective May 11,
2000. On June 7, 2000 and June 8, 2000, the Company was notified by the
counterparties for its other collar agreement and its interest rate swap that
such arrangements would be terminated shortly due to the defaults under the
credit facility.
See Management's Discussion and Analysis of Financial Condition and Results
of Operations and Note B of the Notes to Consolidated Financial Statements for
further information on the foregoing matters.
Year End Adjustments and Restatement of Fiscal 1999 Quarterly Financial
Information
At the end of fiscal 1999, the Company performed an extensive review of the
adequacy of the reserves for doubtful accounts and excess and obsolete
inventories. The Company also reviewed the capitalization of accessories for its
medical equipment and made determinations regarding the status of certain
deposits and the need for additional accruals for professional fees. As a result
of these reviews, the Company determined that certain adjustments should have
been made. These adjustments resulted in an increase in the net loss
attributable to shareholders for fiscal 1999 by $26.3 million, net of tax of
$6.3 million, or $24.14 per share. Due to the magnitude of the adjustments, the
Company has determined that restatement of previously published quarterly
financial information is necessary. The adjustments, net of tax, and per share
amounts, respectively, for each of the first three quarters were: first quarter
- $1.6 million, $1.49; second quarter - $5.1 million, $4.71; third quarter, $2.9
million, $2.71. The Company filed amended Form 10-Q's for each quarter. See
Management's Discussion and Analysis of Financial Condition and Results of
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Operations and Note F of the Notes to Consolidated Financial Statements for
further information about the adjustments.
Special Investigation
The Audit Committee of MEDIQ's Board of Directors, in connection with the
extensive year end reviews discussed above, retained special counsel with
assistance from an independent accounting firm to conduct an investigation into
certain accounting and financial reporting matters related to the audit of the
Company's fiscal 1999 financial information, particularly those concerning
reserves for doubtful accounts. The purpose of the investigation was to
determine remedial actions, if any, needed to be taken by the Company concerning
these matters, and the possibility that illegal acts were committed. The
investigation was unable to conclude that it was likely that illegal conduct
occurred. Notwithstanding that finding, the Audit Committee decided to institute
certain remedial measures to improve the Company's internal controls and
financial reporting environment in order to prevent any repetition of the
circumstances that prompted the investigation. Some of these measures were:
hiring a new Chief Financial Officer for the Company; changing the financial
reporting structure so that it reports directly to the Board of Directors
through the Audit Committee chairman; improving the billing and collection
functions; and adopting a new methodology for calculating reserves for doubtful
accounts.
Highly Leveraged Financial Position
The Company emerged from the merger, refinancing, and accompanying
acquisition that occurred on May 29, 1998 highly leveraged. Amounts borrowed to
fund acquisitions in fiscal 1999 discussed below further increased the leveraged
position. This affects the Company's liquidity, financial condition, and results
of operations. See Management's Discussion and Analysis of Financial Condition
and Results of Operations for further information.
Organization
MEDIQ Incorporated collectively with MEDIQ/PRN and MEDIQ/PRN's subsidiaries
are referred to herein as the Company. MEDIQ/PRN is the sole subsidiary of
MEDIQ. At September 30, 1999, MEDIQ/PRN had two wholly owned operating
subsidiaries - MEDIQ Management Services, Inc. and MEDIQ/PRN Canada, Inc.
MEDIQ/PRN Canada was established in fiscal 1999 to conduct business in Canada.
The operations of MEDIQ/PRN Canada were minimal in fiscal 1999, as it commenced
business in September 1999.
In May 1998, MEDIQ underwent a merger with MQ Acquisition Corporation in
which MEDIQ continued as the surviving company. MQ was organized by affiliates
of the firms of Bruckmann, Rosser, Sherrill & Co., Inc., Ferrer Freeman Thompson
& Co. LLC, and Galen Associates solely for their purpose of obtaining a
controlling interest in MEDIQ. In the merger, a new series of MEDIQ's common
stock, which became the only voting security, was issued. For accounting
purposes, the merger was treated as a recapitalization. Accordingly, the
historical basis of the Company's consolidated assets and liabilities was not
affected. Upon the merger, MQ was dissolved. In connection with the merger, a
corporate restructuring took place in which MEDIQ contributed the capital stock
of all of its subsidiaries to MEDIQ/PRN. Simultaneously with the merger, a
refinancing was undertaken in which MEDIQ issued and sold $140.9 million
aggregate amount at maturity of 13% senior discount debentures for gross
proceeds of $75.0 million. At the same time, MEDIQ/PRN entered into a $325.0
million senior secured credit facility under which was borrowed $200.0 million
in term loans and issued and sold $190.0 million principal amount of 11% senior
subordinated notes. Amounts received in the refinancing along with a $109.5
million equity contribution provided by the new controlling shareholders and
$4.5 million in existing cash balances were used to: (i) finance the cash
consideration and pay the related fees and expenses associated with the merger
aggregating $391.0 million; (ii) repay $138.0 million of outstanding
indebtedness; and (iii) finance an acquisition by MEDIQ/PRN simultaneous with
the merger amounting to $50.0 million. Each share of each series of MEDIQ's
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capital stock outstanding prior to the merger was exchanged for $13.75 cash and
.075 of a share of a new series of Series A preferred stock.
MEDIQ was incorporated under the laws of the State of Delaware in 1977. The
executive offices are located at One MEDIQ Plaza, Pennsauken, New Jersey 08110,
and the telephone number is (856) 662-3200.
General
MEDIQ/PRN operates the largest critical care, life support, and other
movable medical equipment rental business in the United States. MEDIQ/PRN
services hospitals, alternate care and home care providers, nursing homes, and
other health care providers. MEDIQ/PRN also operates the third largest
therapeutic support surfaces rental business in the United States. In addition,
MEDIQ/PRN sells a variety of disposable products, accessories, and repair parts
and provides several outsourcing alternatives to health care providers.
A percentage breakdown of the Company's total revenues within each of the
past three fiscal years follows:
1999 1998 1997
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Rentals..................... 71% 79% 80%
Sales....................... 23 15 13
Other....................... 6 6 7
For fiscal 2000, sales and other revenues are expected to each show a
larger percentage of total revenues, as overall growth in total revenues will
come from these classes of revenues. For the first six months of fiscal 2000,
the percentage breakdown of the Company's total revenues was: rentals - 65%;
sales - 28%; other - 7%. See Management's Discussion and Analysis of Financial
Condition and Results of Operations for further information about fiscal 2000
revenues.
Acquisitions During Fiscal 1999
On June 15, 1999, MEDIQ/PRN acquired all of the issued and outstanding
common stock of HTD Corporation. The total purchase price was an adjusted $53.2
million, consisting of $49.7 million in cash and $3.5 million aggregate value of
common and preferred stock of MEDIQ. The cash portion of the purchase price was
financed under the credit facility. MEDIQ/PRN retained HTD's business serving
the acute care, alternate care, and home care marketplaces, consisting of its
core business of disposable product sales, medical equipment rentals, and
biomedical services. Contemporaneously with MEDIQ/PRN's acquisition of HTD, HTD
sold to an unrelated third party all of the issued and outstanding common stock
of HTD's subsidiaries that specialized in the acute care distribution business.
Following the acquisition, HTD was merged into MEDIQ/PRN. During fiscal 1999,
MEDIQ/PRN made other acquisitions as follows:
o November 1998, Vivax Medical Services, Inc., specializing in rentals of
support surfaces,
o January 1999, Veritas Enterprises, Incorporated, specializing in rentals of
support surfaces,
o February 1999, Hospital Rentals of America, Inc., specializing in rentals
of medical equipment and support surfaces.
The aggregate cost of these acquisitions was $33.2 million cash, of which $27.8
million was financed under the credit facility.
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Rentals
At September 30, 1999, the rental business operated in 104 locations
throughout the United States. The Company believes it offers the broadest and
most comprehensive selection of medical equipment for rent in the country.
Because of its extensive product line and large inventory, the Company believes
it is better positioned than any of its rental competitors to be a single source
supplier of medical equipment. The Company offers a wide selection of rental
programs including (i) daily 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's 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. The Company provides a full
range of rental and related services, including equipment delivery, inspection,
maintenance, repair, and documentation through, as of September 30, 1999, a
staff of 171 sales representatives, 335 customer service representatives to
assist with rental needs, and 226 experienced biomedical technicians.
Medical equipment and support surfaces inventories are maintained at each
Company location. The Company utilizes a centralized order entry and dispatching
system that for fiscal 1999 processed on average approximately 40,000 deliveries
and pickups per month. Most orders are received by telephone at the Company's
Pennsauken, New Jersey facility, and scheduling and routing of equipment
delivery are also performed from this site. Upon return, equipment is inspected,
cleaned, and tested at the receiving location before being redesignated as
available for rental. Major service and repair work on Company owned equipment
is performed at the Company's Pennsauken, New Jersey or Santa Fe Springs,
California repair facilities. The Company's equipment information and inventory
system has sufficient capability and capacity to adequately handle the large
quantities and variety of rental units maintained by the Company. These systems
track essential activities, such as equipment availability, training, repair,
preventative maintenance, delivery and pickup, predelivery inspections, major
inspections, and call backs.
Parts and Disposables
At September 30, 1999, the Company supplied over 14,000 parts and
disposables products, actively stocking over 7,000 items, through eight
distribution centers strategically located throughout the United States. Each
distribution center maintains a level of products sufficient to supply the
customer base that it serves. A small quantity of parts and disposables are
maintained at certain rental locations in order to provide immediate delivery on
an emergency basis. The Company sells a variety of parts and disposables to its
customers some of which complement its rental business. This enables the Company
to generate incremental revenues within an existing customer relationship. The
Company is the exclusive distributor of certain parts and disposables for one
manufacturer. To support the growth in its parts and disposables business, the
Company established a dedicated sales and marketing operation incorporating
inside sales representatives, direct mail, and trade publication advertising. At
September 30, 1999, 15 customer service representatives, 17 sales
representatives, and 11 purchasing personnel were dedicated to this business.
The Company utilizes a separate centralized information system to track parts
and disposables.
Outsourcing Services
To enable health care providers to better manage their assets and increase
their profitability, the Company offers a number of outsourcing services. Each
outsourcing service leverages the Company's extensive distribution network,
know-how, and broad customer base. These services include (i) a Comprehensive
Asset Management Program ("CAMP"), that analyzes the critical care equipment
activity of a client and provides a variety of logistics and services designed
to manage, track, and service the client's medical equipment, (ii) a biomedical
service that provides 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 extensive distribution network, (iv) a medical gas
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supply program designed to provide one stop service to health care providers in
the fragmented medical gases market, and (v) a health care consulting and
management service designed to assist the Company's clients in the management of
their businesses.
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 services for patient care equipment, including providing
on site personnel, equipment cleaning and processing, maintenance, patient
billing, documentation, and tracking services. CAMP focuses on increasing the
utilization of hospital owned assets. CAMP clients benefit through the reduction
of central supply and biomedical staff (some of whom may be employed by the
Company in its outsourcing programs), lower equipment maintenance expenses, the
reduction of capital expenditures related to equipment, increased equipment
utilization, and increased captured patient charges. The Company also offers its
CAMP logistics program that provides similar management services for multisite
health care networks. Additionally, the Company has programs in which it
acquires all or some of the client's equipment and rents the equipment back to
the client, eliminating the client's burdens of ownership, underutilization, and
seasonal usage.
The Company performs safety inspections, preventative maintenance, and
repairs for most brands and models of moveable medical equipment owned by the
Company, health care organizations, and other third parties. Service and repairs
can be performed on site. Pick up and delivery is also available for servicing
at any of the Company's locations. Major service and repairs on equipment owned
by the Company are performed at the Company's major service centers in New
Jersey and California. A third service center located in Phoenix, Arizona is
dedicated principally to the repair of customer owned medical equipment. This
service center has contracts with certain customers to serve as their national
service organization in addressing the equipment repair needs for all of their
customers.
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 extensive distribution network. The Company also
offers a medical gas administrative management service to health care providers
to enable the 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. This service offers price
standardization, elimination of multiple local vendor contracts, reduction in
the time to process supplier invoices, and improved purchasing efficiencies.
Quality Assurance
Quality control, quality assurance, and risk management procedures are
conducted for all of the Company's medical equipment and support surfaces to
ensure compliance with safety, testing, and performance standards at all of its
locations. All medical equipment and support surfaces are serviced and tested
prior to delivery 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. The
Company's trained personnel at all of its locations conduct routine servicing.
Customers
The Company's customer base is composed of proprietary national and
regional hospital chains, group purchasing organizations, and acute and
non-acute health care facilities and organizations. For fiscal 1999, no single
account represented 10% or more of the Company's 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
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contracts with group purchasing organizations, which provide their members the
opportunity to purchase or rent products at reduced prices. The group purchasing
organizations do not require members to purchase or rent from a particular
supplier to the organization, and many health care providers are members of more
than one organization.
Competition
The movable medical equipment rental industry is highly competitive and the
Company encounters competition in all locations in which it operates.
Competition is generated from (i) medical equipment manufacturers that sell
medical equipment directly to health care providers which the Company believes
generate the strongest competition, (ii) national, regional, and local medical
equipment rental and leasing companies and medical equipment distributors that
rent medical equipment to health care providers, 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 its geographic scope, service capability, and national account
relationships provide it with competitive advantages over its moveable medical
equipment competitors. The Company believes that key factors influencing the
decision in selecting a moveable medical equipment rental vendor include
availability and quality of 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.
The Company faces vigorous competition in support surfaces. The two largest
competitors are Hill-Rom Inc. and Kinetic Concepts, Inc. These companies are
larger and have more resources and national contracts than the Company. The
Company believes the key competitive factors in this business are creative
pricing options, unique product offerings, quality and availability of products,
and dependability and service. The Company believes it offers a superior product
unique from its competitors. The design and construction of this product lends
itself to lower support and maintenance costs, thereby affording the Company
what it believes to be greater pricing flexibility than its competitors. The
Company believes these are attractive alternatives to health care providers
seeking ways to reduce their costs in the face of decreasing cost reimbursement
rates in managing the long term care of their patients.
Parts and disposables include a very large variety of items. There are
numerous providers of parts and disposables, many of which are much larger and
with considerably more resources and experience in this market than the Company.
Many of these larger suppliers focus on large contracts and large orders. The
Company believes the key competitive factors in this business are product
selection, quality and availability of products, dependability, and service. The
Company provides specialized services to a niche within the overall market in
that it focuses on national, regional, and individual customers in the alternate
care portion of the health care industry.
Suppliers
The Company acquires substantially all of its medical equipment, support
surfaces, and parts and disposables from approximately 400 suppliers. The
Company is the exclusive distributor of certain parts and disposables for one
manufacturer. Approximately $10 million of the Company's annual sales in parts
and disposables in fiscal 1999 were connected with this arrangement. Otherwise,
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. At September 30, 1999, the Company
had open commitments totaling $11.1 million. Effective October 1, 1999, the
Company entered into an agreement that commits the Company to purchase parts and
disposable products over its 5 year term. The amount of the commitment under
this agreement for fiscal 2000 is $5.0 million. Thereafter, the annual
commitment will vary based on a formula that takes into consideration the
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quantity of inventory subject to the agreement the Company has on hand and on
order and the quantity of items subject to the agreement the Company sold in the
previous year.
Segments
The Company's business is essentially exclusive to the United States. Its
business is focused on the health care industry in that the Company primarily
rents medical equipment and support surfaces and sells parts and disposables to
health care providers. The Company operates its rental, sale, asset management,
and outsourcing service and product offerings through a single distribution
system in that each service and product offering receives operational and
administrative support from the same employees and through the same facilities.
As a result, the Company's lines of businesses share similar characteristics,
such as nature and purpose of equipment and products, type of customers and
their industry concentration, marketing and distribution methods, and regulatory
environment.
The Company operates in three business segments in the determination of
revenue only based upon the type of product or service provided. These revenue
segments consist of rental, sales, and other, and such are presented on the
statement of operations. Rental revenues are derived from rentals of moveable
medical equipment and support surfaces, along with related revenue share
arrangements. Sales revenues are principally derived from sales of parts and
disposables, along with sales of medical equipment, support surfaces, medical
gases, and related revenue share arrangements. Other revenues principally
consist of asset management and outsourcing services. The Company does not
evaluate expenses of operations or profit and loss by segment nor does it
attribute assets or liabilities to any revenue segment.
Employees
At September 30, 1999, the Company had 1,432 employees. None of the
Company's employees are subject to a collective bargaining agreement. The
Company believes that its relations with employees are satisfactory.
In March and June 2000, the Company implemented a strategic initiative to
streamline the organization and increase operational response and efficiency. In
the process, 250 positions were combined and/or eliminated. The Company recorded
charges of approximately $2.8 million and $3.0 million in the second and third
quarters of fiscal 2000 for severance and related benefits associated with the
reduction.
Seasonality
The Company's rentals of moveable medical equipment and support surfaces
have been somewhat 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.
Overview of the Health Care Industry
The United States health care system includes approximately 5,200 acute
care community hospitals and numerous other health care providers such as long
term care facilities including skilled nursing and subacute care facilities,
ambulatory surgical centers, specialty clinics, and home health care agencies.
These health care providers normally spend considerable sums on capital
equipment, including movable medical equipment. Health care providers have a
number of options in obtaining this equipment, including purchase, lease, and
rental. Historically, health care providers have favored the purchase option in
meeting a substantial portion of their movable medical equipment needs. However,
the Company believes that a variety of trends favor a rental alternative to
purchase or lease, including the significant cost containment pressures under
which health care providers currently operate.
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By way of example, the cost containment pressures on hospitals have
increased greatly during the past decade as a result of Federal regulations
implementing Medicare's prospective payment system for inpatient care. Under
this system of reimbursement, adopted in 1991 and subject to a 10 year phase in,
Medicare related equipment costs are reimbursed in a single, fixed rate per
discharge. These fixed rates were established by the Health Care Financing
Administration and they may or may not reflect a hospital's actual equipment
costs. Under the prospective payment system, the manner in which hospitals incur
equipment costs (whether through purchase, lease, or rental) does not impact the
extent of reimbursement to the hospitals.
The Balanced Budget Act of 1997 expanded Medicare's prospective payment
system to include skilled nursing facilities. The Balanced Budget Act also
authorized Medicare to implement a prospective payment system for home health
agencies and granted the states the flexibility to use a prospective payment
system for hospital and skilled nursing services furnished to Medicaid patients.
The Company believes that the expansion of the prospective payment system may
reduce levels of reimbursement by Medicare and Medicaid, as well as other third
party payors such as commercial health plans. 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 discounted fee arrangements and capitated (fixed patient care
reimbursement) managed care arrangements.
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 medical equipment. Because the Medicare
system is, to an increasing extent, reimbursing hospitals and skilled nursing
facilities at fixed rates unrelated to actual equipment costs, these providers
have an incentive to manage their equipment costs more efficiently and
effectively. Providers may better manage their capital costs by replacing fixed
capital costs with variable operating costs. In the case of medical equipment,
these fixed costs include equipment acquisition costs and the substantial costs
associated with maintaining the equipment. 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. Under such a program, hospitals would
replace their owned equipment with rented equipment. However, there can be no
assurances that hospitals will convert existing fixed equipment programs to
rental and equipment management programs. As the prospective payment system
expands, many health care providers 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 nonuse periods.
Governmental Regulation of the Health Care Industry
The Company's businesses are subject to Federal, state, and local laws,
rules, and regulations relating to the operation of such businesses.
Manufacturers and certain providers of the Company's medical equipment and
support surfaces are subject to regulations and standards developed and enforced
by agencies and organizations such as the Food and Drug Administration, the
Association for the Advancement of Medical Instrumentation, Underwriter
Laboratories, the National Fire Protection Agency, and the Canadian Standards
Association. The FDA regulates companies that manufacture, prepare, propagate,
or install medical devices. Device manufacturers must comply with registration
and labeling regulations, submit premarket notifications or obtain premarketing
approvals, and comply with medical device reporting, tracking, and post market
surveillance regulations and with quality systems regulations, and are subject
to FDA inspection. The quality systems regulations specify the minimum standards
for the manufacture, storage, distribution, and installation of medical devices,
and impose certain record keeping requirements. The FDA currently does not
regulate as device manufacturers the Company or organizations which provide
similar services as the Company. However, any company that services, repairs, or
reconditions medical devices is subject to regulatory action by the FDA if its
activities cause the devices to become adulterated or mislabeled. In addition,
no assurance can be given that in the future the FDA will not regulate as device
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manufacturers entities that acquire ownership of devices, service, repair,
recondition, or rebuild such devices and rent them to customers or which
service, repair, or recondition devices owned by others, as does the Company.
The Company is unable to predict the cost of compliance if any such regulations
are adopted. The foregoing laws and regulations that are directly applicable to
manufacturers of medical equipment became applicable to the Company upon its
acquisition of CH Industries, Inc. In November 1998, the Company closed the
manufacturing operation acquired with CHI and became what the FDA calls a
"specification developer" manufacturer. The Company's manufacturing activities
were transferred to third party contract manufacturers that are also registered
with the FDA.
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 laws 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 antikickback
and antireferral laws and regulations, and similar laws barring or restricting
referrals. Noncompliance with Federal and state antikickback and antireferral
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 Medicare and Medicaid programs, the Company is
subject to the foregoing antikickback and antireferral laws and regulations. The
Company believes that its operations comply in all material respects with all
applicable antikickback, antireferral, 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 health care providers for their medical equipment costs under
Federal programs and by other third party payors as previously discussed.
Changes to reimbursement methodologies or amounts may have a material adverse
effect on the business of the Company.
In addition, the Company is subject to Federal, state, and local laws,
rules, and regulations relating to the protection of the environment, including
laws, rules, and regulations governing the use, management, and disposal of
hazardous and 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 related to current
or past operations. The Company is not aware of any such threatened or pending
cleanup liabilities, however, and believes that it is in material compliance
with all applicable environmental laws.
ITEM 2. PROPERTIES
At September 30, 1999, the Company had 111 locations in 42 states, and one
location in each of the District of Columbia, Puerto Rico, and Canada. MEDIQ's
principal facility is owned by MEDIQ/PRN and is located in Pennsauken, New
Jersey, where the Company's corporate offices and a portion of its operating
activities are located. Major repairs of Company owned medical equipment and
support surfaces are performed at this location, and this location serves as a
distribution and sales center. A storage facility is also located in Pennsauken,
New Jersey. A leased facility located in Santa Fe Springs, California also
performs repairs of Company owned medical equipment and support surfaces. A
leased facility in Phoenix, Arizona principally performs biomedical repair
services for customer owned equipment. A leased facility in Florida serves as a
branch location and distribution center, and a leased facility in New York
serves as a sales office and distribution center. Of 103 branch offices located
elsewhere, 88 contain office and warehouse space and are leased by the Company
and 15 are operated by independent distributors. The Company has five leased
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facilities, one each in California, Georgia, Illinois, Texas, and Utah, which
serve as distribution centers for parts and disposables. None of the above
property leases were with a party affiliated with the Company. The Company
believes that the properties owned and leased by it are adequate for its
operations for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
On January 15, 1998, Crandon Capital Partners, a stockholder of MEDIQ, sued
MEDIQ and each of its directors in Delaware Chancery Court, alleging breaches of
fiduciary duties in connection with the approval of the merger by the directors
of MEDIQ and related transactions. MEDIQ has never been served and there has not
been any activity with respect to this matter since the suit was initiated.
In July 1998, MEDIQ Mobile X-Ray Services, Inc., formerly 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 been informed of the nature or scope of the investigation. The Company
has not received any further notices or inquiries nor has there been any other
activity with respect to this matter.
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 Siemens' attempted termination of a distribution agreement between the
parties. The suit was settled amicably out of court in December 1999, and an
amendment extending the distribution agreement for five years was reached in
December 1999. There was no adverse effect upon the Company as a result of this
settlement.
On July 8, 1999, SizeWise Rental, Inc. filed a suit against the Company in
the United States District Court, District of Kansas. The suit is in connection
with the purported termination by SizeWise of a rental agreement with the
Company due to an alleged breach of the agreement by the Company. The complaint
seeks a declaratory judgment and damages. On September 21, 1999, the court
entered an order staying the case pending arbitration. On February 17, 2000, the
district court entered an order enjoining the Company, until the earlier of
November 1, 2000 or the resolution of the underlying arbitration, from renting
products designed for patients over 350 pounds to facilities to which it had
previously rented SizeWise products. The Company has filed a notice of appeal
and motion for expedited treatment which are scheduled to be heard in May 2000.
On May 26, 2000, the United States Court of Appeals for the Tenth Circuit (the
"Court") issued its Order and Judgement regarding the appeal. The Court affirmed
the district court's ruling discussed above. The Company and SizeWise will enter
arbitration shortly to resolve the damages portion of the suit unless a
settlement is negotiated prior to the start of arbitration. Based on information
available and established reserves, the Company believes that resolution of the
suit should not have a material adverse effect on the operations or financial
condition of the Company.
Other than the foregoing matters, the Company is not a party to any
material pending legal proceeding. The Company is subject to ordinary litigation
incidental to the conduct of its businesses and the ownership of its properties,
none of which individually or in the aggregate would have a material effect on
the Company's business, results of operations, or financial condition.
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, 1999.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
No established public trading market exists for MEDIQ's common stock. At
May, 2000, there were 50 holders of record of MEDIQ's common stock.
MEDIQ did not pay any dividends in fiscal 1999 or 1998. Terms of
MEDIQ/PRN's $325.0 million senior secured credit facility and the indentures
related to MEDIQ's $140.9 million 13% senior discount debentures and MEDIQ/PRN's
$190.0 million 11% senior subordinated notes limit MEDIQ's ability to pay
dividends with respect to its common and preferred stock. MEDIQ does not
anticipate paying dividends in the foreseeable future. Accrued and unpaid
dividends on MEDIQ's three cumulative preferred stock series are added to its
liquidation value or reflected as long term liabilities as appropriate.
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,
-------------------------------------------------------------
1999 (1) 1998 (2) 1997 1996 1995
-------- -------- ---- ---- ----
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Summary Statement of Operations Data:
Revenues $ 217,681 $ 180,916 $155,960 $136,066 $132,241
Operating (loss) income (3) (2,518) (18,704) 29,504 25,446 24,202
Interest expense (4) 55,095 27,894 19,107 27,307 29,241
Other credits and (charges) - net (5) 984 5,072 (7,504) (4,695) 1,381
(Loss) income from continuing operations
before income taxes (56,629) (41,526) 2,893 (6,556) (3,658)
Loss from continuing operations (45,807) (29,071) (2,241) (6,178) (3,346)
Loss from continuing operations per share (6) (59.94) (2.05) (.09) (.25) (.14)
Summary Balance Sheet Data:
Current assets 76,164 86,813 69,751 45,103 44,436
Investments in discontinued operations -- -- -- 64,967 70,162
Property, plant, and equipment - net 112,233 103,917 113,589 122,706 132,823
Total assets 361,593 309,218 257,552 308,423 334,169
Current liabilities (7) 611,297 37,039 40,019 45,614 64,685
Senior debt, net of current portion (7) 557 277,490 128,131 192,461 136,949
Subordinated debt, net of current portion (7) -- 190,514 10,055 41,229 81,907
Mandatorily redeemable preferred stock (8) 130,955 113,037 -- -- --
Stockholders' (deficiency) equity (9) (389,743) (325,353) 48,603 17,445 31,517
No cash dividends were declared in any year presented.
</TABLE>
See Notes to Selected Consolidated Financial Data.
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Notes to Selected Consolidated Financial Data
(1) The Company's results of operations and financial position reflected the
incremental effects of the acquisition of HTD that for accounting purposes
was effected May 28, 1999 and three other acquisitions completed during
fiscal 1999 from their respective acquisition dates. The acquisitions were
financed with debt aggregating $77.5 million and equity of $3.5 million.
(2) On May 29, 1998, MEDIQ effected a merger accounted for as a
recapitalization. The historical basis of assets and liabilities was not
changed. In connection with the merger, new capital stock was issued, debt
was refinanced, and additional debt was incurred. Also on that date, the
Company acquired the CH Medical Business that was financed with $50.0
million of debt. The Company's results of operations and financial position
reflected the incremental effects of the acquisition of CH Medical and
another acquisition completed in June 1998 from their respective
acquisition dates.
(3) Fiscal 1998 included nonrecurring merger and acquisition charges of $35.0
million. Fiscal 1996 included a restructuring charge of $2.2 million.
(4) Fiscal 1999 and 1998 principally reflected the higher levels of
indebtedness incurred in the merger and an acquisition in May 1998. Fiscal
1999 also included the effect of amounts borrowed during the year to fund
acquisitions. Fiscal 1997 reflected the reductions in indebtedness
undertaken with the proceeds of certain disposals conducted in fiscal 1997
and 1996.
(5) Fiscal 1998 included a cash settlement of $3.0 million on a fully reserved
note receivable and accretion of discount of $1.1 million on another note
receivable. Fiscal 1997 included a charge of $11.0 million for the
repurchase of MEDIQ/PRN warrants, a gain of $9.2 million on the sale of an
equity investment, a reserve of $5.5 million on a note receivable, the
write off of deferred acquisition costs of $4.0 million, and accretion of
discount of $1.8 million on another note receivable. Fiscal 1996 included a
reserve of $6.0 million on a note receivable and a net gain of $.6 million
on the sale of assets. Fiscal 1995 included a net loss of $.4 million on
the sale of assets.
(6) Reduced for the annual amount accrued for dividends and accretion on all
series of preferred stock of $19.4 million in fiscal 1999 and $6.1 million
in fiscal 1998. The disparity in the fiscal 1999 and 1998 per share amounts
compared to preceding years was due to the greatly reduced number of common
shares outstanding resulting from the merger in May 1998. Per share amounts
for each year presented were the same for basic and diluted.
(7) As a result of MEDIQ/PRN's default of its senior credit facility and cross
default provisions under the other debt indentures, all principal
outstanding under the facility and indentures for fiscal 1999 was
classified as a current liability. Accordingly, for fiscal 1999 $556.7
million has been reclassified.
(8) Included cumulative dividends and accretion for series A and C preferred
stock of $20.0 million through fiscal 1999 and $4.8 million through fiscal
1998 and issuance in fiscal 1999 of new shares of series A and C amounting
to $2.7 million.
(9) In addition to net losses in each year, fiscal 1999 and 1998 included
annual amounts accrued for dividends and accretion on all preferred stock.
Fiscal 1999 also included the issuance of shares of preferred stock. Fiscal
1998 also included the effects of the merger and related recapitalization.
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MEDIQ is a holding company whose only substantial asset is ownership of its
wholly owned subsidiary MEDIQ/PRN. MEDIQ/PRN along with its wholly owned
subsidiaries MEDIQ Management Services and MEDIQ/PRN Canada are the only
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, which distributions are limited by
MEDIQ/PRN's loan agreements.
In May 1998, MEDIQ/PRN completed an acquisition that greatly expanded and
provided a national presence for the Company's support surfaces business. Since
then, MEDIQ/PRN acquired another business in fiscal 1998 and three businesses in
fiscal 1999 that specialized in rentals of support surfaces to further
strengthen this line of business. One of these fiscal 1999 acquisitions also
contributed to rentals of medical equipment. In June 1999, MEDIQ/PRN acquired
HTD Corporation that specialized in the sale of disposable products, rentals of
medical equipment, and biomedical repair services. This acquisition provided the
Company with a much broader customer base, a greatly expanded product line of
disposable products, and added experience and sophistication in this line of
business.
Liquidity and Capital Resources
Default of Indebtedness and Going Concern
At the filing date of this report, MEDIQ/PRN was in default of a number of
covenants under its senior secured credit facility. Potential additional events
of default concerning financial covenants may exist as a result of the
restatements of fiscal 1999 quarterly financial information. The lenders to the
credit facility have the right to accelerate payment of all amounts outstanding
under the facility as a result of these defaults. Although the lenders have not
yet exercised that right, there can be no assurance that they will not do so in
the future.
Until a formal agreement relating to the defaults and potential defaults is
reached with the lenders, the Company is unable to access the credit facility
and must fund its working capital needs through other sources of cash. For the
first six months of fiscal 2000, the Company has had adequate funds from its
working capital and operating activities to fund operations, including capital
expenditures and debt service. However, the Company's current cash forecast
indicates additional sources of cash will be required to meet future working
capital needs, including the funding of the June 2000 debt service payments
aggregating approximately $24.1 million, of which $10.5 million is for interest
on the 11% notes.
The indenture to the 11% notes permit the lenders under the senior credit
facility to elect to block the payment of amounts due and payable with respect
to the 11% notes for a period of up to 180 days. This payment blockage may occur
during a period of default under the credit facility in which the maturity of
debt outstanding thereunder may be accelerated. Pursuant to a letter dated May
25, 2000, the lenders to the credit facility have sent notice to the trustee for
the 11% notes and the Company to effect a payment blockage on the 11% notes such
that the semiannual interest payment of $10.5 million payable on June 1, 2000
was not made. Any nonpayment of interest on the 11% notes existing for more than
30 days would be an event of default under the indenture to the 11% notes. As
long as the maturity of the debt outstanding under the credit facility has not
been accelerated, payments with respect to the 11% notes may be continued after
the payment blockage period expires.
On June 12, 2000 and June 30, 2000, MEDIQ/PRN made $8.5 million in payments
under the credit facility. Such payments represented normal interest costs,
LIBOR/prime plus the applicable margin, but did not include default interest of
$1.8 million as required under the credit agreement. Non-payment of the default
interest constitutes a default under the credit facility. In addition, MEDIQ/PRN
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<PAGE>
notified the lenders for the credit facility that the Company intended to defer
the principal payment of $3.3 million due June 30, 2000 to $1.1 million July 21,
2000; $1.1 million August 18, 2000; and $1.1 million September 15, 2000. Such
deferment constitutes a default under the credit facility.
As a result of the defaults, effective January 4, 2000, MEDIQ/PRN began
incurring default rates of interest and margins on debt outstanding under the
credit facility. The default rates consist of additional interest of two percent
per annum. The default rates will be in effect until the defaults are cured. At
January 4, 2000, rates of interest including applicable margins on debt
outstanding under the credit facility increased from 9.50% to 11.75% on $18.0
million, 8.375% to 10.625% on $80.0 million, and 8.875% to 11.125% on $199.0
million.
LIBOR contracts under the credit facility cannot be renewed while defaults
exist thereunder. Therefore, LIBOR contracts that expire automatically convert
to the default prime rate of interest. At the filing date of this report, LIBOR
contracts for $8.0 million and $1.0 million that had been outstanding at 10.625%
and 11.125%, respectively, were converted to prime rate borrowings at 12.25%.
Outstanding LIBOR contracts scheduled to expire in June 2000 amounting to $72.0
million at 10.625% and $198.0 million at 11.125% will also convert to prime rate
borrowings at that time should the defaults not be cured.
While the credit facility is in default, the ultimate disposition of the
debt outstanding thereunder is under the control of the lenders to the facility.
As a result, all outstanding principal under the credit facility at September
30, 1999 of $288.5 million was classified as a current liability. The amount of
principal outstanding under the credit facility at the filing date of this
report was $297.0 million.
The Company is in violation of covenants under the indentures governing
MEDIQ's 13% Senior Discount Debentures due 2009 and MEDIQ/PRN's 11% Senior
Subordinated Notes due 2008 with respect to the timely filing of financial
information for fiscal 1999 and fiscal 2000. Upon written notice from the
trustees or holders of at least 25% of the outstanding debt under either
indenture that the Company is in default of these covenants, the Company will
have 30 days to cure the default. Failure to cure the default would give rise to
an event of default under the indentures. There would be additional events of
default under the indentures if the lenders to the senior credit facility
ultimately decide to accelerate the indebtedness outstanding under the facility
and such acceleration is not rescinded within 10 days. If events of default
exist under the indentures, the trustees or the holders of at least 25% of the
outstanding debt under either indenture, in each case subject to certain rights
of the credit facility, will be entitled to accelerate the payment of all
principal and interest outstanding under the affected indenture. At the filing
date of this report, the Company has not received a notice of default with
respect to either indenture.
The indentures discussed above as well as the indenture for MEDIQ's 7.50%
Exchangeable Debentures due 2003 contain cross default provisions that
accelerate debt outstanding under each in the event that outstanding debt under
any other loan arrangement is in default and thereby accelerated. Because the
Company does not control the ultimate disposition of the debt outstanding under
the credit facility, all outstanding principal under the indentures at September
30, 1999 of $278.6 million was classified as a current liability. As of May 31,
2000, the amount of principal outstanding under the indentures was $286.5
million.
The Company does not have sufficient current assets nor does it presently
have any other available sources of capital to satisfy the current liability
represented by the potential to accelerate amounts outstanding under the credit
facility and indentures. In addition, the credit facility permits the lenders
thereunder the right to liquidate collateral under the security agreement
thereto to satisfy amounts outstanding. The credit facility is secured by a
first priority lien and security interests in substantially all tangible and
intangible assets of MEDIQ/PRN and its subsidiaries.
The Company has incurred recurring losses from operations, has negative
working capital, and a significant shareholders deficiency. These conditions
plus the foregoing circumstances raise substantial doubt about the Company's
ability to continue as a going concern. The Company cannot predict at this time
what actions may be taken with respect to its continued existence.
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<PAGE>
The Company is in discussions with the lenders to the credit facility to
reach a formal agreement with respect to the defaults and potential defaults.
The Company cannot predict what such agreement may consist of and what effects
may ensue on the operations of the Company. Also, the Company is uncertain as to
what actions will be taken by the lenders to the credit facility if the defaults
are not cured.
The Company is currently investigating alternative sources of liquidity
sufficient to meet working capital needs in a way that is satisfactory to its
lenders. In the meantime, the Company has implemented an aggressive cash
management program. This program consists of daily scrutiny and monitoring of
cash receipts and disbursements as well as more intensive cash collection
efforts. There can be no assurance that this cash management program will be
effective or successful.
The amount of the current portion of debt outstanding at September 30, 1999
excluding the potentially accelerated amounts discussed above would be $11.2
million. Notwithstanding the foregoing discussion, the financial statements
herein have been presented on the basis of a going concern.
In connection with the default under the credit facility, MEDIQ/PRN was
notified by the counterparty to one of its collar agreements in the notional
amount of $50.0 million that the agreement was terminated effective May 11,
2000. As a result of this early termination of the agreement, the counterparty
owes MEDIQ/PRN approximately $1.0 million. In accordance with the terms of the
credit facility, the lenders to the credit facility will retain this amount owed
to repay debt outstanding thereunder. The collar served to mitigate variable
interest rates to MEDIQ/PRN when LIBOR rates of interest were in excess of
7.00%.
On June 7, 2000 and June 8, 2000, the Company was notified by the
counterparties for its other collar agreement and its interest rate swap that
such arrangements would be terminated shortly due to the defaults under the
credit facility. The Company received $.6 million in connection with such
terminations, and such proceeds were utilized to repay indebtedness under the
credit facility.
Effects of the Merger, Refinancing, and Acquisitions
The Company underwent a merger, refinancing, and acquisition of CHI, Inc.
on May 29, 1998. The Company emerged from these transactions highly leveraged.
The amount of debt outstanding immediately after the merger was $476.4 million
compared to $144.8 million outstanding before the merger. The Company
additionally issued $108.2 million of mandatorily redeemable preferred stock in
the merger. During fiscal 1999, the Company borrowed an additional $77.5 million
to fund acquisitions made during the year.
Such high leverage and associated limitations connected with the borrowing
arrangements have important consequences for the Company. The Company's ability
to obtain additional financing for acquisitions, working capital, capital
expenditures, or other purposes may be impaired or any such financing may not be
on terms favorable to the Company. Interest expense may reduce the funds that
would otherwise be available to the Company for its operations and future
business opportunities. A substantial decrease in net operating cash flows could
make it difficult for the Company to meet its debt service requirements, and
purchase medical equipment or support surfaces, or could force it to modify its
operations. 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. Indebtedness incurred under the credit facility is at
variable rates of interest, which causes the Company to be vulnerable to
increases in interest rates. Indebtedness under the credit facility is secured
by substantially all of the assets of MEDIQ/PRN and its subsidiaries, possibly
reducing its ability to obtain additional financing or to adjust timely to
changing market conditions. Additionally, the credit facility and the indentures
to the 13% discount debentures and 11% notes include significant operating and
financial limitations, 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.
Interest on debt outstanding under the credit facility is principally due
quarterly. Interest on the 11% notes is payable semiannually in June and
December. Commencing March 31, 2000, quarterly principal payments on the credit
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facility are $3.3 million through June 30, 2001. Thereafter, the quarterly
payments increase incrementally each year until final maturity of the respective
loans under the facility. Acquisition and subfacility B loans are scheduled to
be paid off in 2004 and the term loans in 2006. Starting in 2003, annual cash
interest of $18.3 million is payable on the 13% discount debentures, with the
full principal face value of $140.9 million due in 2009. Principal of $190.0
million on the 11% notes is due in 2008. The 13% Series A and 13.5% Series C
preferred stocks are mandatorily redeemable in 2011 and 2012, respectively. Each
preferred stock series has preferred dividends that are cumulative. Unpaid
dividends must be paid at the stock redemption dates. At this time, the Company
has no plans to pay dividends on the preferred stock prior to their redemption
dates. Redemption of stated value plus cumulative unpaid dividends at the date
of redemption are scheduled to amount to $436.3 million for Series A and $205.4
million for Series C. The 13.25% Series B preferred stock is not redeemable but
has cumulative dividends. There are no plans to pay dividends on Series B. At
September 30, 1999, cumulative dividends on series B were $5.6 million, and such
dividends are scheduled to accumulate to $161.1 million in 2012. The Company has
not developed any plans at this time to satisfy any of these long term cash
requirements.
Other Liquidity and Capital Resources during Fiscal 1999
The $325.0 million senior secured credit facility was amended in May 1999
by reducing the capacity under the acquisition facility from $75.0 million to
the present $50.0 million and increasing the capacity of the revolving credit
facility from $50.0 million to the present $75.0 million. A new subfacility B
was established under the revolving credit facility to contain the additional
$25.0 million capacity, with the initial $50.0 million capacity being designated
as subfacility A. This modification permitted MEDIQ/PRN to have additional
availability of and access to cash than formerly under the credit facility.
MEDIQ/PRN used the $25.0 million additional available capacity to finance a
portion of the HTD acquisition. The $200.0 million term facility portion of the
credit facility was not changed.
At September 30, 1999, principal outstanding under the credit facility was
$14.0 million under subfacility A, $25.0 million under subfacility B, $50.0
million under the acquisition facility, and $199.5 million under term loans. As
long as an event of default under the credit facility exists, no amounts are
available under subfacility A. No further borrowing capacity is available under
the acquisition and term loan facilities.
The Company projects cash capital expenditures of $26.5 million for fiscal
2000, primarily for rental equipment. At September 30, 1999, the Company had
open commitments totaling $11.1 million. Effective October 1, 1999, the Company
entered into an agreement that commits the Company to purchase parts and
disposable products over its 5 year term. The amount of the commitment under
this agreement for fiscal 2000 is $5.0 million. Thereafter, the annual
commitment will vary based on a formula that takes into consideration the
quantity of inventory subject to the agreement the Company has on hand, on order
and the quantity of items subject to the agreement the Company sold in the
previous year. The Company expects to satisfy the commitments for fiscal 2000
with internally generated cash, since the Company does not have access to its
credit facility while the facility is in default, and other means of borrowing
are limited under the Company's existing debt arrangements.
The Company has outstanding letters of credit aggregating $2.1 million in
support of its various insurance policies.
Cash Flows Fiscal 1999 Compared to Fiscal 1998
Net cash provided by operating activities for fiscal 1999 decreased by
$17.3 million after adjusting fiscal 1998 for nonrecurring merger and
acquisition payments of $35.0 million. These merger and acquisition payments
were principally funded by borrowings initiated with the merger and refinancing.
The decrease in fiscal 1999 was principally due to increased interest payments
for fiscal 1999 of $25.0 million. The increased interest payments were due to
the greater level of debt incurred in connection with the merger and associated
refinancing in May 1998, additional indebtedness incurred in the funding of
acquisitions made since May 1998 and additional working capital needs during the
year. Greater working capital needs resulted from increased expenses of
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<PAGE>
operations commensurate with the accelerated growth in the Company since May
1998.
Net cash used in investing activities was greater for fiscal 1999 primarily
due to the number of acquisitions made. The Company made four acquisitions in
fiscal 1999 aggregating $84.1 million compared to two in fiscal 1998 aggregating
$59.5 million. Each fiscal year contained one acquisition amounting to cash
consideration of approximately $50.0 million. The majority of the funding for
the acquisitions in each year was borrowed under the credit facility. Purchases
of equipment represented the continual need to maintain adequate inventory
levels with the latest available technology consistent with customer demand and
growth. Equipment purchases generally were temporarily funded with amounts
borrowed from working capital facilities. These working capital borrowings were
subsequently repaid with cash provided by operations. Collections on notes
receivable in fiscal 1998 represented substantially the entire principal amount
of notes then outstanding.
Net cash provided by financing activities was higher for fiscal 1999
principally due to the $14.0 million borrowed under the working capital portion
of the credit facility during the year. Borrowings made in fiscal 1999 in the
amount of $77.5 million were used to fund acquisitions, and the remaining
borrowings were used for working capital needs. Debt repaid in fiscal 1999
consisted of $2.4 million in regularly scheduled monthly payments for capital
leases and $.5 million for the initial scheduled installment on term loans.
Repayment of the principal on the term loans in quarterly installments began in
September 1999 and continues at this amount through June 2004. Net cash provided
by financing activities in fiscal 1998 primarily resulted from the Company's
refinancing for the principal purpose of funding the Company's merger, the
acquisition of CHI Industries, and costs associated with each and the
refinancing.
Cash Flows Fiscal 1998 Compared to Fiscal 1997
Adjusting fiscal 1998 and 1997 for nonrecurring items, net cash provided by
operating activities for fiscal 1998 increased by $29.3 million. Fiscal 1998
included merger and acquisition payments of $35.0 million principally funded by
borrowings, and fiscal 1997 included $4.0 million in expenses associated with an
aborted acquisition. Fiscal 1998 benefited from reduced interest and income tax
payments of $4.6 million and $6.7 million, respectively. Reduced interest
primarily resulted from the repayment of debt in fiscal 1997 with the proceeds
from the sale of discontinued operations. Reduced income taxes reflected the
Company's loss position in fiscal 1998 compared with taxable operations and
gains on sales of operations in fiscal 1997. Also, fiscal 1997 reflected
increased working capital requirements that reduced cash from operations for
that year.
Net cash used in investing activities in fiscal 1998 principally reflected
two acquisitions aggregating $59.5 million and increased purchases of rental
equipment of $4.6 million. Collections on notes receivable in fiscal 1998
represented substantially the entire principal amount of notes then outstanding.
Net cash provided by investing activities in fiscal 1997 principally reflected
the proceeds from the sale of discontinued operations of $130.3 million. The
sale of the discontinued operations completed the Company's strategic initiative
to focus on the core business of MEDIQ/PRN. Purchases of equipment represented
the continual need to maintain adequate inventory levels with the latest
available technology consistent with customer demand and growth. Equipment
purchases generally were temporarily funded with amounts borrowed from working
capital facilities. These working capital borrowings were subsequently repaid
with cash provided by operations.
Net cash provided by financing activities in fiscal 1998 primarily resulted
from the Company's refinancing for the principal purpose of funding the
Company's merger, the acquisition of CHI Industries, and costs associated with
each and the refinancing. In financing the merger and acquisition, MEDIQ issued
and sold $140.9 million aggregate amount at maturity of 13% senior discount
debentures for gross proceeds of $75.0 million. MEDIQ/PRN entered into the
$325.0 million senior secured credit facility under which was borrowed $200.0
million in term loans and issued and sold $190.0 million principal amount of 11%
senior subordinated notes. The senior secured credit facility replaced a former
credit facility that had been in place. In connection with the refinancing, in
July 1998 the Company terminated its then existing interest rate hedging
contracts and entered into two series of new interest rate hedging contracts.
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<PAGE>
The cost to terminate the previous hedging contracts was $.6 million. Net cash
used in financing activities in fiscal 1997 was principally for the repayment of
debt with proceeds from the refinancing undertaken at the beginning of fiscal
1997 and the sale of discontinued operations during the year.
Results of Operations
Year End Adjustments and Restatement of Fiscal 1999 Quarterly Financial
Information
At the end of fiscal 1999, the Company performed an extensive review of the
adequacy of the reserves for doubtful accounts and excess and obsolete
inventories. The Company also reviewed the capitalization of accessories for its
medical equipment and made determinations regarding the status of certain
amounts on deposit and the need for additional accruals for professional fees.
As a result of these reviews, the Company determined that certain adjustments
should have been made. These adjustments resulted in an increase in the net loss
attributable to shareholders for fiscal 1999 by $26.3 million, net of tax of
$6.3 million, or $24.14 per share. The adjustments on a pretax basis consisted
of charges of $19.6 million in additional provisions for doubtful accounts, $6.7
million in provisions for excess and obsolete inventories, $2.9 million for the
write off of accessory costs previously capitalized, $2.3 million in
professional fees, and $1.1 million in provisions for disputed deposits. The
statement of operations was affected on a pretax basis as follows: rental
revenue reduced by $12.0 million; cost of sales increased by $4.1 million;
operating expenses increased by $12.6 million; general and administrative
expenses increased by $3.4 million; and depreciation increased by $.5 million.
Due to the magnitude of the adjustments, the Company has determined that
restatement of previously published quarterly financial information is
necessary. The adjustments, net of tax, and per share amounts, respectively, for
each of the first three quarters were: first quarter - $1.6 million, $1.49;
second quarter - $5.1 million, $4.71; third quarter, $2.9 million, $2.71.
Fiscal 1999 Compared with Fiscal 1998
Rental revenues are derived from rentals of moveable medical equipment and
support surfaces, along with related revenue share arrangements. Sales revenues
are principally derived from sales of parts and disposables, along with sales of
medical equipment, support surfaces, medical gases, and related revenue share
arrangements. Other revenues principally consist of outsourcing services. The
increase in fiscal 1999 overall revenues was apportioned 6.2% or $11.1 million
to rental, 12.3% or $22.2 million to sales, and 1.9% or $3.4 million to other.
The increased revenues were principally attributed to the incremental effects of
acquisitions made by the Company in May, June, and November 1998, and January,
February, and June 1999. The acquisition in June 1999 of HTD focused on
expanding the disposable products business while also contributing to rentals of
medical equipment and outsourcing services. The Company's other acquisitions
principally focused on expanding the Company's rental business.
The net increase in rental revenues for fiscal 1999 was primarily related
to incremental revenues from acquisitions made since May 1998 of businesses
specializing in rentals. Rentals of support surfaces increased by 102.4% or
$21.3 million, to $42.1 million principally due to acquisitions, partially
offset by increased charges for reserves for doubtful accounts. Rentals of
medical equipment decreased by 8.4%, or $10.2 million, to $111.8 million
principally as a result of increased charges for reserves for doubtful accounts,
pricing concessions granted to a large national account and the termination of
the Company's largest revenue share arrangement in June 1999, partially offset
by incremental revenues from businesses acquired, increased volume of 4.5% in
total average units on rent, and increased revenues from other revenue share
arrangements. The Company experienced and continues to experience pricing
pressures as a result of increased competition from other rental providers.
The net increase in sales revenues for fiscal 1999 was primarily
acquisition related. Sales of parts and disposables increased 102.4%, or $20.4
million, to $40.2 million primarily due to the incremental revenues provided
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by the HTD acquisition and in part to internal growth. Sales of medical
equipment for fiscal 1999 increased by $1.2 million to $5.3 million as a result
of internal initiatives. Sales of support surfaces for fiscal 1999 increased by
$1.5 million to $1.9 million, as the Company's acquisitions of support surfaces
businesses provided added equipment available for sale. Sales of gases for
fiscal 1999 decreased by $.9 million to $2.7 million due to decreased volume
with one predominant customer. Sales of gas to this customer are expected to
continue at this level for the foreseeable future.
Within other revenues for fiscal 1999, biomedical repair services increased
by $2.6 million to $5.7 million. About half of this increase was attributed to
incremental revenues provided by the biomedical repair business acquired from
HTD, with the remainder provided by internal growth. Logistics services
increased by $1.2 million to $3.8 million primarily from the continuation of
contracts that started at various times in fiscal 1998 with one large multisite
customer group and in part from a net increase in the number of contracts
outstanding in fiscal 1999 compared to fiscal 1998. Reconditioning services
decreased by $1.1 million to $.4 million as the Company decided to discontinue
such services.
Based on the Company's projections and revenues for the first six months of
fiscal 2000, the Company's expects overall revenues for fiscal 2000 to be higher
than those for fiscal 1999. Although rentals will still be the largest class of
the Company's revenues, sales and other revenues are expected to each show a
larger percentage of total revenues, as the overall growth will come from these
classes of revenues. The increase in sales will be principally due to the added
revenue base in disposable products obtained in the acquisition of HTD in June
1999. The increase in other revenues will be principally due to a full year of
revenue from the biomedical repair operation obtained in the HTD acquisition
coupled with expansion of established internal programs. Rental revenues are
expected to be lower, as these revenues will be depressed principally by
competitive pricing pressures. The Company expects competitive pricing pressures
to continue with a depressing effect on its rental revenues for the foreseeable
future. For the first six months of fiscal 2000, the percentage breakdown of the
Company's total revenues was: rentals - 65%; sales - 28%; other - 7%. For the
first six months of fiscal 2000, sale and other revenues were higher than those
for the comparable prior year period, and rental revenues were lower.
Cost of sales for fiscal 1999 included $4.0 million in charges for excess
and obsolete inventories, whereas no such charges were made for fiscal 1998.
Otherwise, increased costs of sales were consistent with the increase in sales.
Sales margin was 11.5% for fiscal 1999 and 18.9% for fiscal 1998. This decrease
was primarily due to the inventory adjustments previously cited, partially
offset by higher margins associated with direct sales of parts and disposables
previously subject to a revenue share arrangement that terminated in fiscal 1999
and more higher margin equipment sales in fiscal 1999 than in fiscal 1998.
Selling expenses increased in fiscal 1999 due to the Company's expanded
operations for support surfaces and parts and disposables resulting from
acquisitions since May 1998.
Operating and general and administrative expenses are viewed together
because each covers a broad spectrum of expenses that crosses functions within
the Company. These expenses increased for fiscal 1999 primarily due to: (i)
increased provisions for bad debts of $5.5 million; (ii) increased charges for
excess and obsolete inventories of $2.0 million; (iii) additional charges
aggregating $3.4 million for disputed deposits and professional fees; (iv) write
off of accessory costs of $2.4 million; (v) increased infrastructure and
employee costs associated with larger and expanded operations connected with the
growth in the business; (vi) increased service and repair and maintenance
requirements associated with a larger and expanded equipment and product
inventory; and (vii) the incremental effect of management fees initiated with
the merger in May 1998.
Depreciation for fiscal 1999 included $.5 million for write offs of
accessory costs and fiscal 1998 included $6.0 million to write down
underutilized equipment. Other than the forgoing, depreciation and amortization
increased for fiscal 1999 due to additional depreciable equipment purchased and
obtained in acquisitions and increased goodwill amortization from additional
goodwill incurred in acquisitions made since May 1998.
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<PAGE>
Operating margin was negative for both fiscal 1999 and 1998. The operating
margin for fiscal 1999 was lower principally due to: (i) increased provisions
for doubtful accounts of $19.4 million; (ii) increased provisions for
inventories of $6.0; (iii) additional charges aggregating $3.4 million for
disputed deposits and professional fees; (iv) a change in the mix of the revenue
base, as higher margin rentals decreased and lower margin sales of parts and
disposables increased; (v) effects on revenues of price concessions on generally
higher margin medical equipment rentals; and (vi) increased expenses of
operations related to the growth in the business coupled with increased
depreciation and amortization related to acquisitions exceeding the incremental
revenues generated by internal growth and acquisitions. These increases were
partially offset by decreased write offs of equipment costs of $3.1 million.
Fiscal 1998 included nonrecurring merger and acquisition charges of $35.0
million. For the first six months of fiscal 2000, the operating margin improved
to 4.13%, but was still below the operating margin for the comparable period of
fiscal 1999 on a restated basis of 9.38%.
Operating income/loss exclusive of depreciation and amortization is known
as EBITDA. EBITDA for fiscal 1999 was $40.1 million and $23.0 million for fiscal
1998. EBITDA for fiscal 1998 included nonrecurring merger and acquisition
charges of $35.0 million. 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.
Interest expense increased primarily due to the greatly increased levels of
debt outstanding since May 1998 that had been incurred to finance the merger and
acquisitions since that time. The portion of interest expense that represents
cash was $42.1 million for fiscal 1999 and $22.7 million for fiscal 1998. The
remaining interest expense primarily represented noncash accretion of the
Company's 13% discount debentures and amortization of deferred debt issuance
costs. Due to higher average debt outstanding, a general increase in market
variable interest rates available to the Company, and the additional default
rates of interest, interest expense and the related cash portion for fiscal 2000
are expected at the filing date of this report to be higher than that for fiscal
1999 by approximately $9.0 million and $7.0 million, respectively.
The primary difference in other charges and credits between fiscal 1999 and
1998 was that fiscal 1998 included a cash receipt of $3.0 million for a
settlement on a note receivable and virtually all of the remaining accretion of
discount of $1.1 million on another note receivable.
The effective tax rate for continuing operations for fiscal 1999 was 19.1%
and 30.0% for fiscal 1998. The difference was principally attributable to
increased valuation allowances applied against tax assets in fiscal 1999. The
Company's income tax benefit at its effective tax rate for fiscal 1999 was lower
than the tax benefit computed at the statutory rate as a result of the
nondeductiblity of certain goodwill amortization and the nonrecognition of
certain operating losses.
Dividends and accretion on preferred stock represent accrued and unpaid
dividends on all cumulative preferred stocks issued in May 1998 and accretion of
the differences between carrying amounts and liquidation values on all
mandatorily redeemable preferred stocks issued in June 1999. The difference
between fiscal 1999 and 1998 was primarily due to the amount of time that the
preferred stocks were outstanding in each year.
Due to the magnitude of interest expense, noncash dividends and accretion
on preferred stocks, and noncash depreciation and amortization, the Company
expects that it will continue to report a net loss available to common
shareholders for the foreseeable future.
In March and June 2000, the Company implemented a strategic initiative to
streamline the organization and increase operational response and efficiency. In
the process, 250 positions were combined and/or eliminated. The Company recorded
charges of approximately $2.8 million and $3.0 million in the second and third
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<PAGE>
quarters of fiscal 2000 for severance and related benefits associated with the
reduction.
Fiscal 1998 Compared with Fiscal 1997
The increase in fiscal 1998 overall revenues was apportioned 11.8%, or
$18.4 million, to rental, 4.9%, or $7.7 million, to sales, and (.7)%, or $(1.1)
million, to other. Rental revenues for fiscal 1998 increased primarily due to
acquisitions in September 1997, May 1998, and June 1998 of businesses that
specialized in support surfaces. Rental revenue for medical equipment for fiscal
1998 remained flat with that for fiscal 1997, with increased revenue from
revenue share activities offset by decreased revenue from equipment rentals.
Revenue share activities increased principally from greater volume with ongoing
customers. The decrease in medical equipment rentals was principally
attributable to a shift from rental to purchase by one of the Company's large
home care customers in the fourth quarter of fiscal 1997. Sales revenues for
fiscal 1998 increased principally due to greater volume in all sales components,
with sales of medical gases having been initiated in the fourth quarter of
fiscal 1997. Other revenues decreased primarily due to the subsequent
elimination of revenues for logistic services provided by MEDIQ to SpectraCair
prior MEDIQ's acquisition of SpectraCair in September 1997, partially offset by
increased revenues from biomedical repair services and asset management
projects.
The operating loss for fiscal 1998 included nonrecurring charges of $35.0
million related to the merger and CHI acquisition in May 1998 and a charge of
$6.0 million for the write off of underutilized equipment. Contributing to the
operating loss for fiscal 1998 were increased expenses for sales and operational
personnel to facilitate the growth in support surfaces, parts and disposables,
and outsourcing services, increased depreciation related to additional equipment
purchased and obtained in acquisitions, and increased goodwill amortization due
to additional goodwill incurred in acquisitions made during the fiscal year.
Operating margin for fiscal 1998 was a negative 10.3% compared to a
positive margin of 18.9% for fiscal 1997. The operating margin for fiscal 1998
included nonrecurring merger and acquisition charges of $35.0 million and fiscal
1997 included $4.0 million in expenses incurred in an aborted acquisition. The
decrease in fiscal 1998 operating margin was due to the proportionately greater
amount of growth in the Company's sales of lower margin parts and disposables
and revenue share activities than that for its rental business. The margin was
additionally depressed by added operational, sales support, and general and
administrative costs in fiscal 1998 associated with actual and anticipated
growth in the business and increased depreciation and amortization in fiscal
1998. EBITDA for fiscal 1998 including the nonrecurring merger and acquisition
charges of $35.0 million was $23.0 million compared to that for fiscal 1997 of
$59.9 million that included $4.0 million in expenses associated with an aborted
acquisition.
Interest expense increased principally as a result of the substantial
increase in debt incurred in May 1998 in connection with the merger, the
refinancing, and an acquisition, and the termination of then existing interest
rate hedging contracts connected with the refinancing.
Other charges and credits for fiscal 1998 included $3.0 million cash
received by MEDIQ in the fourth quarter for a settlement on a note receivable
from a company. Additionally, the Company recognized in fiscal 1998 virtually
all of the remaining accretion of discount of $1.1 million on a previously
discounted note receivable. Fiscal 1997 principally reflected a charge of $11.0
million for the repurchase of outstanding warrants of MEDIQ/PRN, offset in part
by $1.8 million in accretion of a discounted note receivable. Fiscal 1997 also
included a gain of $9.2 million from the sale of an equity investment offset by
a $5.5 million reserve on a note receivable and $4.0 million in costs associated
with an aborted acquisition.
The Company's effective tax rate for continuing operations for fiscal 1998
was 30.0% and 45.2% for fiscal 1997. The difference is primarily attributable to
the nondeductibility in fiscal 1997 of the MEDIQ/PRN warrants repurchased in
that year. The Company's income tax benefit at its effective tax rate for fiscal
1998 was lower than the tax benefit computed at the statutory rate as a result
of the nondeductiblity of certain goodwill amortization and the nonrecognition
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<PAGE>
for state income tax purposes of certain operating losses.
In the fourth quarter of fiscal 1998, the Company recognized $2.0 million
in gain on disposal of discontinued operations from cash received of $2.9
million in settlement of an equity investment disposed of in fiscal 1997.
Disposal of discontinued operations for fiscal 1997 included disposals of five
separate operations, the most significant of which resulted in an after tax gain
of $32.6 million.
The difference between fiscal 1998 and 1997 in the extraordinary loss
associated with the early retirement of debt reflected the relative costs
associated with debt retired of $143.9 million in fiscal 1998 compared to $307.6
million in fiscal 1997.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk is changes in interest rates as the loan
facilities under MEDIQ/PRN's credit facility are subject to variable rates of
interest. The variable interest rates impacting MEDIQ/PRN are LIBOR and prime,
which are the interest rate options available under the credit facility.
As required under the terms of the credit facility, MEDIQ/PRN entered into
a swap contract in a notional amount of $100.0 million. To mitigate potential
unfavorable interest rate positions relative to the swap, MEDIQ/PRN entered in
two separate collar contracts each in the notional amount of $50.0 million. The
swap and collar contracts hedge MEDIQ/PRN's interest rate exposure and terminate
in fiscal 2003 (see below). MEDIQ/PRN did not enter into the swap or collars for
trading or speculative purposes.
The following table summarizes the Company's market risks associated with
debt outstanding at September 30, 1999 and 1998. The table assumes future cash
flows associated with this debt notwithstanding the default of the credit
facility. Fair values of fixed rate debt were determined based on market prices,
except for capital leases which were determined by the present values of the
future monthly lease payments based on the interest rates associated with the
leases at their inception. The fair values of variable rate debt were based on
interest rates in effect on the debt at September 30, 1999 and 1998,
respectively, because the short term variable nature of the rates were
reflective of market conditions at these dates. The fair values of the swap and
collars are the estimated amounts to settle the contracts if terminated at
September 30, 1999 and 1998, respectively. The information presented in the
table should be read in conjunction with Notes K, O, and P to the consolidated
financial statements.
The debt cash flows represent scheduled principal repayments and maturities
as they existed for principal amounts outstanding at September 30, 1999 and
1998, respectively, and their related rates of interest for fixed rate debt.
Variable interest rates for all periods presented represent the weighted average
rates of the associated debt outstanding at September 30, 1999 and 1998,
respectively. Amounts at September 30, 1998 presented herein have been adjusted
from the amounts presented last year to conform to the current year
presentation. The amounts in the table are presented without giving effect to
any potential acceleration of debt in respect of the default under the credit
facility and violations under the indentures.
24
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Expected Fiscal Year of Maturity
(in thousands, except percentages)
<TABLE>
<CAPTION>
Fair
2000 2001 2002 2003 2004 Thereafter Total Value
---- ---- ---- ---- ---- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
At September 30, 1999
Fixed rate debt:
Principal due (a) $ 784 $ 441 $ 70 $ 561 (c) $ -- $330,885 (d) $332,741 $184,165
Average interest rate (a) 7.75% 7.83% 10.09% 7.73% (c) 11.85% (d)
Variable rate debt:
Principal due (b) $10,437 $14,187 $17,469 $21,219 $55,188 $170,000 $288,500 $288,500
Average interest rate (b) 7.81% 7.81% 7.81% 7.81% 7.81% 7.81%
At September 30, 1998
Fixed rate debt:
Principal due (a) $ 262 $ 166 $ -- $ 514 (c) $ -- $330,885 (d) $331,827 $249,035
Average interest rate (a) 8.86% 8.08% 7.50% (c) 11.85% (d)
Variable rate debt:
Principal due (b) $ 2,000 $ 2,000 $ 2,000 $ 2,000 $21,500 $170,000 $199,500 $199,500
Average interest rate (b) 8.50% 8.50% 8.50% 8.50% 8.50% 8.50%
</TABLE>
(a) Represents capital lease obligations except as otherwise noted.
(b) Represents amounts outstanding under the credit facility.
(c) Includes $514 of 7.50% subordinated exchangeable debentures.
(d) Represents $190,000 of 11% senior subordinated notes and full accreted face
value of $140,885 of 13% senior discount debentures. At September 30, 1999,
carrying value of the discount debentures was $88,086.
MEDIQ/PRN entered into the interest rate swap in July 1998 in connection
with the credit facility. The swap expires in 2003. The swap effectively fixes
MEDIQ/PRN's borrowing rate on $100.0 million of outstanding debt at 5.35% until
July 2003 as long as the three month LIBOR rate does not exceed 6.25%. MEDIQ/PRN
owes the counterparty to the swap when the three month LIBOR rate is less than
5.35% and MEDIQ/PRN is due from the counterparty when the rate is greater than
5.35%. Cash amounts exchanged are based on the rate differential for the
applicable three month period times the notional amount of $100.0 million. If on
the rate setting date the three month LIBOR rate exceeds 6.25%, the swap
temporarily terminates until the three month LIBOR rate on a succeeding setting
date is below 6.25%. The three month LIBOR rate is set quarterly at the market
rate on or the closest business day to January 3, April 3, July 3, and October
3. On the latest rate setting date of April 3, 2000, the market three month
LIBOR rate was 6.29%. MEDIQ/PRN would have received an estimated $60 thousand if
the swap were terminated at September 30, 1999. At September 30, 1998,
termination of the swap would have cost MEDIQ/PRN an estimated $2.9 million. The
foregoing estimated amounts were determined by the counterparty to the swap
based on prevailing market conditions at each date.
MEDIQ/PRN entered into the two collars in July 1998 to mitigate its
exposure to three month LIBOR rates above 7.00%. The collars expire in 2003 (see
below). The collars are marked to the market three month LIBOR rate as set
quarterly on or the closest business day to March 10, June 10, September 10, and
December 10. The weighted average ceiling and floor rates are 7.00% and 5.03%,
respectively. MEDIQ/PRN owes the counterparties to the collars when the three
month LIBOR rate is less than the respective contracted floor rates and
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<PAGE>
MEDIQ/PRN is due from the counterparties when the rate is greater than the
contracted ceiling rates. Cash amounts exchanged for each collar are based on
the rate differential for the applicable three month period times the contracted
notional amount of $50.0 million. On the latest rate setting date of March 10,
2000, the market three month LIBOR rate was 6.13%. MEDIQ/PRN would have received
an estimated aggregate of $1.0 million if the collars were terminated at
September 30, 1999. At September 30, 1998, termination of the collars would have
cost MEDIQ/PRN an estimated aggregate of $2.2 million. The counterparties to the
collars determined the foregoing estimated amounts based on prevailing market
conditions at each date.
Market LIBOR rates in effect for MEDIQ/PRN declined to 5.00% in March 1999,
and have steadily climbed since then to 6.29% in effect at the filing date of
this report. The market prime rate available to MEDIQ/PRN has increased
periodically in increments of 25 basis points from 8.00% in June 1999 to 9.50%
at the filing date of this report. An increasing prime rate has important
consequences to MEDIQ/PRN for debt outstanding under the credit facility due to
its inability to renew LIBOR contracts while the facility is in default. Any
amounts outstanding under expiring LIBOR contracts automatically convert to the
prime rate of interest while the Company is in default under the credit
facility. The Company cannot predict whether interest rates will continue to
rise and by how much, and therefore cannot predict the future extent of its
interest rate risk on debt outstanding, the swap, and the collars.
For fixed rate debt, changes in principal due and the weighted average
rates at September 30, 1999 when compared to September 30, 1998 for the periods
presented are due to the additional capital leases obtained by the Company in
acquisitions during fiscal 1999. For variable rate debt, changes in principal
due at September 30, 1999 when compared to September 30, 1998 for the periods
presented represent principal outstanding on acquisition loans and revolving
credit facilities at September 30, 1999 amounting to $89.0 million and related
scheduled repayments thereon. No debt was outstanding under these facilities at
September 30, 1998. Changes in the weighted average interest rates for variable
rate debt at September 30, 1999 when compared to September 30, 1998 for the
periods presented reflect the lower prevailing market interest rates existing at
September 30, 1999 compared to September 30, 1998. Changes in the fair values
displayed in the table reflect the difference in the prevailing market interest
rate conditions existing at September 30, 1999 when compared to September 30,
1998.
As a result of the defaults under the credit facility, effective January 4,
2000, MEDIQ/PRN began incurring default rates of interest and margins on debt
outstanding under the credit facility. The default rates consist of additional
interest of two percent per annum. The default rates will be in effect until the
defaults are cured. At January 4, 2000, rates of interest including applicable
margins on debt outstanding under the credit facility increased from 9.50% to
11.75% on $18.0 million, 8.375% to 10.625% on $80.0 million, and 8.875% to
11.125% on $199.0 million. LIBOR contracts under the credit facility cannot be
renewed while defaults exist thereunder. Therefore, LIBOR contracts that expire
automatically convert to the default prime rate of interest. At the filing date
of this report, LIBOR contracts for $8.0 million and $1.0 million that had been
outstanding at 10.625% and 11.125%, respectively, were converted to prime rate
borrowings at 12.25%. LIBOR contracts outstanding at the filing date of this
report scheduled to expire in June 2000 amounting to $198.0 million at 10.625%
and $72.0 million at 11.125% will also convert to prime rate borrowings at that
time should the defaults not be cured. Due to higher average debt outstanding, a
general increase in market variable interest rates available to the Company, and
the additional default rates of interest, interest expense and the related cash
portion for fiscal 2000 are expected at the filing date of this report to be
higher than that for fiscal 1999 by approximately $9.0 million and $7.0 million,
respectively.
In connection with the default under the senior credit facility, MEDIQ/PRN
was notified by the counterparty to one of the collars that the agreement was
terminated effective May 11, 2000. As a result of this early termination of the
agreement, the counterparty owes MEDIQ/PRN approximately $1.0 million that will
be utilized to repay amounts outstanding under the credit facility. On June 7,
2000 and June 8, 2000, the Company was notified by the counterparties for its
other collar agreement and its interest rate swap that such arrangements would
be terminated shortly due to the defaults under the credit facility. The Company
received $.6 million as a result of such terminations, and the funds were
utilized to repay amounts outstanding under the credit facility.
26
<PAGE>
New Accounting Pronouncements
In July 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities". This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
imbedded in other contracts, and for hedging activities. In June 1999, the FASB
issued SFAS No. 137 that delayed the effective date of SFAS No. 133 to fiscal
years beginning after June 15, 2000. At the filing date of this report, the
Company has not determined the impact the adoption of SFAS No. 133 will have on
the Company's financial statements.
Year 2000
The Company did not incur any Year 2000 related problems concerning its
equipment on rent and business operations on January 1, 2000 through the filing
date of this report. All rental equipment performed safely as represented by
equipment manufacturers or as indicated by separate assessments conducted by the
Company. There were no disruptions in business operations, as all of the
Company's information systems performed seamlessly in the transition to the new
year and there were no Year 2000 related interruptions in external services
provided to the Company. There was no need by the Company to employ any
contingency measures in any of its operations with respect to Year 2000 issues.
It is possible that some Year 2000 problems related to the Company's rental
equipment and information systems and those related to customers and suppliers
may manifest later in Year 2000. However, based on what was experienced on
January 1, 2000 through the filing date of this report, the Company believes
that the potential for wide spread problems materially impacting the Company has
passed. The Company further believes that any Year 2000 problems that may yet
occur will most likely be isolated incidences that will not materially impact
the Company. The Company will rely on its general contingency measures routinely
in place concerning the overall continued operations of the business to address
isolated problems that may occur. The Company cannot make any assurances about
the later occurrence of any Year 2000 problems and their impact on the Company's
financial position and results of operations.
27
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
Independent Auditors' Report 29
Consolidated Statements of Operations -
Three Years Ended September 30, 1999 30
Consolidated Balance Sheets - September 30, 1999 and 1998 31
Consolidated Statements of Stockholders' Equity (Deficiency) -
Three Years Ended September 30, 1999 32
Consolidated Statements of Cash Flows -
Three Years Ended September 30, 1999 33
Notes to Consolidated Financial Statements 34 - 57
28
<PAGE>
Independent Auditors' Report
To the Board of Directors and Stockholders of
MEDIQ Incorporated
Pennsauken, New Jersey
We have audited the accompanying consolidated balance sheets of MEDIQ
Incorporated and subsidiaries (the "Company") as of September 30, 1999 and 1998,
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, 1999. 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 auditing standards generally
accepted in the United States of America. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1999 in conformity with accounting principles generally accepted
in the United States of America. 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.
The accompanying consolidated financial statements have been prepared
assuming that MEDIQ Incorporated and subsidiaries will continue as a going
concern. As discussed in Notes B and X to the consolidated financial statements,
the Company is in default of a number of covenants under various debt
facilities. The lenders for the Company's senior credit facility invoked their
right to block the Company's June 1, 2000 payment of interest on the Company's
11% notes. In addition, the Company did not pay the required default interest
due under the senior credit facility through June 30, 2000 and deferred the
principal payment due on June 30, 2000. Also, the Company has incurred
recurring losses from operations and has negative working capital and a
significant stockholders' deficiency at September 30, 1999. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plan regarding these matters is also described in Note B.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
June 1, 2000, except for Note X, as to
which the date is June 30, 2000
29
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------
1999 1998 1997
-------- -------- --------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Revenues:
Rental $153,865 $142,736 $124,316
Sales 50,137 27,928 20,230
Other 13,679 10,252 11,414
-------- -------- --------
217,681 180,916 155,960
Expenses of Operations:
Cost of sales 44,347 22,659 16,334
Operating 76,880 63,072 46,139
Selling 27,118 16,590 13,353
General and administrative 29,187 20,586 20,271
Merger and acquisition charges -- 35,021 --
Depreciation and amortization 42,667 41,692 30,359
-------- -------- --------
220,199 199,620 126,456
-------- -------- --------
Operating Income (Loss) (2,518) (18,704) 29,504
Other (Charges) and Credits:
Interest expense (55,095) (27,894) (19,107)
Interest income 842 948 2,069
Other - net 142 4,124 (9,573)
-------- -------- --------
(Loss) Income from Continuing Operations before
Income Taxes (56,629) (41,526) 2,893
Income Tax (Benefit) Expense (10,822) (12,455) 5,134
-------- -------- --------
Loss from Continuing Operations before Disposal of
Discontinued Operations and Extraordinary Items (45,807) (29,071) (2,241)
Net Gain on Disposal of Discontinued Operations (net of
income taxes of $875 in 1998 and $20,507 in 1997) -- 2,044 34,941
-------- -------- --------
(Loss) Income before Extraordinary Items (45,807) (27,027) 32,700
Extraordinary Loss - Early Retirement of Debt (net of income
taxes of $(1,939) in 1998 and $(5,316) in 1997) -- (4,527) (8,037)
-------- -------- -------- -
Net (Loss) Income (45,807) (31,554) 24,663
Dividends and Accretion on Preferred Stock (19,411) (6,149) --
-------- -------- --------
Net (Loss) Income Attributable for Common Shareholders $(65,218) $(37,703) $ 24,663
======== ======== ========
Basic and Diluted Earnings per Share:
Continuing operations, net of dividends and accretion
on preferred stock $ (59.94) $ (2.05) $ (.09)
Disposal of discontinued operations -- .12 1.38
Extraordinary items -- (.26) (.32)
-------- -------- --------
Net (loss) income available for common shareholders $ (59.94) $ (2.19) $ .97
======== ======== ========
Weighted average number of common shares outstanding 1,088 17,205 25,297
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
30
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
--------------------------------
1999 1998
---------- ----------
(in thousands)
Assets
<S> <C> <C>
Current Assets:
Cash $ 9 $ 2,411
Accounts receivable (net of allowance of $24,435 for
1999 and $11,432 for 1998) 53,836 52,659
Inventories - net 17,313 21,820
Deferred income taxes -- 6,267
Other current assets 5,006 3,656
--------- ---------
Total Current Assets 76,164 86,813
Property, Plant, and Equipment - net 112,233 103,917
Goodwill - net 142,002 91,121
Deferred Financing Costs - net 18,322 20,013
Other Assets 12,872 7,354
--------- ---------
Total Assets $ 361,593 $ 309,218
========= =========
Liabilities and Stockholders' Deficiency
Current Liabilities:
Current portion of long term debt $ 567,884 $ 2,037
Accounts payable 17,502 14,152
Accrued expenses 24,773 20,569
Other current liabilities 1,138 281
--------- ---------
Total Current Liabilities 611,297 37,039
Senior Debt 557 277,490
Subordinated Debt -- 190,514
Deferred Income Taxes 1,779 14,019
Other Liabilities 6,748 2,472
Mandatorily Redeemable Preferred Stock (liquidation preference
of $135,956 for 1999 and $113,037 for 1998) 130,955 113,037
Commitments and Contingencies (Note U) -- --
Stockholders' Deficiency:
Series B 13.25% Cumulative Compounding Perpetual
Preferred Stock ($.01 par value) 31 30
Common stock ($.01 par value: authorized 30,000 shares;
issued and outstanding - 1,119 for 1999 and 1,075 for 1998) 11 11
Capital in excess of par value 42,277 41,450
Accumulated deficit (432,062) (366,844)
-------------- ---------
Total Stockholders' Deficiency (389,743) (325,353)
------------- ---------
Total Liabilities and Stockholders' Deficiency $ 361,593 $ 309,218
========= =========
</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> <C>
Balance October 1, 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 cumulative
preferred stock
------ ------- ----- --- ------- -------- -------
Balance September 30, 1998 -- -- 3,000 30 1,075 11 41,450
Net loss
Issuance of stock 146 1 44 -- 827
Dividends earned on cumulative
preferred stock
Accretion on redeemable
preferred stock
------ ------- ----- --- ------- -------- -------
Balance September 30, 1999 -- $ -- 3,146 $31 1,119 $ 11 $42,277
====== ====== ===== === ======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
(Accumulated
Deficit)
Retained Treasury
Earnings Stock
------------ --------
<S> <C> <C> <C>
Balance October 1, 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 cumulative
preferred stock (6,149)
--------- -------
Balance September 30, 1998 (366,844) --
Net loss (45,807)
Issuance of stock
Dividends earned on cumulative
preferred stock (19,355)
Accretion on redeemable
preferred stock (56)
--------- -------
Balance September 30, 1999 $(432,062) $ --
========= =======
</TABLE>
See Notes to Consolidated Financial Statements
32
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------
1999 1998 1997
---------- ---------- -------
Cash Flows From Operating Activities (in thousands)
------------------------------------
<S> <C> <C> <C>
Net (loss) income $ (45,807) $ (31,554) $24,663
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization 42,667 41,692 30,359
Deferred income taxes (10,893) (13,459) 26,921
Accretion on discount debentures 10,524 3,305 --
Provision for doubtful accounts 27,302 7,912 3,234
Provision for inventory reserves 6,563 533 --
Reserve on note receivable -- -- 5,523
Discontinued operations - net -- -- (34,281)
Extraordinary item - early retirement of debt -- 6,466 2,879
Gain on sale of Cardinal stock -- -- (9,213)
Equity participation - MEDIQ/PRN warrants -- -- 11,047
Other 2,083 1,478 1,751
Decrease (increase) in working capital, excluding
effects of acquisitions:
Accounts receivable (12,909) (16,441) (8,067)
Inventories 167 (7,037) (6,397)
Accounts payable (3,080) 4,773 (1,577)
Accrued expenses 861 (1,297) (4,402)
Federal and state taxes payable 1,839 2,184 (36,273)
Other current assets and liabilities (2,128) 913 (4,930)
--------- --------- -------
Net cash provided by (used in) operating activities 17,189 (532) 1,237
Cash Flows From Investing Activities
Purchases of equipment (22,452) (20,022) (15,458)
Acquisitions (84,105) (59,468) (1,915)
Collection of notes receivable -- 7,862 --
Proceeds from sale of discontinued operations -- -- 130,259
Repurchase of MEDIQ/PRN warrants -- -- (12,500)
Other 985 (603) 947
--------- --------- -------
Net cash (used in) provided by investing activities (105,572) (72,231) 101,333
Cash Flows From Financing Activities
Borrowings 89,000 464,257 214,000
Debt repayments (2,316) (143,889) (307,639)
Issuance of capital stock -- 148,983 --
Repurchase of capital stock -- (377,875) --
Deferred financing fees (703) (20,814) (8,874)
Other -- 873 363
--------- --------- -------
Net cash provided by (used in) financing activities 85,981 71,535 (102,150)
--------- --------- -------
(Decrease) increase in cash (2,402) (1,228) 420
Cash:
Beginning balance 2,411 3,639 3,219
--------- --------- -------
Ending balance $ 9 $ 2,411 $ 3,639
========= ========= =======
Supplemental disclosure of cash flow information:
Interest paid $ 41,722 $ 16,746 $21,381
========= ========= =======
Net income taxes (refunded) paid $ (1,768) $ 833 $ 7,553
========= ========= =======
Supplemental disclosure of noncash investing and financing activities:
Common and preferred stock issued in an acquisition $ 3,545 $ -- $ --
========= ========= =======
Equipment financed under capital leases $ -- $ 534 $ --
========= ========= =======
Conversion of 7.25% subordinated debentures into common stock $ -- $ -- $ 6,251
========= ========= =======
</TABLE>
See Notes to Consolidated Financial Statements
33
<PAGE>
Note A - Summary of Significant Accounting Policies
Description of operations
MEDIQ Incorporated (which collectively with its wholly owned subsidiary
MEDIQ/PRN Life Support Services, Inc. and MEDIQ/PRN's subsidiaries is referred
to as the Company) through MEDIQ/PRN rents movable critical care and life
support medical equipment and support surfaces, sells and distributes disposable
products, accessories, and repair parts, and provides outsourcing services to
the health care industry principally throughout the United States. MEDIQ/PRN
along with its wholly owned subsidiaries MEDIQ Management Services, Inc. and
MEDIQ/PRN Canada, Inc. are the only operating companies. MEDIQ Management
Services, Inc. provides consulting services to the acute care hospital industry
and management services to several diagnostic imaging centers primarily in the
mid-Atlantic region. MEDIQ/PRN Canada was established in fiscal 1999 to conduct
business in Canada.
Principles of consolidation
The consolidated financial statements include the accounts of the Company.
Investments in companies last owned by the Company in fiscal 1997 that were
owned 20% to 50% were accounted for under the equity method of accounting. All
significant intercompany transactions and balances have been eliminated in
consolidation.
Reserves for doubtful accounts
The Company provides reserves for doubtful accounts, which includes
provisions for bad debts and credit memos, based upon historical trends
adjusted, as appropriate, for specific uncollectible accounts and other
estimates and assumptions deemed appropriate by management. Charges for such
reserves are reflected either in revenue or operating expenses depending upon
the nature of the charge.
Inventories
Inventories, which consist primarily of disposable products and repair
parts for rental equipment, are stated at the lower of cost (first-in, first-out
method) or market. Excess and obsolete inventories are carried at net realizable
values.
Property, plant, and equipment
Rental equipment, equipment and fixtures, 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, equipment and fixtures - 2 to 10 years; buildings and
improvements - 10 to 25 years). Expenditures for repairs and maintenance are
charged to expense when incurred. Expenditures for major renewals and
betterments that extend the useful lives of the related items are capitalized
and depreciated.
Goodwill
The cost of businesses acquired in excess of the fair value of the net
assets acquired is amortized on a straight line basis primarily over 20 years.
Accumulated amortization was $23.1 million and $16.7 million at September 30,
1999 and 1998, respectively.
Deferred financing costs
Costs incurred in the issuance of long term debt are amortized over the
term of the related debt instrument. Accumulated amortization was $3.2 million
and $.9 million at September 30, 1999 and 1998, respectively.
34
<PAGE>
Note A - Summary of Significant Accounting Policies (continued)
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 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.
Deferred income taxes
The liability method is used under which deferred income taxes are recorded
based on the differences between the financial reporting and income tax bases of
assets and liabilities. The deferred income taxes are measured using enacted tax
rates and laws that will be in effect when the underlying assets or liabilities
are expected to be received or settled. Valuation allowances are applied against
deferred income tax assets based on the probability of utilization of the
underlying tax deductions, credits, and loss carryforwards in future income tax
returns.
Stock based compensation
The Company accounts for stock options issued using the intrinsic value
method. The stock option plan is considered to be a fixed award plan for which
compensation cost is recognized for the excess, if any, of the fair value at the
date of grant of the option of the common stock underlying the option over the
exercise price of the option.
Accretion on debt issued at a discount
Debentures issued at a discount from their full face value were initially
recorded at the amount of the discounted cash proceeds received. The difference
between the carrying amount and the full face value of the debentures is
accreted to interest expense and to the carrying amount of the debentures using
the interest method at the effective rate of interest. The accretion is over the
discount period that ends with the date that cash interest begins to accrue, at
which time the carrying amount of the debentures will equal their full face
value.
Accretion on redeemable preferred stock
The difference between the mandatory redemption amount and carrying amount
of mandatorily redeemable preferred stock is accreted to the carrying amount.
The term of the accretion is from the date of issuance of the stock to the
stock's scheduled redemption date. Accretion is based on the interest method.
The accretion is added to the carrying amount of the stock so that the carrying
amount will equal the redemption amount at the scheduled date of redemption.
Amounts accreted are charged to accumulated deficit and are deducted in arriving
at the net amount available for common shareholders on the statement of
operations.
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, net of
reserves for credit memos. Revenues from other activities are recognized as
services are rendered, income is earned, or products are shipped, net of
reserves for credit memos.
The Company has revenue share arrangements with original equipment
manufacturers ("OEM's") 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.
Amounts due to the OEMs are recorded in the same period that the related revenue
is recognized.
35
<PAGE>
Note A - Summary of Significant Accounting Policies (continued)
Professional fees
The Company provides accruals for professional fees, such as accounting,
legal, etc., in the period that the services the events such fees relate to
first occur.
Earnings per share
Basic earnings per share ("EPS") is computed by dividing net income or loss
available for/attributable to common shareholders, as well as other applicable
items in the 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 the net amount available for/attributable to common shareholders
and other reportable items as applicable. No potential common shares are
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, for the Company basic and diluted per share amounts and the
respective weighted average number of common shares outstanding presented on the
face of the statement of operations are the same within each period presented
because of a loss from continuing operations in each period. Excluded from the
computation of EPS are outstanding warrants and options to purchase the
Company's common stock aggregating 91,209 and 53,470 shares, respectively. The
disparity in the per share amounts for fiscal 1999 compared to the preceding
fiscal years presented is due to the greatly reduced number of common shares
outstanding that resulted from the merger in May 1998. (See Note C)
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results may differ from those
estimates and assumptions. The Company utilizes estimates in determining the
allowance for doubtful accounts, reserves to reduce inventory to net realizable
value, certain accrued costs, and depreciation and amortization of certain
costs.
Reclassification of accounts
Certain reclassifications have been made to conform prior years' balances
to the current year presentation.
Note B - Default of Indebtedness and Going Concern
MEDIQ/PRN was in default of a number of covenants under its senior secured
credit facility, including timely filing of financial information for fiscal
1999 and fiscal 2000 and meeting certain financial ratios. Potential additional
events of default concerning financial covenants may exist as a result of the
restatements of fiscal 1999 quarterly financial information. The lenders to the
credit facility have the right to accelerate payment of all amounts outstanding
under the facility as a result of these defaults. Although the lenders have not
yet exercised that right, there can be no assurance that they will not do so in
the future.
Until a formal agreement relating to the defaults and potential defaults is
reached with the lenders, the Company is unable to access the credit facility
and must fund its working capital needs through other sources of cash. For the
first six months of fiscal 2000, the Company has had adequate funds from its
working capital and operating activities to fund operations, including capital
expenditures and debt service. However, the Company's current cash forecast
indicates additional sources of cash will be required to meet future working
capital needs, including the funding of the June 2000 debt service payments
aggregating approximately $24.1 million, of which $10.5 million is for interest
on the 11% notes. (See Note X.)
The indenture to the 11% notes permit the lenders under the senior credit
facility to elect to block the payment of amounts due and payable with respect
to the 11% notes for a period of up to 180 days. This payment blockage may
36
<PAGE>
Note B - Default of Indebtedness and Going Concern (continued)
occur during a period of default under the credit facility in which the maturity
of debt outstanding thereunder may be accelerated. Pursuant to a letter dated
May 25, 2000, the lenders to the credit facility have sent notice to the trustee
for the 11% notes and the Company to effect a payment blockage on the 11% notes
such that the semiannual interest payment of $10.5 million payable on June 1,
2000 was not made. Any nonpayment of interest on the 11% notes existing for more
than 30 days would be an event of default under the indenture to the 11% notes.
As long as the maturity of the debt outstanding under the credit facility has
not been accelerated, payments with respect to the 11% notes may be continued
after the payment blockage period expires.
As a result of the defaults, effective January 4, 2000, MEDIQ/PRN began
incurring default rates of interest and margins on debt outstanding under the
credit facility. The default rates consist of additional interest of two percent
per annum. The default rates will be in effect until the defaults are cured. At
January 4, 2000, rates of interest including applicable margins on debt
outstanding under the credit facility increased from 9.50% to 11.75% on $18.0
million, 8.375% to 10.625% on $80.0 million, and 8.875% to 11.125% on $199.0
million.
LIBOR contracts under the credit facility cannot be renewed while defaults
exist thereunder. Therefore, LIBOR contracts that expire automatically convert
to the default prime rate of interest. At the filing date of this report, LIBOR
contracts for $8.0 million and $1.0 million that had been outstanding at 10.625%
and 11.125%, respectively, were converted to prime rate borrowings at 12.25%.
Outstanding LIBOR contracts scheduled to expire in June 2000 amounting to $198.0
million at 10.625% and $72.0 million at 11.125% will also convert to prime rate
borrowings at that time should the defaults not be cured.
While the credit facility is in default, the ultimate disposition of the
debt outstanding thereunder is under the control of the lenders to the facility.
As a result, all outstanding principal under the credit facility at September
30, 1999 of $288.5 million was classified as a current liability. The amount of
principal outstanding under the credit facility at the filing date of this
report was $297.0 million.
The Company is in violation of covenants under the indentures governing
MEDIQ's 13% Senior Discount Debentures due 2009 and MEDIQ/PRN's 11% Senior
Subordinated Notes due 2008 with respect to the timely filing of financial
information for fiscal 1999 and fiscal 2000. Upon written notice from the
trustees or holders of at least 25% of the outstanding debt under either
indenture that the Company is in default of these covenants, the Company will
have 30 days to cure the default. Failure to cure the default would give rise to
an event of default under the indentures. There would be additional events of
default under the indentures if the lenders to the senior credit facility
ultimately decide to accelerate the indebtedness outstanding under the facility
and such acceleration is not rescinded within 10 days. If events of default
exist under the indentures, the trustees or the holders of at least 25% of the
outstanding debt under either indenture, in each case subject to certain rights
of the credit facility, will be entitled to accelerate the payment of all
principal and interest outstanding under the affected indenture. At the filing
date of this report, the Company has not received a notice of default with
respect to either indenture.
The indentures discussed above as well as the indenture for MEDIQ's 7.50%
Exchangeable Debentures due 2003 contain cross default provisions that
accelerate debt outstanding under each in the event that outstanding debt under
any other loan arrangement is in default and thereby accelerated. Because the
Company does not control the ultimate disposition of the debt outstanding under
the credit facility, all outstanding principal under the indentures at September
30, 1999 of $278.6 million was classified as a current liability. As of May 31,
2000, the amount of principal outstanding under the indentures was $286.5
million.
The Company does not have sufficient current assets nor does it presently
have any other available sources of capital to satisfy the current liability
represented by the potential to accelerate amounts outstanding under the credit
facility and indentures. In addition, the credit facility permits the lenders
thereunder the right to liquidate collateral under the security agreement
thereto to satisfy amounts outstanding. The credit facility is secured by a
first priority lien and security interests in substantially all tangible and
intangible assets of MEDIQ/PRN and its subsidiaries.
37
<PAGE>
Note B - Default of Indebtedness and Going Concern (continued)
The Company has incurred recurring losses from operations, has negative
working capital, and a significant shareholders deficiency. These conditions
plus the foregoing circumstances raise substantial doubt about the Company's
ability to continue as a going concern. The Company cannot predict at this time
what actions may be taken with respect to its continued existence.
The Company is in discussions with the lenders to the credit facility to
reach a formal agreement with respect to the defaults and potential defaults.
The Company cannot predict what such agreement may consist of and what effects
may ensue on the operations of the Company. Also, the Company is uncertain as to
what actions will be taken by the lenders to the credit facility if the defaults
are not cured.
The Company is currently investigating alternative sources of liquidity
sufficient to meet working capital needs in a way that is satisfactory to its
lenders. In the meantime, the Company has implemented an aggressive cash
management program. This program consists of daily scrutiny and monitoring of
cash receipts and disbursements as well as more intensive cash collection
efforts. There can be no assurance that this cash management program will be
effective or successful.
The amount of the current portion of debt outstanding at September 30, 1999
excluding the potentially accelerated amounts discussed above would be $11.2
million. Notwithstanding the foregoing discussion, the financial statements
herein have been presented on the basis of a going concern.
Note C - Merger, Reorganization, Refinancing, and Recapitalization
In May 1998, MEDIQ underwent a merger with MQ Acquisition Corporation in
which MEDIQ continued as the surviving company. MQ was organized by affiliates
of the firms of Bruckmann, Rosser, Sherrill & Co., Inc. ("BRS"), Ferrer Freeman
Thompson & Co. LLC ("FFT"), and Galen Associates ("Galen") solely for their
purpose of obtaining a controlling interest in MEDIQ. In the merger, a new
series of MEDIQ's common stock, which became the only voting security, was
issued. For accounting purposes, the merger was treated as a recapitalization.
Accordingly, the historical basis of the Company's assets and liabilities was
not affected. Upon the merger, MQ was dissolved. In connection with the merger,
a corporate restructuring took place in which MEDIQ contributed the capital
stock of all of its subsidiaries to MEDIQ/PRN. Simultaneously with the merger, a
refinancing was undertaken in which MEDIQ issued and sold $140.9 million
aggregate amount at maturity of 13% senior discount debentures for gross
proceeds of $75.0 million. At the same time, MEDIQ/PRN entered into a $325.0
million senior secured credit facility under which was borrowed $200.0 million
in term loans at a variable rate of interest and issued and sold $190.0 million
principal amount of 11% senior subordinated notes. Amounts received in the
refinancing along with a $109.5 million equity contribution provided by the new
controlling shareholders and $4.5 million in existing cash balances were used to
(i) finance the cash consideration and pay the related fees and expenses
associated with the merger aggregating $391.0 million, (ii) repay $138.0 million
of outstanding indebtedness, and (iii) finance an acquisition by MEDIQ/PRN
simultaneous with the merger amounting to $50.0 million.
In the merger, each share of MEDIQ's premerger series A preferred stock and
common stock outstanding was converted into the right to receive $13.75 in cash,
without interest, and 0.075 of a share of a new series A 13.0% cumulative
compounding preferred stock, par value $.01. An exception was made for 1.0
million shares of certain premerger preferred stock that was converted into
shares of a newly issued series B 13.25% cumulative compounding perpetual
preferred stock, par value $.01 per share and MEDIQ's new common stock. 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 related exercise price per option and 0.075
shares of series A preferred stock. Shares held in treasury at the date of the
merger were cancelled.
After the merger, the authorized capital stock of MEDIQ consisted of (i)
new common stock, par value $.01, (ii) new series A preferred stock, par value
$.01, (iii) series B preferred stock, par value $.01, and (iv) a newly issued
series C 13.5% cumulative compounding preferred stock, par value $.01.
38
<PAGE>
Note C - Merger, Reorganization, Refinancing, and Recapitalization (Continued)
Certain costs were incurred to effect the merger aggregating $32.4 million
and were charged to expense as merger and acquisition charges in the statement
of operations. The costs consisted of $19.7 million related to the exercise of
stock options in MEDIQ held by the Company's employees, $6.7 million in
incentive bonuses paid to certain of the Company's executives in connection with
the merger, and a one time management fee of $6.0 million paid collectively to
BRS, FFT, and Galen.
Note D - Acquisitions
On June 15, 1999, MEDIQ/PRN acquired all of the issued and outstanding
common stock of HTD Corporation. The total adjusted purchase price was $53.2
million, consisting of $49.7 million in cash and $3.5 million aggregate value of
common and preferred stock of MEDIQ (see Notes L and M). The total consideration
paid was adjusted in the fourth quarter of fiscal 1999 to the $53.2 million from
that of $59.7 million initially reported in the third quarter of fiscal 1999.
This adjustment resulted from the revaluation by an independent appraisal
company of the Company's stock issued in the acquisition. The initial valuation
based on the Company's estimate of $17.12 per share for common stock and $10.00
per share for each series of preferred stock was subsequently appraised at $7.00
and $3.50 per share, respectively. The cash portion of the consideration was
financed under MEDIQ/PRN's senior secured credit facility (see Note K).
Additional costs incurred in the acquisition totaled $1.0 million. MEDIQ/PRN
retained certain of HTD's businesses serving the acute care, alternate care, and
home care marketplaces, consisting of the sales of disposable products, medical
equipment rentals, and biomedical services. Contemporaneously with MEDIQ/PRN's
acquisition of HTD, HTD sold to an unrelated third party all of the issued and
outstanding common stock of HTD's subsidiaries that specialized in the acute
care distribution business. For accounting purposes, the acquisition of HTD was
effective May 28, 1999.
MEDIQ/PRN completed three other acquisitions in fiscal 1999 for an
aggregate acquisition cost of $33.2 million in cash, of which $27.8 million was
financed under MEDIQ/PRN's credit facility (see Note K). Such acquisitions
supported the Company's medical equipment and support surface rental activities.
The purchase price of one of these acquisitions is subject to adjustment each
year within a four year period that ends January 2003. The adjustment is based
upon net revenue as defined in the purchase agreement for each year. The
adjustment over the four year period is not to exceed an aggregate of $24.8
million.
On May 29, 1998, MEDIQ/PRN purchased specified assets, rights, and certain
subsidiaries of and related to CH Industries, Inc. Collectively, these are
referred to as the CH Medical Business. The purchase price was $48.5 million in
cash, including related costs and expenses and the assumption of certain
specified obligations related to the CH Medical Business. The purchase price and
related costs and expenses were financed with term loans under MEDIQ/PRN's
credit facility. CHI was a national sales, rental, and service corporation
specializing in support surfaces. The allocation of the acquisition cost was
adjusted in fiscal 1999 by a reduction to goodwill of $2.7 million, resulting
from the completion of a valuation of patents obtained in the acquisition and
cash received by MEDIQ/PRN in settlement of closing net assets acquired.
MEDIQ/PRN completed another acquisition in fiscal 1998 at a cost of $11.0
million to support the support surface rental business.
The above acquisitions were accounted for by the purchase method of
accounting and, accordingly, their acquisition costs were allocated to assets
acquired and liabilities assumed based on their estimated fair values on the
effective dates of acquisition. The excess of the acquisition costs over the
estimated fair values of the net assets acquired, which were $33.2 million for
HTD, an adjusted $25.3 million for CHI, and an aggregate $33.7 million for the
other four acquisitions, was recorded as goodwill and is being amortized on a
straight line basis over 20 years.
The results of operations of the above acquisitions were included in the
Company's statement of operations from their respective effective dates of
acquisition. The following unaudited pro forma financial information presents
the consolidated results of operations of the Company for the respective periods
as if all of the acquisitions had occurred on October 1, 1997, to the extent not
already included in the historical results of operations. The unaudited pro
39
<PAGE>
Note D - Acquisitions (continued)
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,
1999 1998
--------- --------
in thousands, except per share amounts
unaudited
Revenues $268,463 $278,216
Loss before extraordinary items, less
dividends and accretion on preferred stock (66,292) (39,210)
Loss per share amount (60.93) (2.27)
Net loss attributable to common shareholders (66,292) (43,737)
Loss per share amount (60.93) (2.54)
The disparity in the loss per share amounts between the years presented is due
to the greatly reduced number of common shares outstanding resulting from the
merger in May 1998.
The Company incurred $2.6 million in costs for the severance of employees
and duplicate purchase commitments of the Company as a result of the acquisition
of the CH Medical Business. Such costs were reflected as merger and acquisition
charges in the statement of operations in fiscal 1998.
Note E - Dispositions
In fiscal 1997, the Company recorded an after tax reserve of $1.3 million
in net gain on disposal of discontinued operations in the statement of
operations against its investment in InnoServ Technologies 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 September 1998, the Company
received $2.9 million in cash, net of related expenses, ($2.0 million net after
tax) with respect to a change of control of Innoserv during fiscal 1998 that had
been a condition of the Company's sale of Innoserv. This gain was reflected in
net gain on disposal of discontinued operations.
In December 1996, the Company sold to NutraMax Products, Inc. all of the
shares of NutraMax common stock owned by the Company and recognized an after tax
gain of $4.8 million in net gain on disposal of discontinued operations. The
Company received from NutraMax $19.9 million in cash and an interest bearing
promissory note in the amount of $16.4 million. The note did not bear a market
rate of interest for its full term and, accordingly, the note was discounted to
$13.6 million. The Company received $10.5 million and $5.6 million in cash on
the note in fiscal 1997 and 1998, respectively. At September 30, 1999, the
carrying amount of the note 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 was fully
reserved for in fiscal 1997 and has since been considered uncollectible. The
sale resulted in an after tax charge of $1.0 million. The charge was netted in
net gain on disposal of discontinued 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.
The consideration received was $5.3 million in cash and shares of Integrated
Health 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 $1.1 million in additional cash
consideration that was recorded in net gain on disposal of discontinued
operations.
In October 1996, Cardinal Health, Inc. acquired PCI Services, Inc. In that
transaction, the Company received 1,449,000 shares 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 in net gain on disposal of discontinued
operations. The Company sold its Cardinal shares in January 1997 for $88.4
million and used the proceeds to reduce debt. A gain of $9.2 million on the
40
<PAGE>
Note E - Dispositions (Continued)
sale of the stock was recorded in other-net within other charges and credits.
Note F - Significant Year End Adjustments
At the end of fiscal 1999, the Company performed an extensive review of the
adequacy of the reserves for doubtful accounts and excess and obsolete
inventories. The Company also reviewed the capitalization of accessories for its
medical equipment and made determinations regarding the status of certain
amounts on deposit and the need for additional accruals for professional fees.
As a result of these reviews, the Company determined that certain adjustments
should have been made. These adjustments resulted in an increase in the net loss
attributable to shareholders for fiscal 1999 by $26.3 million, net of tax of
$6.3 million, or $24.14 per share. The adjustments on a pretax basis consisted
of charges of $19.6 million in additional provisions for doubtful accounts, $6.7
million in provisions for excess and obsolete inventories, $2.9 million for the
write off of accessory costs previously capitalized, $2.3 million in
professional fees, and $1.1 million in provisions for disputed deposits. The
statement of operations was affected on a pretax basis as follows: rental
revenue reduced by $12.0 million; cost of sales increased by $4.1 million;
operating expenses increased by $12.6 million; general and administrative
expenses increased by $3.4 million; and depreciation increased by $.5 million.
Due to the magnitude of the adjustments, the Company has determined that
restatement of previously published quarterly financial information is
necessary. The effect of those adjustments on the first three quarterly periods
within fiscal 1999 is as follows:
<TABLE>
<CAPTION>
First Second Third
Quarter Quarter Quarter
--------- ------- ---------
in thousands, except per share amounts
(unaudited)
<S> <C> <C> <C>
Net loss attributable to common shareholders
as previously reported $ (9,179) $(4,082) $(10,993)
Adjustments:
Pretax (2,442) (7,833) (3,701)
Tax effect (836) (2,762) (770)
-------- ------- --------
Restated net loss attributable to common shareholders $(10,785) $(9,153) $(13,924)
======== ======= ========
Net loss attributable to common shareholders
per share as previously reported (8.54) (3.80) (10.15)
Per share amount of the adjustment $ (1.49) $ (4.71) $ (2.71)
-------- ------- --------
Restated net loss attributable to common shareholders
per share $ (10.03) $ (8.51) $ (12.86)
======== ======= ========
</TABLE>
Note G - Nonrecurring Charges in Fiscal 1997
The Company wrote off $4.0 million of deferred acquisition and financing
costs associated with the termination of the Company's attempt to acquire
Universal Hospital Services, Inc. The Company incurred a charge of $11.0 million
on the repurchase of outstanding warrants that were for the purchase of the
capital stock of MEDIQ/PRN. These nonrecurring charges were included in
other-net within other charges and credits in the statement of operations.
41
<PAGE>
Note H - Inventory
The components of inventory were as follows:
<TABLE>
<CAPTION>
September 30,
-------------------------------
1999 1998
------- -------
in thousands
<S> <C> <C>
Raw materials $ 633 $ 2,791
Finished goods 24,680 20,236
------- -------
25,313 23,027
Reserves for excessive quantities and obsolescence (8,000) (1,207)
------- -------
$17,313 $21,820
======= =======
</TABLE>
The company has an additional $2.5 million of finished goods inventory included
in other assets as such inventory is not anticipated to be sold in fiscal 2000.
Note I - Property, Plant, and Equipment
The components of property, plant, and equipment were as follows:
<TABLE>
<CAPTION>
September 30,
---------------------------------
1999 1998
-------- --------
in thousands
<S> <C> <C>
Rental equipment $267,906 $236,828
Equipment and fixtures 17,626 14,561
Building and improvements 8,599 8,128
Land 149 149
-------- --------
294,280 259,666
Less accumulated depreciation and amortization (182,047) (155,749)
-------- --------
$112,233 $103,917
======== ========
</TABLE>
Depreciation expense related to property, plant, and equipment was $34.4
million, $36.9 million, and $26.5 million in 1999, 1998, and 1997, respectively.
Fiscal 1998 included a $6.0 million charge to write down certain under utilized
rental equipment to net realizable value.
Note J - Accrued Expenses
The components of accrued expenses consisted of the following:
<TABLE>
<CAPTION>
September 30,
--------------------------
1999 1998
------- -------
in thousands
<S> <C> <C>
Interest $ 8,457 $ 8,086
Pension 2,638 1,910
Payroll and related taxes 2,572 2,490
Commissions 1,663 1,876
Other 9,443 6,207
------- -------
$24,773 $20,569
======= =======
</TABLE>
42
<PAGE>
Note K - Long Term Debt
The components of long term debt consisted of the following:
<TABLE>
<CAPTION>
September 30,
------------------------------
1999 1998
-------- --------
in thousands
<S> <C> <C>
Senior debt:
Senior secured credit facility:
Term loans $199,500 $200,000
Acquisition loans 50,000 --
Revolving credit loans 39,000 --
13% senior discount debentures due 2009 88,086 77,562
Capital lease obligations payable in varying installments
through 2003 at fixed rates of interest from 0% to 14.66% 1,341 1,965
-------- --------
377,927 279,527
Less current portion 377,370 2,037
-------- --------
$ 557 $277,490
======== ========
Subordinated debt:
11% senior subordinated notes due 2008 $190,000 $190,000
7.50% exchangeable subordinated debentures due 2003 514 514
-------- --------
190,514 190,514
Less current portion 190,514 --
-------- --------
$ -- $190,514
======== ========
</TABLE>
MEDIQ/PRN's senior secured credit facility is in default and debt
outstanding thereunder is subject to acceleration upon demand by the lenders to
the facility. Since the ultimate disposition of the debt outstanding under the
credit facility is under the control of the lenders to the facility, all
outstanding principal under the credit facility at September 30, 1999 of $288.5
million is classified as a current liability. The amount of principal
outstanding under the credit facility at the filing date of this report was
$297.0 million. The indentures to the 13% senior discount debentures, 11% senior
subordinated notes, and 7.50% exchangeable debentures contain cross default
provisions that accelerate debt outstanding under each in the event that
outstanding debt under any other loan arrangement is in default and thereby
accelerated. Because the Company does not control the ultimate disposition of
the debt outstanding under the credit facility, all outstanding principal under
the indentures at September 30, 1999 of $278.6 million was classified as a
current liability. As of May 31, 2000, the amount of principal outstanding under
the indentures was $286.5 million. The amount of the current portion of debt
outstanding at September 30, 1999 excluding the potentially accelerated amounts
discussed above would be $11.2 million. The Company is unable to access the
credit facility while it is under default. See Note B for further information
with respect to interest rates in effect for the credit facility while it is
under default, other effects of the default of the facility, and circumstances
concerning the 13% discount debentures and 11% notes.
The indenture to the 11% notes permit the lenders under the senior credit
facility to elect to block the payment of amounts due and payable with respect
to the 11% notes for a period of up to 180 days. This payment blockage may occur
during a period of default under the credit facility in which the maturity of
debt outstanding thereunder may be accelerated. The lenders to the credit
facility have sent notice to the trustee for the 11% notes and the Company to
effect a payment blockage on the 11% notes such that the semiannual interest
payment of $10.5 million payable on June 1, 2000 was not made. Any nonpayment of
interest on the 11% notes existing for more than 30 days would be an event of
default under the indenture to the 11% notes. As long as the maturity of the
debt outstanding under the credit facility has not been accelerated, payments
with respect to the 11% notes may be continued after the payment blockage period
expires.
The following discussion is notwithstanding the default of the credit
facility and the circumstances concerning the 13% discount debentures and 11%
notes unless otherwise indicated.
43
<PAGE>
Note K - Long Term Debt (Continued)
MEDIQ/PRN has a $325.0 million senior secured credit facility, as amended
in May 1999, that consists of: (i) a $200.0 million term loan facility; (ii) a
$50.0 million acquisition facility; and (iii) a revolving credit facility not to
exceed $75.0 million. The amendment reduced the capacity under the acquisition
facility from $75.0 million to the present $50.0 million and increased the
capacity of the revolving credit facility from $50.0 million to the present
$75.0 million. A new subfacility B was established under the revolving credit
facility to contain the additional $25.0 million capacity, with the initial
$50.0 million capacity being designated as subfacility A.
The 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 which is owned by MEDIQ/PRN 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 credit facility.
Borrowings under the credit facility bear interest at a floating rate based
upon, at MEDIQ/PRN's option, (i) LIBOR or (ii) the higher of the prime rate of
Banque Nationale de Paris (the arranger of the credit facility) or the Federal
funds effective rate plus 0.5%. A margin is added to the selected rate. In the
case of the term loan facility, the margin ranges from 1.00% to 1.75% over the
prime rate and 2.25% to 3.00% over the LIBOR rate. In the case of the revolving
credit and acquisition loan facilities, the margin ranges from .5% to 1.25% over
the prime rate and 1.75% to 2.50% over the LIBOR rate. For borrowings under the
prime rate, interest is payable at the end of March, June, September, and
December. For borrowings under LIBOR rates, MEDIQ/PRN may elect interest periods
of one, two, three, or six months, with interest payable at the end of the
borrowing period except for six month periods which are due every three months.
Commitment fees are presently required at 0.5% per year on the undrawn portion
of each facility's commitment and are payable quarterly. The level of the
leverage ratio computation specified in the credit facility determines the
applicable margin and commitment fee percentage.
In fiscal 1999, MEDIQ/PRN borrowed under the acquisition facility a total
of $27.8 million in January 1999 to fund acquisitions in January and February
1999 and $22.2 million in June 1999 to fund the HTD acquisition. Also in June
1999, MEDIQ/PRN borrowed the $25.0 million available under subfacility B and
used $2.5 million of subfacility A in the funding of the HTD acquisition.
The full capacities of the term, acquisition, and subfacility B facilities
of $200.0 million, $50.0 million, and $25.0 million, respectively, have been
borrowed. Principal amounts outstanding under term loans began amortizing on a
quarterly basis on September 30, 1999, payable in incremental installments under
a schedule within the credit facility with a final maturity of June 30, 2006.
Principal amounts outstanding under the acquisition facility and subfacility B
began amortizing on a quarterly basis on March 31, 2000 and are payable in
incremental installments under a schedule within the credit facility with final
maturity on June 30, 2004. Principal amounts outstanding under subfacility A are
due and payable in full at final maturity on May 31, 2004. Principal amounts
repaid for term, acquisition, and subfacility B loans may not be reborrowed.
Amounts borrowed and repaid under subfacility A may be reborrowed prior to the
final maturity of the facility. There is no availability of the unborrowed
capacity under subfacility A while the credit facility is under default. Loans
outstanding under the credit facility 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. Loans
outstanding under the credit facility are required to be prepaid with a certain
percentage of the excess cash flow (as defined in the credit facility) of
MEDIQ/PRN. The applicable percentage is determined by conditions specified in
the credit facility.
Rates of interest on principal amounts outstanding at September 30, 1999
under the credit facility were principally 8.06% for term loans, a weighted
average 7.42% for acquisition loans, 7.56% for loans under subfacility B, and a
weighted average 8.70% for loans under subfacility A. Aggregate commitment fees
incurred in fiscal 1999 were $.4 million.
44
<PAGE>
Note K - Long Term Debt (Continued)
MEDIQ/PRN has outstanding $190.0 million principal amount of 11% senior
subordinated notes due 2008. The 11% notes are unsecured obligations maturing on
June 1, 2008 and bear interest at 11% per year payable on June 1 and December 1.
The 11% 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 11% 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 11% notes at a
redemption price of 111%, plus accrued and unpaid interest, with proceeds from a
public offering of equity securities. In the event of a change in control of the
Company, MEDIQ/PRN may be required to repurchase the 11% notes at a redemption
price of 101%, plus accrued and unpaid interest. The 11% notes are subordinate
to senior indebtedness of MEDIQ/PRN and its subsidiaries, including obligations
under the credit facility.
MEDIQ has outstanding $140.9 million aggregate principal amount at maturity
of 13% senior discount debentures due 2009. The 13% discount debentures are
unsecured obligations of MEDIQ maturing on June 1, 2009. The 13% discount
debentures were issued at an aggregate discounted amount of $74.3 million. The
carrying amount per bond accretes incrementally at an effective rate of 13.1% to
the full principal amount on June 1, 2003. No cash interest accrues through June
1, 2003. Thereafter, cash interest accrues at 13% per year, payable on June 1
and December 1. Commencing June 1, 2003, the 13% discount debentures may be
redeemed at MEDIQ's option at prices specified in the indenture. Prior to June
1, 2001, MEDIQ may at its option redeem a limited amount of the 13% discount
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, MEDIQ may be required to
repurchase the 13% discount debentures at a redemption price of 101% of the
accreted value per bond, plus accrued and unpaid interest. The 13% discount
debentures are subordinate to the credit facility and 11% notes, 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 credit facility and the indentures for the 13% discount debentures and
11% notes include significant operating and financial limitations, 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.
The outstanding balance of the 7.50% exchangeable debentures at September
30, 1999 of $.5 million is subject to redemption at MEDIQ's option at a
redemption price per bond of $102.50 through July 14, 2000 and $101.67 from July
15, 2000 through July 14, 2001. The 7.50% exchangeable debentures mature July
15, 2003.
The Company has outstanding letters of credit aggregating $2.1 million in
support of its various insurance policies.
Term loans and revolving credit advances outstanding at the date of the
merger were repaid with proceeds from the credit facility, 13% discount
debentures, and 11% notes. As a result of such repayments, the Company
recognized an extraordinary loss of $6.2 million related to the write off of the
balance of unamortized deferred financing costs associated with the debt repaid.
In June 1998, pursuant to a change of control provision, MEDIQ made a tender
offer to repurchase the remaining outstanding balance of $10.1 million of its
7.50% exchangeable debentures. On July 3, 1998, MEDIQ redeemed $9.5 million
pursuant to the tender offer. Early retirement of this debt resulted in an
extraordinary loss of $.3 million, related to the write off of the balance of
unamortized deferred financing costs associated with this debt. In fiscal 1997,
the Company refinanced, repurchased, and redeemed outstanding debt that resulted
in the write off of the balances of associated unamortized deferred financing
costs and recognized an aggregate extraordinary loss of $13.4 million.
45
<PAGE>
Note K - Long Term Debt (Continued)
Notwithstanding the amounts potentially subject to acceleration previously
discussed, maturities of long term debt in the next five years are $11.2 million
in 2000, $14.6 million in 2001, $17.5 million in 2002, $21.8 million in 2003,
and $55.2 million in 2004. Excluding the amounts potentially subject to
acceleration, maturities in the next five years are $.8 million in 2000, $.4
million in 2001, $70 thousand in 2002, $47 thousand in 2003, and none in 2004.
The adjusted maturities in each year represent capital lease obligations.
Note L - Preferred Stock
Preferred stock consisted of the following:
<TABLE>
<CAPTION>
September 30,
--------------------------
1999 1998
-------- --------
in thousands
<S> <C> <C>
Mandatorily Redeemable Preferred Stock:
Series A 13.0% cumulative compounding $ 94,306 $ 81,669
Series C 13.5% cumulative compounding 36,649 31,368
-------- --------
$130,955 $113,037
Preferred Stock in Stockholders' Deficiency:
Series B 13.25% cumulative compounding perpetual $ 31 $ 30
========= ========
</TABLE>
MEDIQ issued the present series of preferred stock in connection with the
merger in May 1998. At September 30, 1999, authorized shares issued and
outstanding for each series were: series A - authorized 10 million, issued and
outstanding 8,336,310; series B - authorized 5 million, issued and outstanding
3,146,302; and series C - authorized 5 million, issued and outstanding
3,264,438. The number of shares outstanding for each series increased by
513,548, 146,303, and 264,438 shares, respectively, during fiscal 1999. These
additional shares were issued in connection with the acquisition of HTD
Corporation. Each share of each series issued in the HTD acquisition was valued
at its then fair value of $3.50. The total value of the preferred shares issued
in the acquisition was $3.2 million. Shares issued at the date of the merger
were 7,822,762 for series A, 2,999,999 for series B, and 3,000,000 for series C.
At the date of the merger, all but 1.0 million shares then outstanding of the
premerger series A preferred stock, par value $.50 was to be exchanged for 0.075
shares of postmerger series A stock and cash consideration. The 1.0 million
shares were exchanged for series B and new common stock. Shares of premerger
series A stock outstanding and held in treasury were cancelled. The number of
series A shares outstanding was adjusted in fiscal 1999 by 744 to account for
fractional shares upon the exchange of all premerger stock for series A stock in
accord with the merger consideration.
Dividend rates per share of each series of preferred stock are $1.30 for
series A, $1.325 for series B, and $1.35 for series C. 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 MEDIQ's board of directors. Accrued and unpaid dividends are
cumulative for each series and are added to the liquidation value for series A
and series C, and to long term liabilities for series B. Accrued dividends not
paid on any dividend payment date accrue additional dividends compounded
annually. Liquidation preference per share, whether voluntary or involuntary,
for each series is $10.00, plus cumulative dividends in arrears.
All outstanding shares of series A and series C are required to be redeemed
by MEDIQ from legally available funds on December 31, 2011 and 2012,
respectively, at a liquidation value per share of $10.00, plus accrued and
unpaid dividends. At its option, subject to debt restrictions, MEDIQ may redeem
outstanding shares on a pro rata basis among all holders of series A or series C
at any time in whole or part from legally available funds. Series A has an
optional redemption price per share through December 31, 1999 of $11.00, plus
accrued and unpaid dividends, and from January 1, 2000 through December 31, 2002
of $10.50, plus accrued and unpaid dividends. Series C has an optional
redemption price per share of $10.00 at any time, plus accrued and unpaid
dividends. No partial redemption of either series A or series C 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.
MEDIQ has neither the right nor is required to redeem any outstanding shares of
series B. However, outstanding shares of series B may be repurchased by MEDIQ
with the consent of the selling holder, subject to debt restrictions.
Series A has priority with respect to dividends and liquidation rights over
the other two preferred stock series. Series B has priority over series C with
respect to such rights. Each series of preferred stock has priority over common
46
<PAGE>
Note L - Preferred Stock (Continued)
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 1999 were $10.8 million for series
A, $4.2 million for series B, and $4.3 million for series C. Cumulative accrued
and unpaid dividends at September 30, 1999 were $14.2 million for series A, $5.6
million for series B, and $5.7 million for series C. Accrued dividends for each
series were charged to accumulated deficit. At September 30, 1999, dividends in
arrears per share for shares issued at the date of the merger were $1.80 for
series A, $1.83 for series B, and $1.87 for series C, and for shares issued in
the HTD acquisition were $.38 for series A, $.39 for series B, and $.40 for
series C. Accretion of the difference between the mandatory redemption and
carrying amounts for the shares of series A and C issued in the HTD acquisition
for fiscal 1999 and cumulatively at September 30, 1999 was $56 thousand. At
September 30, 1999, the involuntary liquidation preference amount of Series B
preferred stock was $37.0 million compared to its carrying amount of $36.1
million. The involuntary liquidation preference and carrying amounts include
cumulative dividends in arrears and the carrying amount also includes the par
value and amounts recorded in additional paid in capital.
MEDIQ has 20 million authorized shares, par value $.01 available for
issuance in one or more preferred stock series. These may be issued by the board
of directors, with preference, terms, and rights determined by the board of
directors, without further action by the holders of common stock.
Terms of the credit facility, 11% notes, and 13% discount debentures limit
the ability of MEDIQ to pay dividends with respect to each series of preferred
stock.
Note M - Common Stock and Warrants
MEDIQ issued the present series of common stock in connection with the
merger in May 1998. At September 30, 1999, MEDIQ had common stock of 30 million
shares authorized and 1,119,048 shares outstanding. The amount outstanding
increased during fiscal 1999 by 44,225 shares. These additional shares were
issued in connection with the acquisition of HTD Corporation. Each share issued
in the HTD acquisition was valued at $7.00, with a total value of $.3 million.
At the date of the merger, MEDIQ issued 1.0 million shares. In September 1998,
members of the Company's management purchased an additional 74,823 shares.
Shares of common stock, par value $1.00 outstanding on the merger date were
exchanged for 0.075 of a share of postmerger series A preferred stock and cash
of $13.75 per share. Shares of premerger common stock outstanding and in
treasury were cancelled. Stock options outstanding on the merger became
exercisable on that date and were exchanged for 0.075 of a share of postmerger
series A preferred stock and cash consideration.
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 may declare from
legally available funds.
MEDIQ issued 140,885 warrants in May 1998 entitling holders to purchase in
the aggregate 91,209 shares of MEDIQ's common stock. Each warrant has an
exercise price of $.01, is exchangeable into .6474 shares of common stock, and
became exercisable on May 30, 1999. The warrants expire 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 units with
the 13% discount debentures but have since become separated.
Terms of the credit facility, 11% notes, and 13% discount debentures limit
the ability of MEDIQ to pay dividends on the common stock.
47
<PAGE>
Note N - Stock Options
On October 1, 1998, the board of directors adopted a stock option plan.
Participants of the plan are selected employees. The plan authorizes the
issuance of nonqualified options to eligible employees to purchase up to a
maximum of 61,543 shares of MEDIQ's common stock in the aggregate, subject to
adjustment as specified in the plan. The maximum number of shares of common
stock to which options may be granted to an individual is 5,121, subject to
adjustment as specified in the plan. The exercise price of the options is no
less than the fair value, as determined under the plan, of the common stock at
the date the options are granted. Options have a term no greater than 10 years
and otherwise expire on October 1, 2008. No options are exercisable sooner than
six months from the date of grant. Stock options initially vest and become
exercisable based on performance criteria and a formula specified in the plan.
The plan was amended on March 31, 1999 to provide that stock options that do not
vest in accordance with the performance criteria vest and become exercisable
seven years from the date of grant. Unvested stock options immediately vest and
become exercisable in the event of an initial public offering of MEDIQ's common
stock or there is a sale of the Company as defined in the stock option plan.
The Company accounts for stock options issued using the intrinsic value
method. Since the exercise price of the stock was equal to or greater than the
fair market value of the underlying common stock, no compensation expense was
recognized in fiscal 1999 for options issued. If the fair value method of
valuing the stock options issued in fiscal 1999 had been used, fiscal 1999 net
loss attributable to common shareholders would have increased by an estimated
$16 thousand, with an increase of $.02 in the related loss per share amount. The
Black-Scholes method was used in estimating fair value employing the following
weighted average assumptions: risk free interest rate of 6.00%; expected life of
3 years; and expected dividends of none. Volatility of the Company's common
stock was not factored into the formula as the stock is not publicly traded.
At and for the year ended September 30, 1999, the status and changes during
the year of the stock option plan were as follows:
Weighted Average
Shares Exercise Price
------ ----------------
Outstanding at beginning of year -- $ --
Granted 61,613 $10.59
Forfeited (8,143) $10.20
------
Outstanding at end of year 53,470 $10.65
======
Options exercisable at year end --
Weighted average fair value of
options granted during the year $1.49
Status of options outstanding at September 30, 1999 was as follows:
Weighted Average
Exercise Remaining Contractual
Price Shares Life (Years)
--------- ------ ---------------------
$10.00 48,606 9
$17.12 4,864 9
------
53,470 9
======
All stock options outstanding under plans existing prior to MEDIQ's merger
in May 1998 were exercised on the date of the merger and all of these plans were
terminated.
Note O - Financial Instruments
MEDIQ/PRN is party to interest rate swap and collar contracts (see below)
to manage its interest rate exposure. The principal object of these contracts is
to minimize the risks and/or costs associated with the Company's variable rate
debt obligations. MEDIQ/PRN does not use the swap or collars for trading or
other speculative purposes. The counterparties to these arrangements are major
financial institutions. MEDIQ/PRN is exposed to credit loss in the event of
nonperformance by these counterparties. MEDIQ/PRN does not anticipate
nonperformance by the counterparties.
48
<PAGE>
Note O - Financial Instruments (Continued)
The swap and collars are intended to reduce the impact of changes in the
variable rates of interest associated with principal outstanding under the
credit facility. The swap exchanges payments associated with variable rates of
interest for a fixed interest rate on a quarterly basis over the life of the
contract without the exchange of the underlying notional amount. MEDIQ/PRN owes
the counterparty when the specified market rate is below the contracted fixed
rate and is due from the counterparty when the market rate exceeds the fixed
rate. The collars are assessed on a quarterly basis, and payments are exchanged
only when the specified market interest rate is outside the range of rates
established by the collars without exchange of the underlying notional amounts.
MEDIQ/PRN owes the counterparties when the specified market rate is below the
contracted floor rates and is due from the counterparties when the market rate
exceeds the contracted ceiling rates. The notional amounts of the swap and
collars are used to measure interest to be paid or received and do not represent
the amount of exposure to credit loss. The net cash amounts paid or received on
each contract are recognized as an adjustment to interest expense over the
quarterly rate period.
MEDIQ/PRN entered into the interest rate swap contract in July 1998 in a
notional amount of $100.0 million in connection with the new credit facility.
The swap expires in July 2003. There is one counterparty to the swap. The swap
effectively fixes MEDIQ/PRN's borrowing rate at 5.35% on $100.0 million of
outstanding debt as long as the three month LIBOR rate does not exceed 6.25%. If
on the rate setting date the three month LIBOR rate exceeds 6.25%, the swap
temporarily terminates until the three month LIBOR rate on a succeeding setting
date is below 6.25%. The three month LIBOR rate is set quarterly at the market
rate on or the closest business day to January 3, April 3, July 3, and October
3. On the latest rate setting date of April 3, 2000, the market three month
LIBOR rate was 6.29%. MEDIQ/PRN would have received an estimated $60 thousand if
the swap were terminated at September 30, 1999.
To mitigate its interest rate exposure for LIBOR rates above 7.00%,
MEDIQ/PRN obtained two zero cost collars each with a notional amount of $50.0
million. Each contract has one counterparty. The collars expire in July 2003.
The ceiling rates are 7.00% and the weighted average floor rate is 5.03%. The
collars are marked to the market three month LIBOR rate as set quarterly on or
the closest business day to March 10, June 10, September 10, and December 10. On
the latest rate setting date of March 10, 2000, the market three month LIBOR
rate was 6.13%. MEDIQ/PRN would have received an estimated aggregate of $1.0
million if the collars were terminated at September 30, 1999. (See Note X.)
In July 1998, MEDIQ/PRN terminated its previously existing interest rate
hedging contracts at a cost of approximately $.6 million, which was recorded as
interest expense.
Note P - Fair Value of Financial Instruments
The estimated fair value amounts of financial instruments have been
determined by the Company using market information and appraisals when available
and other appropriate methodologies. However, considerable judgment is required
in interpreting market data to develop the estimates of fair value. Accordingly,
the fair values presented are estimates only and 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.
Accounts receivable and accounts payable
The carrying amounts of these items, net of the allowance for doubtful
accounts for accounts receivable, at September 30, 1999 and 1998 approximate
their fair values at those dates.
Long term debt (excluding capital lease obligations)
Fair values for the 13% discount debentures and 11% notes were determined
based on market prices. The aggregate carrying amount and fair value for these
obligations were $278.1 million and $163.8 million, respectively, at September
30, 1999 and $267.6 million and $216.4 million, respectively, at September 30,
1998. The carrying amounts of debt incurred under the credit facility of $288.5
million at September 30, 1999 and $200.0 million at September 30, 1998
49
<PAGE>
Note P - Fair Value of Financial Instruments (Continued)
approximated their fair values at those dates because the debt is subject to
short term variable rates of interest that were reflective of the market
interest rates on those dates. The carrying amount of the 7.50% exchangeable
debentures of $.5 million at September 30, 1999 and 1998 was assumed to
approximate its fair value at those dates.
Interest rate instruments
The fair values of the swap and collars are the estimated amounts that
MEDIQ/PRN would receive or pay to terminate the contracts at September 30, 1999
and 1998, taking into account current interest rates and the current
creditworthiness of the counterparties. At September 30, 1999 and 1998, the
aggregate fair value on the aggregate notional amount of $200.0 million was a
$1.0 million receipt and $5.1 million payment, respectively. No carrying value
is attributed to the interest rate instruments.
Mandatorily redeemable preferred stock
The carrying amount and fair value of series A and series C preferred
stocks combined were $116.0 million and $51.0 million, respectively, at
September 30, 1999, and $108.2 million and $51.4 million, respectively, at
September 30, 1998. The carrying amounts exclude cumulative dividends. The fair
values for series A were based upon its market price at each respective fiscal
year end date of $4.75 per share. Series C preferred stock is closely held and
does not trade. The fair value per share for series C at September 30, 1998 was
assumed to approximate the fair value per share for series A at September 30,
1998 of $4.75. The fair value for series C at September 30, 1999 was based on
the appraised fair value per share of $3.50.
Note Q - Income Taxes
Total income tax (benefit) expense consisted of:
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------
1999 1998 1997
------------ -------- --------
in thousands
<S> <C> <C> <C>
Continuing operations:
Current:
Federal $ -- $ 547 $(24,397)
State 71 176 51
------------ -------- --------
71 723 (24,346)
------------ -------- --------
Deferred:
Federal (12,672) (13,178) 29,641
State 1,779 -- (161)
------------ -------- --------
(10,893) (13,178) 29,480
------------ -------- --------
Total continuing operations (10,822) (12,455) 5,134
Discontinued operations -- 875 20,507
Extraordinary items -- (1,939) (5,316)
------------ -------- --------
Total income tax (benefit) expense $ (10,822) $(13,519) $ 20,325
============ ======== ========
</TABLE>
The differences between the Company's income tax (benefit) expense on
continuing operations and the income tax (benefit) expense computed using the
statutory Federal income tax rate were:
50
<PAGE>
Note Q - Income Taxes (Continued)
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------
1999 1998 1997
--------- -------- --------
in thousands
<S> <C> <C> <C>
Statutory federal tax (benefit) expense $ (19,254) $(14,119) $ 984
State income taxes, net of federal income taxes 1,826 116 (72)
Goodwill amortization 779 916 350
Equity participation - subsidiary warrants repurchased -- -- 3,756
Valuation allowance against federal loss carryforwards 5,530 -- --
Other items - net 297 632 116
------------ -------- ------
Income tax (benefit) expense $ (10,822) $(12,455) $5,134
============ ======== ======
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
were:
<TABLE>
<CAPTION>
September 30,
--------------------------
1999 1998
--------- ---------
Liabilities: in thousands
<S> <C> <C>
Depreciation $(20,105) $(27,527)
Intangible assets (3,287) (2,543)
Accrued expenses (5,202) (5,198)
Prepaid expenses (160) (48)
Other (117) (118)
-------- --------
Gross deferred tax liabilities (28,871) (35,434)
Assets:
Net operating and capital loss carryforwards 11,974 7,119
Tax credit carryforwards 6,355 5,219
Accrued expenses and reserves 17,981 10,350
Intangible assets 7,083 3,702
Stock options exercised -- 7,724
Other 142 687
-------- --------
Gross deferred tax assets 43,535 34,801
Valuation allowance - federal (5,530) --
Valuation allowance - state (10,913) (7,119)
-------- --------
Net deferred tax assets 27,092 27,682
-------- --------
Net deferred tax liability $ (1,779) $ (7,752)
======== ========
</TABLE>
At September 30, 1999, the Company had a Federal net operating loss
carryforward of $11.0 million that expires through 2019. At September 30, 1999,
the Company had carryforwards for a Federal alternative minimum tax credit of
$5.6 million and general business tax credits of $.7 million that expire through
2003. A valuation allowance of $5.5 million was established for Federal tax
assets due to the uncertainty of their realization in future income tax returns.
Aggregate state net operating loss carryforwards of $102.8 million expire in
varying amounts through 2019, and were fully reserved with a valuation
allowance.
Note R - Retirement Benefits
The Company maintains a noncontributory defined benefit pension plan that
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
51
<PAGE>
Note R - Retirement Benefits (Continued)
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.
The components of net periodic pension expense were as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------
1999 1998 1997
-------- -------- ------------
in thousands
<S> <C> <C> <C>
Service cost $ 761 $ 551 $ 451
Interest cost on projected benefit obligation 1,280 1,196 1,158
Expected return on plan assets (1,337) (1,297) (1,101)
Recognized gains -- (58) --
Amortization of transition obligation 24 23 24
-------- ------- --------
Net periodic pension expense $ 728 $ 415 $ 532
======= ======= =======
</TABLE>
The following table presents the changes in the pension benefit obligation
and the pension plan assets and the funded status of the plan:
<TABLE>
<CAPTION>
September 30,
-------------------------
1999 1998
-------- --------
in thousands
<S> <C> <C>
Projected benefit obligation:
Obligation at beginning of year $19,309 $16,680
Service cost 761 551
Interest cost 1,280 1,196
Actuarial (gains) losses (2,888) 1,692
Benefits paid (749) (810)
------- -------
Obligation at end of year 17,713 19,309
------- -------
Fair value of plan assets:
Assets at beginning of year 17,046 16,528
Actual return on plan assets 1,831 861
Company contributions -- 467
Benefits paid (749) (810)
------- -------
Assets at end of year 18,128 17,046
------- -------
Funded status 415 (2,263)
Unrecognized net (gain) loss (3,243) 139
Balance of unrecorded transition obligation 190 214
------- -------
Accrued pension liability $(2,638) $(1,910)
======= =======
</TABLE>
The change between fiscal 1999 and 1998 in actuarial (gains) losses and actual
return on plan assets reflects the favorable market conditions existing during
fiscal 1999.
The weighted average rates assumed in accounting for the pension plan were
as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Discount rate 7.75% 6.75% 7.5%
Expected long term rate of return on plan assets 8% 8% 8%
Increase in compensation levels 5% 5% 5%
</TABLE>
52
<PAGE>
Note R - Retirement Benefits (Continued)
The Company sponsors a 401(k) plan that is a defined contribution plan.
Contributions made by the Company to the plan were $.3 million in each of fiscal
1999, 1998, and 1997. The contributions were expensed in the year in which made.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits." This statement provides for additional disclosure
regarding pensions and other postretirement benefits. This statement became
effective for the Company in fiscal 1999 and the above disclosures reflect the
applicable disclosures required by the statement.
Note S - Related Party Transactions
Fees incurred by the Company with firms in which certain members of its
board of directors are employed were $1.0 million, $8.3 million, and $2.3
million in fiscal 1999, 1998, and 1997, respectively. Included in 1998 is a one
time fee of $6.0 million with respect to consummation of the merger. The fees
are paid in cash periodically.
In July 1998, the Company received $3.0 million in cash from MHM Services,
Inc. in full satisfaction of all amounts due under MHM's promissory note to the
Company. This amount was recorded in other-net within other charges and credits
in the statement of operations. MHM was spun off from the Company in fiscal 1993
and remained a related party through individuals with ownership interests in
both companies. The Company recorded interest income on the note of $1.0 million
in fiscal 1997. Also in fiscal 1997, the Company recorded a reserve of $5.5
million against the MHM note that was included in other-net within other charges
and credits.
Note T - Business Segment Data
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," that established standards for the way
public business enterprises report information about operating segments in
financial statements issued to the public. It also established standards for
related disclosures about products and services, geographic areas, and major
customers.
The Company's business is essentially exclusive to the United States. Its
business is focused on the health care industry in that the Company primarily
rents medical equipment and support surfaces and sells parts and disposables to
health care providers. The Company operates its rental, sale, asset management,
and outsourcing service and product offerings through a single distribution
system in that each service and product offering receives operational and
administrative support from the same employees and through the same facilities.
As a result, the Company's lines of businesses share similar characteristics,
such as nature and purpose of equipment and products, type of customers and
their industry concentration, marketing and distribution methods, and regulatory
environment.
The Company operates in three business segments in the determination of
revenue only based upon the type of product or service provided. These revenue
segments consist of rental, sales, and other, and such are presented on the
statement of operations. Rental revenues are derived from rentals of moveable
medical equipment and support surfaces, along with related revenue share
arrangements. Sales revenues are principally derived from sales of parts and
disposables, along with sales of medical equipment, support surfaces, medical
gases, and related revenue share arrangements. Other revenues principally
consist of asset management and outsourcing services. The Company does not
evaluate expenses of operations or profit and loss by segment nor does it
attribute assets or liabilities to any revenue segment.
The revenue segments detailed for each period on the statement of
operations reflect revenues from external customers. No individual customer
generated 10% or more of the Company's total revenues in any year presented.
53
<PAGE>
Note U - Commitments and Contingencies
Leases
The Company leases equipment, vehicles, 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
2000 $1,039 $ 5,916
2001 607 4,343
2002 78 3,187
2003 49 2,138
2004 -- 625
Thereafter -- --
------ --------
Total minimum lease payments 1,773 $16,209
=======
Less amount representing interest 432
------
Present value of minimum lease payments $1,341
======
Total rent expense under operating leases was $6.7 million, $5.7 million,
and $5.6 million in 1999, 1998, and 1997, respectively. Certain leases, which
are for terms of up to five years, contain options to renew for additional
periods.
At September 30, 1999, rental equipment and machinery and equipment
included assets under capitalized lease obligations of $10.1 million, less
accumulated amortization of $6.1 million.
Purchase commitments
At September 30, 1999, the Company had open commitments totaling $11.1
million. During fiscal 1999, 1998, and 1997, the Company satisfied commitments
amounting to $14.5 million, $13.8 million, and $1.2 million, respectively.
Effective October 1, 1999, the Company entered into an agreement that commits
the Company to purchase parts and disposable products over its 5 year term. The
amount of the commitment under this agreement for fiscal 2000 is $5.0 million.
Thereafter, the annual commitment will vary based on a formula that takes into
consideration the quantity of inventory subject to the agreement the Company has
on hand and on order and the quantity of items subject to the agreement the
Company sold in the previous year.
Employment agreements
The Company maintains an employment agreement with its chief executive
officer and certain officers of its subsidiaries. The agreements with active
officers automatically renew periodically unless terminated as described in the
agreements and provide for minimum salary levels, adjusted annually in
accordance with Company policy. A majority of the employment agreements contain
provisions for severance payments unless the individual is terminated for cause
or resigns ranging from six months to two years. The employment agreements
provide for aggregate minimum annual base compensation of $2.7 million, expiring
on various dates through 2001.
Management agreement
In connection with the Company's merger, MEDIQ/PRN entered into a
management agreement with the three firms that are the controlling shareholders
of MEDIQ as stated in Note C. These firms 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 incurred $1.0 million
54
<PAGE>
Note U - Commitments & Contingencies (Continued)
and $.3 million under the agreement in 1999 and 1998, respectively.
Adjustment to purchase prices of acquisitions
Two acquisitions contain provisions for additional cash consideration as
adjustments to their respective purchase prices. The purchase price for one
acquisition was subject to adjustment based upon specified annual rental
revenue. The maximum adjustment for each year was $1.4 million. The Company
settled the adjustment for both years combined at approximately $.8 million. The
purchase price adjustment for the other acquisition is subject to adjustment
each year within a four year period that ends January 2003 based upon specified
net revenue for each year. The adjustment over the four year period is not to
exceed an aggregate of $24.8 million. The Company expects that the adjustment
for the first year will not be material.
Investigations and legal proceedings
In July 1998, MEDIQ Mobile X-Ray Services, Inc., formerly 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 July 8, 1999, SizeWise Rental, Inc. filed a suit against the Company in
the United States District Court, District of Kansas. The suit is in connection
with the purported termination by SizeWise of a rental agreement with the
Company due to an alleged breach of the agreement by the Company. The complaint
seeks a declaratory judgment and damages. On September 21, 1999, the court
entered an order staying the case pending arbitration. On February 17, 2000, the
district court entered an order enjoining the Company, until the earlier of
November 1, 2000 or the resolution of the underlying arbitration, from renting
products designed for patients over 350 pounds to facilities to which it had
previously rented SizeWise products. The Company has filed a notice of appeal
and motion for expedited treatment which are scheduled to be heard in May 2000.
On May 26, 2000, the United States Court of Appeals for the Tenth Circuit (the
"Court") issued its Order and Judgement regarding the appeal. The Court affirmed
the district court's ruling discussed above. The Company and SizeWise will enter
arbitration shortly to resolve the damages portion of the suit unless a
settlement is negotiated prior to the start of arbitration. Based on information
available and established reserves, the Company believes that resolution of the
suit should not have a material adverse effect on the operations or financial
condition of the Company.
Other than the foregoing matters, the Company is not a party to any
material pending legal proceeding. The Company is subject to ordinary litigation
incidental to the conduct of its businesses and the ownership of its properties,
none of which individually or in the aggregate would have a material effect on
the Company's business, results of operations, or financial condition.
Note V - Subsidiary Dividend and Funding Restrictions
Throughout fiscal 1999, and in accordance with the provisions of the senior
secured credit facility, MEDIQ/PRN was permitted to fund certain expenses and
pay certain liabilities of MEDIQ. As of September 30, 1999, MEDIQ had
approximately $9,000 of assets, exclusive of its investment in MEDIQ/PRN and
deferred financing costs, $2.6 million of current liabilities consisting
principally of pension and deferred compensations liabilities, $88.6 million of
long-term debt and $6.2 million of other long-term liabilities, exclusive of its
obligations under mandatorily redeemable preferred stock and amounts owed to
MEDIQ/PRN. MEDIQ's only means to satisfy its obligations and to pay its expenses
is from cash advanced from MEDIQ/PRN. Effective January 2000, and due to the
defaults under the senior secured credit facility, MEDIQ/PRN is no longer
permitted to fund the obligations and expenses of MEDIQ.
55
<PAGE>
Note W - New Accounting Pronouncements
The FASB issued SFAS No. 130, "Reporting Comprehensive Income," which
requires disclosure of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general purpose financial
statements. For the three year period ending September 30, 1999, the Company did
not have any comprehensive income to report.
In July 1998, FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments imbedded in other contracts, and for hedging activities. In June
1999, FASB issued SFAS No. 137 that delayed the effective date of SFAS No. 133
to fiscal years beginning after June 15, 2000. The Company has not determined
the impact the adoption of SFAS No. 133 will have on the Company's financial
statements.
Note X - Subsequent Events
Work Force Reduction
In March and June 2000, the Company implemented a strategic initiative to
streamline the organization and increase operational response and efficiency. In
the process, 250 positions were combined and/or eliminated. The Company recorded
charges of approximately $2.8 million and $3.0 million in the second and third
quarters of fiscal 2000 for severance and related benefits associated with the
reduction.
Derivative Termination
In connection with the default under the credit facility, MEDIQ/PRN was
notified by the counterparty to one of its collar agreements in the notional
amount of $50.0 million that the agreement was terminated effective May 11,
2000. As a result of this early termination of the agreement, the counterparty
owes MEDIQ/PRN approximately $1.0 million. In accordance with the terms of the
credit facility, the lenders to the credit facility will retain this amount owed
to repay debt outstanding thereunder. The collar served to mitigate variable
interest rates to MEDIQ/PRN when LIBOR rates of interest were in excess of
7.00%.
On June 7, 2000 and June 8, 2000, the Company was notified by the
counterparties for its other collar agreement and its interest rate swap that
such arrangements would be terminated shortly due to the defaults under the
credit facility. The Company received $.6 million in connection with such
terminations, and such proceeds were utilized to repay indebtedness under the
credit facility.
Payment Blockage
The indenture to the 11% notes permit the lenders under the senior credit
facility to elect to block the payment of amounts due and payable with respect
to the 11% notes for a period of up to 180 days. This payment blockage may occur
during a period of default under the credit facility in which the maturity of
debt outstanding thereunder may be accelerated. The lenders to the credit
facility have sent notice to the trustee for the 11% notes and the Company to
effect a payment blockage on the 11% notes such that the semiannual interest
payment of $10.5 million payable on June 1, 2000 was not made. Any nonpayment of
interest on the 11% notes existing for more than 30 days would be an event of
default under the indenture to the 11% notes. As long as the maturity of the
debt outstanding under the credit facility has not been accelerated, payments
with respect to the 11% notes may be continued after the payment blockage period
expires.
President and Chief Executive Officer
On June 1, 2000, the Company announced that it is in the process of
terminating, pursuant to contract, its President and Chief Executive Officer,
Thomas E. Carroll. Regis H. Farrell was appointed Chief Operating Officer on May
15, 2000 and will be named President at the conclusion of Mr. Carroll's
termination process. On June 20, 2000, the Company's Board of Directors voted to
terminate the employment of Mr. Carroll effective August 19, 2000, in accordance
with the terms of his contract.
56
<PAGE>
Note X - Subsequent Events (Continued)
Payments Under the Credit Facility
On June 12, 2000 and June 30, 2000, MEDIQ/PRN made $8.5 million in payments
under the credit facility. Such payments represented normal interest costs,
LIBOR/prime plus the applicable margin, but did not include default interest of
$1.8 million as required under the credit agreement. Non-payment of the default
interest constitutes a default under the credit facility. In addition, MEDIQ/PRN
notified the lenders for the credit facility that the Company intended to defer
the principal payment of $3.3 million due June 30, 2000 to $1.1 million July 21,
2000; $1.1 million August 18, 2000; and $1.1 million September 15, 2000. Such
deferment constitutes a default under the credit facility.
57
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable
58
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table contains information concerning the directors and
executive officers of the Company at June 2000.
<TABLE>
<CAPTION>
Name and Offices Director
with the Company (1) Age Since Principal Occupation and Experience
-------------------- --- ---------- -----------------------------------
<S> <C> <C> <C>
John F. McNamara 65 2000 Former Chairman of the Board of Directors and Chief Executive Officer of
Chairman AmeriSource Corporation. Employed with AmeriSource in various positions from
1981 to 1998. Employed by McKesson Corporation from 1965 to 1981; last
position held was President of Value Rite. Past Chairman of International
Federation of Pharmaceutical Wholesalers and past Chairman of National
Wholesale Drug Association. Presently, Chairman of ImpactHealth.com.
Bruce C. Bruckmann 46 1998 A Managing Director of Bruckmann, Rosser, Sherrill & Co., Inc., an
Director investment firm, since 1995. Officer of Citicorp Venture Capital Ltd. from
1983 to 1994. Director of Mohawk Industries, Inc., AmeriSource Health
Corporation, Chromcraft Revington Corporation, Cort Furniture Rental
Corp., Jitney-Jungle Stores of America, Inc., Town Sports International,
Inc., Anvil Knitwear, Inc., and Penhall International, Inc.
Thomas E. Carroll (2) 56 1995 President and Chief Executive Officer since 1995. President and Chief
President, Chief Executive Officer of MEDIQ/PRN Life Support Services, Inc., a wholly owned
Executive Officer, and subsidiary of the Company, since 1995. President and Chief Operating Officer
Director of MEDIQ/PRN from 1994 to 1995. Executive Vice President and Chief
Operating Officer of MEDIQ/PRN from 1990 to 1994. Director of Roy F.
Weston, Inc.
Michael J. Rotko 62 1965 Of Counsel to the law firm of Drinker Biddle & Reath LLP since 1998. Special
Director Counsel to the United States Senate investigation into issues arising from the
Persian Gulf War in 1997 and 1998. Partner of Drinker Biddle & Reath LLP
from 1993 to 1997.
Stephen C. Sherrill 47 1998 A Managing Director of Bruckmann, Rosser, Sherrill & Co. since 1995. Officer
Director of Citicorp Venture Capital Ltd. from 1983 to 1994. Director of Galey &
Lord, Inc., Jitney-Jungle Stores of America, Inc., B&G Foods, Inc.,
HealthPlus Corporation, Doane Pet Care Enterprises, Inc., and Alliance
Laundry Systems LLC.
Robert T. Thompson 45 1998 A member of Ferrer Freeman Thompson & Co. LLC, an investment firm, since
Director 1995. Managing Director and Equity Group Leader of GE Capital Corporation
from 1988 to 1995. Director of Vista Hospice Care and Timm Medical
Technologies.
L. John Wilkerson 56 1998 General Partner in Galen Associates, a risk capital partnership, since 1990.
Director Director of British Biotechnology PLC, Stericycle, Inc. and Chemdex
Corporation. Mr. Wilkerson holds a Ph.D. from Cornell University.
Kenneth K. Kreider (3) 51 -- Senior Vice President of the Company and MEDIQ/PRN since January
Senior Vice President and 2000. Appointed Chief Financial Officer of the Company and MEDIQ/PRN
Chief Financial Officer in March 2000. President of Wasatch Consulting, a firm specializing in
consulting services in organizational matters, from 1997 to 1999. Director of
Finance and Chief Financial Officer of Lucas Aerospace, a manufacturer of
aerospace components and systems, from 1994 to 1996.
Regis H. Farrell 49 -- Former President of HTD Corporation from 1998 to 1999. Former
Chief Operating Officer Chief Executive Officer of Bimeco Inc. from 1996 to 1998. Former Chief
Executive Officer of Francois Schwarz Inc. from 1992 to 1995.
</TABLE>
(1) Directors hold their offices for a term of one year or until their
successors are elected and qualified. Executive officers serve at the
discretion of the board of directors.
(2) On June 1, 2000, the Company announced that it is in the process of
terminating, pursuant to contract, Mr. Carroll. On June 20, 2000, the
Company's Board of Directors voted to terminate the employment of Mr.
Carroll effective August 19, 2000, in accordance with the terms of his
contract.
(3) Mr. Kreider was brought in to serve as the Chief Financial Officer at the
express direction of the board of directors. Mr. Kreider is a full time
executive who is chartered to develop and strengthen the finance
organization. The terms of Mr. Kreider's employment is still to be
finalized by the Board of Directors.
Note: Mr. Jay M. Kaplan served as the Senior Vice President and Chief Financial
Officer of the Company until the termination of his employment in March 2000.
59
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table contains information concerning compensation paid or
accrued for persons who qualified as a Named Executive Officer of the Company at
September 30, 1999. The compensation is that for the entire fiscal year in which
this position was held.
<TABLE>
<CAPTION>
Long Term
Compensation:
Securities
Annual Compensation (1) Underlying
----------------------------------- Stock All Other
Name and Principal Position Year Salary Bonus Options (#) Compensation
--------------------------- ---- ------------ ----------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Thomas E. Carroll 1999 $394,000 $ -- 4,914 $ 2,500 (3)
President and Chief 1998 374,500 112,000 -- 4,793,000 (2)
Executive Officer 1997 350,000 192,000 50,000 2,000 (3)
Jay M. Kaplan 1999 210,000 -- 3,076 2,453 (3)
Senior Vice President- 1998 200,000 40,000 -- 484,000 (2)
Finance, Treasurer, and 1997 187,500 94,000 25,000 2,000 (3)
Chief Financial Officer
</TABLE>
(1) Excludes information concerning the value of perquisites and other personal
benefits that, in the aggregate, do not exceed the lesser of $50,000 or 10%
of the total salary and bonus reported for each Named Executive Officer.
(2) Consists of:
<TABLE>
<CAPTION>
Mr. Carroll Mr. Kaplan
----------- ----------
<S> <C> <C>
Cash bonus paid upon consummation of the Company's merger $4,790,000 $481,000
Company's matching contribution to the Company's Profit
Sharing Plan and Trust ("401(k) Savings Plan") 3,000 3,000
</TABLE>
(3) Represents Company's matching contribution to the 401(k) Savings Plan.
Stock Option Grants in Fiscal Year
The following table contains information concerning individual grants of
stock options made during fiscal 1999 to each Named Executive Officer in the
Summary Compensation Table.
60
<PAGE>
<TABLE>
<CAPTION>
Individual Grants
----------------------------------------------------------------- Potential Realizable Value at
Percent of Total Assumed Annual Rates of Stock
Number of Options Granted Per Share Price Appreciation for Option Term (a)
Securities Underlying to Employees Exercise Expiration --------------------------------------
Name Options Granted in Fiscal Year Price Date 5% 10% 0% (b)
------------------- --------------------- ---------------- --------- ---------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Thomas E. Carroll 4,914 9.2 $10.00 10/1/2008 $30,909 $78,329 $0
Jay M. Kaplan 3,076 5.8 10.00 10/1/2008 19,348 49,031 0
</TABLE>
(a) Represents the potential gain that would be realized at assumed rates of
appreciation specified by the Securities and Exchange Commission if the
stock options were held for their entire term of ten years. There is no
assurance that such appreciation rates will be realized.
(b) Represents that the fair value of the common stock underlying the stock
options at the date of grant was equal to the exercise price of the stock
options at the date of grant.
Material terms related to grants of stock options are: (i) The aggregate maximum
number of shares of common stock with respect to stock options that may be
granted to any individual during the term of the stock option plan is 5,121.
(ii) The exercise price of each stock option at the date of grant is no less
than 100% of the fair value of the common stock determined at the date of grant
of the stock option. (iii) The term of each stock option is no more than 10
years from the date of grant and expires no later than October 1, 2008. At the
election of the Company's board of directors, stock options expire 15 days after
notice is given of the Company's merger, consolidation or combination with
another person or entity, or of a divisive reorganization or liquidation of the
Company. (iv) Stock options initially vest and become exercisable based on
performance criteria and a formula specified in the stock option plan. Stock
options that do not vest in accordance with the performance criteria vest and
become exercisable seven years from the date of grant. Unvested stock options
immediately vest and become exercisable in the event of an initial public
offering of the Company's common stock or there is a sale of the Company as
defined in the stock option plan. No stock option is exercisable sooner than six
months from the date of grant. (vi) At the discretion of the Company's board of
directors, adjustments may be made to the number of stock options outstanding in
the event of a change in the corporate structure or capitalization or there is a
distribution to stockholders other than a cash dividend.
Stock Option Exercises During the Fiscal Year and Fiscal Year End Stock Option
Values
The following information concerns stock options exercised during fiscal
1999 and outstanding at the end of fiscal 1999 for each Named Executive Officer
in the Summary Compensation Table. No stock options were exercised by Mr.
Carroll or Mr. Kaplan during fiscal 1999. The number of shares of common stock
underlying unexercised stock options that were unexercisable at the end of
fiscal 1999 was 4,914 and 3,076 for Mr. Carroll and Mr. Kaplan, respectively. No
stock options outstanding at the end of fiscal 1999 were exercisable or in the
money.
Pension Plan
The following table shows the estimated annual pension benefits payable
upon retirement to participants of the Company's noncontributory defined benefit
pension plan for various salary levels and years of service.
<TABLE>
<CAPTION>
Average Annual Estimated Annual Benefits
Compensation During Payable at Age 65 for Various
Plan Membership Years of Plan Membership
---------------------- ---------------------------------------------------------
10 20 30 40
------ ------ ------ ------
<S> <C> <C> <C> <C>
$200,000 and above 20,333 39,726 59,004 68,824
100,000 11,933 22,926 33,804 39,424
</TABLE>
The figures shown above apply to the pension plan as of September 30, 1999.
Average annual benefits are based upon the participant's annual compensation
(including bonuses and similar special pay), as more fully defined in the
pension plan, over the number of years of participation up to a maximum of 35
years. During fiscal 1999, the maximum amount of annual compensation that may be
included for pension plan purposes was $160,000. Estimated annual benefits are
61
<PAGE>
determined in part by the average social security wage base during the 35 years
ending in the year of social security normal retirement age. The benefit amounts
listed are not subject to any deduction for social security or other offset
amounts. As a result of limitations imposed under Federal income tax law, the
maximum annual benefit payable under the pension plan for the fiscal year ending
September 30, 1999 is $130,000, although the amount will be actuarially adjusted
in accordance with Federal income tax regulations if payments commence prior to
or following the date that unreduced social security benefits become payable. At
September 30, 1999, years of credited service under the pension plan for each
Named Executive Officer in the Summary Compensation Table was: Mr. Carroll 11;
Mr. Kaplan 26.
Compensation of Directors
Each nonemployee director is entitled to an annual retainer of $12,000 plus
fees of $1,000 for each board meeting attended and $500 for each committee
meeting attended. Directors who are active employees of the Company or its
subsidiaries do not receive compensation as directors.
Employment Agreements
Mr. Carroll has an agreement that automatically renews for two year terms
unless and until either party gives notice of an election to terminate within 60
days of the end of the then current term. The current agreement expires November
12, 2001. If Mr. Carroll's agreement is not renewed, he is terminated without
cause, or he terminates his employment with good reason, Mr. Carroll is entitled
to a termination payment. Mr. Carroll is also entitled to be compensated for any
liabilities imposed under Section 4999 of the Internal Revenue Code of 1986, as
amended, or any successor provision thereto. In addition, Mr. Carroll has agreed
not to compete with the business of the Company for two years following the
termination of his employment under specified circumstances. The employment
agreement includes provisions relating to benefits, confidentiality, and other
terms and conditions customary in agreements of this nature.
Compensation Committee Interlocks and Insider Participation
The compensation committee of the board of directors consists of Messrs.
Bruckmann, Thompson, and Wilkerson. Mr. Bruckmann is a Managing Director of
Bruckmann Rosser Sherrill, Mr. Thompson is a member of Ferrer Freeman Thompson,
and Mr. Wilkerson is a General Partner of Galen, each firm being a principal
holder of the Company's common stock. Each firm also provides management,
business and organizational strategy, and merchant and investment banking
services to the Company.
62
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth, as of May, 2000, the beneficial ownership
of shares of the Company's common stock and each series of preferred stock by
(i) each director of the Company, (ii) each Named Executive Officer as contained
in the "Summary Compensation Table", and (iii) all directors and Named Executive
Officers of the Company as a group, and (iv) each person and entity who is known
by the Company to be the beneficial owner of more than 5% of the Company's
voting securities (the Company's only voting security is its common stock).
<TABLE>
<CAPTION>
Number of Shares/Percent
-----------------------------------------------------------------------------
Series A Series B Series C
Common Preferred Preferred Preferred
Name of Beneficial Owner Stock Stock Stock Stock
--------------------------------------- -------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Bruckmann, Rosser, Sherrill & Co., L.P.(1) 465,259/41.6% 3,155,841/37.9% 899,057/28.6% 1,625,015/49.8%
Health Care Capital Partners, L.P.(2) 199,013/17.8% 1,349,896/16.2% 384,567/12.2% 695,092/21.3%
Galen Partners III, L.P. (3) 132,675/11.9% 899,930/10.8% 256,378/8.2% 463,395/14.2%
Michael J. Rotko (4) 54,891/4.9% 389,108/4.7% 475,017/15.1% --
Thomas E. Carroll (5), (6) 56,888/5.1% 94,816/1.1% 19,724/* 35,650/1.1%
Bruce C. Bruckmann (7) 497,531/44.5% 3,374,739/40.5% 961,418/30.6% 1,737,731/53.2%
Stephen C. Sherrill (7) 497,531/44.5% 3,374,739/40.5% 961,418/30.6% 1,737,731/53.2%
Robert T. Thompson (8) 199,013/17.8% 1,349,896/16.2% 384,567/12.2% 695,092/21.3%
L. John Wilkerson (9) 132,675/11.9% 899,930/10.8% 256,378/8.2% 463,395/14.2%
All directors & Named Executive Officers
as a group (6 persons) 940,998/84.2% 6,108,489/73.3% 2,097,104/66.7% 2,931,868/89.8%
</TABLE>
* Less than one percent of the total outstanding.
(1) A limited partnership, the sole general partner of which is BRS Partners,
Limited Partnership and the manager of which is Bruckmann, Rosser, Sherrill
& Co., Inc. The sole general partner of BRS Partners is BRSE Associates,
Inc. Bruce C. Bruckmann, Harold O. Rosser II, Stephen C. Sherrill, and
Stephen F. Edwards are the only stockholders of Bruckmann, Rosser, Sherrill
& Co. Inc. and BRSE Associates and may be deemed to share beneficial
ownership of the shares shown as beneficially owned by Bruckmann, Rosser,
Sherrill & Co, Inc. Such individuals disclaim beneficial ownership of any
such shares. Address is: Two Greenwich Plaza, Suite 100, Greenwich, CT
06830.
(2) Includes 7,947 shares of common stock, 53,907 shares of Series A preferred
stock, 15,357 shares of Series B preferred stock, and 27,758 shares of
Series C preferred stock held by Health Care Executive Partners, L.P.
Health Care Capital Partners, L.P. disclaims beneficial ownership of such
shares. Health Care Capital and Health Care Executive are limited
partnerships for which Ferrer Freeman Thompson & Co. is the general
partner. Carlos A. Ferrer, David A. Freeman, and Robert T. Thompson are the
only voting members of Ferrer Freeman Thompson and may be deemed to share
beneficial ownership of the shares shown as beneficially owned by Health
Care Capital and Health Care Executive. Such individuals disclaim
beneficial ownership of any such shares. Address is: c/o Ferrer Freeman
Thompson & Co. LLC, The Mill, 10 Glenville Street, Greenwich, CT 06831.
(3) Includes 11,660.08 shares of common stock, 79,089.9 shares of Series A
preferred stock, 22,531.65 shares of Series B preferred stock, and
40,725.24 shares of Series C preferred stock held by Galen Partners
International III, L.P. and 527.47 shares of common stock, 3,577.85 shares
of Series A preferred stock, 1,019.28 shares of Series B preferred stock,
and 1,842.32 shares of Series C preferred stock held by Galen Employee Fund
III, L.P. Galen Partners III, L.P. disclaims beneficial ownership of such
shares. L. John Wilkerson is a general partner of the general partner of
each of Galen Partners III and Galen Partners International. Mr. Wilkerson
disclaims beneficial ownership of the shares held by Galen Partners III,
Galen Partners International III, and Galen Employee Fund III, except to
the extent of his proportionate partnership interest therein. Address is:
610 Fifth Avenue, Rockefeller Center, New York, NY 10020.
(4) Includes 243,252 shares of Series A preferred stock and 475,017 shares of
Series B preferred stock held by the Rotko 1983 Trust-Michael Rotko Share,
of which Mr. Rotko is a co-trustee. Address is: P. O. Box 369, Unionville,
PA 19375.
(5) Address is: c/o MEDIQ Incorporated, One MEDIQ Plaza, Pennsauken, NJ
08110-1460.
(6) Includes 9,000 shares of common stock, 45,474 shares of Series A preferred
stock, 15,000 shares of Series B preferred stock, and 15,000 shares of
Series C preferred stock held by individuals and trusts related to Mr.
Carroll.
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(7) Includes shares held by Bruckmann, Rosser, Sherrill & Co., Inc. and other
entities and individuals affiliated with the firm. Although Messrs.
Bruckmann and Sherrill may be deemed to share beneficial ownership of such
shares, such individuals disclaim beneficial ownership thereof. See Note 1
above. The address for Messrs. Bruckmann and Sherrill is the same as that
for Bruckmann, Rosser, Sherrill & Co., L.P.
(8) Consists of shares held by Health Care Executive and Health Care Partners.
Although Mr. Thompson may be deemed to share beneficial ownership of such
shares, such individual disclaims beneficial ownership thereof. See Note 2
above. The address for Mr. Thompson is the same as that for Ferrer Freeman
Thompson.
(9) Consists of shares held by Galen Partners III, Galen Partners
International, and Galen Employee Fund. Although Mr. Wilkerson may be
deemed to share beneficial ownership of such shares, such individual
disclaims ownership thereof, except to the extent of his proportionate
partnership interest therein. The address for Mr. Wilkerson is: Galen
Associates, 610 Fifth Avenue, 5th Floor, New York, NY 10020.
Securities Purchase and Holders Agreement
The securities purchase and holders agreement contains provisions that,
with certain exceptions, restrict the parties thereto from transferring any
equity securities of MEDIQ. Subject to certain exceptions, in the event that
holders (as identified in the agreement) of common stock and preferred stock
propose to sell at least 2% of such securities then outstanding, the parties to
the agreement have the right to require the proposed transferee to purchase, on
the same terms and conditions as given to the proposed transferor, a pro rata
portion of like securities held by such parties to the agreement. Subject to
certain exceptions, if MEDIQ proposes to issue and sell any of its shares of
common stock or any shares convertible into common stock, MEDIQ must first offer
to each of the other parties to the agreement as described therein who holds in
excess of 5% of common stock of MEDIQ at the date of the agreement and who is an
accredited investor (as defined in the Securities Act) to purchase pro rata
portions of the securities to be sold in such a transaction on the same terms
and conditions as the proposed issuance. If prior to the consummation of a
public offering with respect to such class or series of securities, holders of a
majority of shares of common stock held by the parties to the agreement approve
the sale of MEDIQ (whether by merger, consolidation, sale of all or
substantially all of its assets or the sale of all of its outstanding capital
stock) or holders of a majority of the then outstanding shares of any class or
series of the preferred stock held by the parties to the agreement approve the
sale of all of such class or series of stock, the parties to the agreement will
agree to sell and will be permitted to sell all of their shares of common stock
or preferred stock, as the case may be, on the same terms and conditions as such
holders holding a majority of shares of common stock or preferred stock. The
agreement provides that, subject to certain exceptions, if MEDIQ shall redeem
shares of Series A preferred stock or Series C preferred stock, Bruckmann,
Rosser, Sherrill & Co., L.P. or a third party designated by it will offer to
purchase from the Rotko Entities (as defined in the agreement) a percentage of
the Series B preferred stock held by them equal to the aggregate liquidation
preference of the Series A preferred stock or Series C preferred stock so
redeemed (not including any redemption of Series A preferred stock issued as
consideration in MEDIQ's merger on May 29, 1998) divided by the sum of the
aggregate liquidation preference of the Series A preferred stock, the Series B
preferred stock and the Series C preferred stock then outstanding plus the
original cost of the shares of common stock then outstanding. The parties to the
agreement have been granted the right to participate, or piggyback, in certain
registrations by MEDIQ of Series A preferred stock and Series B preferred stock.
The agreement contains certain rights of MEDIQ to repurchase securities
held by each management stockholder (as defined in the agreement) upon
termination of his or her employment (other than by reason of retirement) with
the Company within a specified period of time of the effective date of the
agreement at formula prices which depend in part upon the circumstances of the
termination.
64
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Management and Others
MEDIQ/PRN has a management services agreement with the firms Bruckmann,
Rosser, Sherrill & Co., Inc., Ferrer Freeman Thompson & Co., and Galen
Associates in which they are collectively paid annually the greater of $1.0
million or 1.5% of EBITDA (as defined in the agreement) for certain management,
business and organizational strategy, and merchant and investment banking
services rendered to the Company. The amount of the annual management fee may be
increased under certain circumstances based upon performance or other criteria
to be established by the board of directors of MEDIQ/PRN. Mr. Bruckmann, Mr.
Thompson, and Mr. Wilkerson are principals in Bruckmann, Rosser, Sherrill & Co.,
Inc., Ferrer Freeman Thompson & Co., and Galen Associates, respectively, and
they are also on MEDIQ's board of directors. From the beginning of fiscal 1999
through the filing date of this report, the Company paid management fees of $1.3
million to Bruckmann, Rosser, Sherrill & Co., Inc., $.3 million to Ferrer
Freeman Thompson & Co., and $.2 million to Galen Associates.
Certain Business Relationships
Mr. Rotko is of Counsel to the law firm of Drinker Biddle & Reath LLP,
which provided legal services to the Company during fiscal 1999. Payments made
by the Company to the firm were not material to the Company or to the firm.
65
<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 Statements 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 34-57
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 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
2.2 Agreement and Plan of Merger between Annex A of the Proxy Statement/Prospectus
MQ Acquisition Corp and MEDIQ dated included in Registration Statement No.
January 14, 1998, as amended April 27, 333-46233 on filed February 13, 1998.
1998
2.3 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 on February 13, 1998.
2.4 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 on February 13, 1998.
2.5 Asset Purchase Agreement among CH Exhibit 2 to Current Report on Form 8-K
Medical, Inc., MEDIQ/PRN Life Support filed on April 28, 1998.
Services, Inc. and the other parties
named therein dated April 24, 1998
2.6 Agreement and Plan of Merger dated Exhibit 2 to Current Report on Form 8-K
June 14, 1999 among MEDIQ, MEDIQ/PRN filed by MEDIQ/PRN Life Support Services, Inc.
Life Support Services, Inc., HTD on June 28, 1999.
Corporation and others named therein
3.1 Certificate of Incorporation Exhibit 3.1 to Form S-1 filed on July 13, 1998.
</TABLE>
66
<PAGE>
(a)(3) Exhibits (continued)
<TABLE>
<CAPTION>
Exhibit Description Incorporation Reference
------- ----------- -----------------------
<S> <C> <C>
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 Form 8-K
Life Support Services, Inc., the filed on 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 Registration Statement
between MEDIQ and First Union Bank, No. 33-61724 originally filed on April 28,
N.A. (formerly First Fidelity Bank, 1993, as amended.
N.A.) for 7.50% Exchangeable
Subordinated Debentures due 2003
4.3 Form of 7.50% Exchangeable Exhibit 4.2 to S-2 Registration Statement
Subordinated Debentures due 2003 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 and New Notes
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 on June 15, 1998.
Life Support Services, Inc., Subsidiary
Guarantors, Credit Suisse First Boston,
NationsBanc Montgomery Securities LLC
and Banque Nationale de Paris
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 on 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 on 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 on August 14, 1998.
Services, Inc., National Patient Care
Systems, Inc. and other parties
named therein
</TABLE>
67
<PAGE>
(a)(3) Exhibits (continued)
<TABLE>
<CAPTION>
Exhibit Description Incorporation Reference
------- ----------- -----------------------
<S> <C> <C>
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 Exhibit 10.5 to Annual Report on Form 10-K
Plan adopted October 1, 1998 filed on January 5, 1999.
11 Statement re: computation of per Not required.
share earnings
21 Subsidiaries of the Registrant Exhibit 21.1 to Post-Effective Amendment No.
1 to Form S-1 Registration Statement No.
333-58933 filed on November 1, 1999.
23 Consent of Deloitte & Touche LLP Filed herein.
27 Financial Data Schedule Filed herein.
</TABLE>
(b) Reports on Form 8-K
MEDIQ filed the following amendment to Form 8-K during the quarter ended
September 30, 1999:
Date of Earliest Event Requiring a Report: June 15, 1999
Date of Filing: August 31, 1999
Items Reported: Item 7(a), Item 7(b), and Item 7(c)
Subject: Financial statements of acquired business, related pro forma
financial statements, and related exhibit in connection with the
acquisition of HTD Corporation by MEDIQ/PRN Life Support Services, Inc.
68
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
(in thousands)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
---------------------------------------------------------------------------------------------------------------------------------
Additions
Description
Balance at Balance at
Beginning Charged to Charged to End of
of Period Operations Other Accounts Deductions Period
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts: (1) (2)
Year Ended September 30, 1999 $11,432 $27,302 $1,092 $15,391 $24,435
Year Ended September 30, 1998 4,077 7,912 2,482 3,039 11,432
Year Ended September 30, 1997 2,383 3,234 478 2,018 4,077
</TABLE>
(1) Fiscal 1999 primarily represents a full reserve against certain accounts
established. Fiscal 1998 and 1997 primarily represent allowances for
doubtful accounts obtained in acquisitions.
(2) Represents accounts directly written off, net of recoveries, in each year.
Fiscal 1999 also includes a cash recovery in settlement of receivables
acquired and reserved for in fiscal 1998 and application of billing credits
against outstanding accounts.
<TABLE>
<S> <C> <C> <C> <C> <C>
Inventory Reserves for Excessive Quantities and Obsolescence: (3)
Year Ended September 30, 1999 $1,207 $6,563 $230 -- $8,000
Year Ended September 30, 1998 674 533 -- -- 1,207
Year Ended September 30, 1997 984 (310) -- -- 674
</TABLE>
(3) Primarily represents reserves obtained in acquisitions.
<TABLE>
<S> <C> <C> <C> <C> <C>
Valuation Allowances against Deferred Tax Assets:
Year Ended September 30, 1999
Federal $ -- $5,530 -- -- $5,530
State 7,119 3,794 -- -- 10,913
Year Ended September 30, 1998
State 4,894 2,225 -- -- 7,119
Year Ended September 30, 1997
State 3,157 1,737 -- -- 4,894
</TABLE>
69
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-61724 on Form S-2, 333-46233 and 333-58935 on Form S-4, and 333-58933 on Form
S-1 of MEDIQ Incorporated and subsidiaries of our report dated June 1, 2000,
except for Note X, as to which the date is June 30, 2000, (which report
expresses an unqualified opinion and includes an explanatory paragraph relating
to substantial doubt about the Company's ability to continue as a going
concern), appearing in this Annual Report on Form 10-K of MEDIQ Incorporated
and subsidiaries for the year ended September 30, 1999.
/s/ DELOITTE & TOUCHE LLP
-------------------------
Philadelphia, Pennsylvania
July 20, 2000
70
<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: July 20, 2000 MEDIQ Incorporated
/s/ Thomas E. Carroll
------------------------
BY: Thomas E. Carroll
President and
Chief Executive Officer
/s/Kenneth K. Kreider
--------------------------
BY: Kenneth K. Kreider
Senior Vice President 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:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- -----
<S> <C> <C>
----------------------- Chairman July 20, 2000
John F. McNamara
/s/Thomas E. Carroll Director, Chief Executive July 20, 2000
------------------------ Officer, and President
Thomas E. Carroll
/s/Bruce C. Bruckmann Director July 20, 2000
------------------------
Bruce C. Bruckmann
/s/Stephen C. Sherrill Director July 20, 2000
------------------------
Stephen C. Sherrill
/s/Robert T. Thompson Director July 20, 2000
------------------------
Robert T. Thompson
/s/L. John Wilkerson Director July 20, 2000
------------------------
L. John Wilkerson
/s/Michael J. Rotko Director July 20, 2000
------------------------
Michael J. Rotko
</TABLE>
71
