<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarter ended: December 31, 1999 Commission File Number: 1-8147
MEDIQ Incorporated
(Exact name of registrant as specified in its charter)
Delaware 51-0219413
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One MEDIQ Plaza, Pennsauken, New Jersey 08110
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (856) 662-3200
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
--- ---
At August 15, 2000, there were outstanding 1,115,669 shares of Common Stock, par
value $.01.
1
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MEDIQ INCORPORATED AND SUBSIDIARIES
Quarter Ended December 31, 1999
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations-
Three Months Ended December 31, 1999 and 1998 4
Condensed Consolidated Balance Sheets-
December 31, 1999 and September 30, 1999 5
Condensed Consolidated Statements of Cash Flows-
Three Months Ended December 31, 1999 and 1998 6
Notes to Condensed Consolidated Financial Statements 7 - 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10 - 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II. OTHER INFORMATION
Item 3. Defaults Upon Senior Securities 15
Item 6. Exhibits and Reports on Form 8-K 15
2
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MEDIQ INCORPORATED AND SUBSIDIARIES
Quarter Ended December 31, 1999
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
3
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MEDIQ INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1999 1998
-------- --------
<S> <C> <C>
Revenues:
Rental $ 38,517 $ 39,635
Sales 19,688 8,591
Other 4,325 2,672
--------- ---------
62,530 50,898
Expenses of Operations:
Cost of sales 16,322 6,444
Operating 17,518 17,349
Selling 6,845 6,974
General and administrative 6,841 6,449
Depreciation and amortization 11,002 9,919
--------- ---------
58,528 47,135
--------- ---------
Operating Income 4,002 3,763
Other (Charges) and Credits:
Interest expense (14,860) (13,257)
Other-net 56 106
--------- ---------
Loss before Income Taxes (10,802) (9,388)
Income Tax Expense (Benefit) 25 (3,214)
--------- ---------
Net Loss (10,827) (6,174)
Dividends on Preferred Stock (5,512) (4,611)
--------- ---------
Net Loss Attributable to Common Shareholders $ (16,339) $ (10,785)
========= =========
Basic and Diluted Net Loss per Share
Attributable to Common Shareholders $ (14.60) $ (10.03)
======== =========
Weighted Average Number of Common Shares Outstanding
Basic and Diluted 1,119 1,075
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
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MEDIQ INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
----------- ------------
(Unaudited) (See note below)
<S> <C> <C>
Assets
Current Assets:
Cash $ 9 $ 9
Accounts receivable (net of allowance of $25,580 and
$24,435, respectively) 51,904 53,836
Inventories 21,283 17,313
Other current assets 3,282 5,006
--------- ---------
Total Current Assets 76,478 76,164
Property, Plant and Equipment (net of accumulated depreciation
and amortization of $189,366 and $182,047, respectively) 113,650 112,233
Goodwill (net of accumulated amortization of $25,477 and
$23,212, respectively) 139,968 142,002
Deferred Financing Costs (net of accumulated amortization
of $3,842 and $3,207, respectively) 17,711 18,322
Other Assets 12,094 12,872
--------- ---------
Total Assets $ 359,901 $ 361,593
========= =========
Liabilities and Stockholders' Deficiency
Current Liabilities:
Current portion of long term debt $ 579,145 $ 567,884
Accounts payable 22,765 17,502
Accrued expenses 17,417 24,773
Other current liabilities 1,292 1,138
--------- ---------
Total Current Liabilities 620,619 611,297
Senior Debt 377 557
Subordinated Debt -- --
Deferred Income Taxes 1,779 1,779
Other Liabilities 7,929 6,748
Mandatorily Redeemable Preferred Stock 135,293 130,955
Stockholders' Deficiency (406,096) (389,743)
--------- ---------
Total Liabilities and Stockholders' Deficiency $ 359,901 $ 361,593
========= =========
</TABLE>
Note: The balance sheet at September 30, 1999 has been condensed from the
audited financial statements at that date.
See Notes to Condensed Consolidated Financial Statements
5
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MEDIQ INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended December 31,
1999 1998
--------- ----------
<S> <C> <C>
Cash Flows From Operating Activities
------------------------------------
Net loss $ (10,827) $ (6,174)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities 12,153 (7,467)
--------- ---------
Net cash provided by (used in) operating activities 1,326 (13,641)
Cash Flows From Investing Activities
------------------------------------
Purchases of equipment (10,198) (4,396)
Acquisitions -- (5,000)
Other 694 (230)
--------- ----------
Net cash used in investing activities (9,504) (9,626)
Cash Flows From Financing Activities
------------------------------------
Borrowings 9,000 23,000
Debt repayments (785) (437)
Other (37) (241)
--------- ---------
Net cash provided by financing activities 8,178 22,322
--------- ---------
(Decrease) increase in cash -- (945)
Cash:
Beginning balance 9 2,411
--------- ---------
Ending balance $ 9 $ 1,466
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
6
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MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A - Condensed Consolidated Financial Statements
The condensed consolidated balance sheet as of December 31, 1999 and
the condensed consolidated statements of operations and cash flows for the three
months ended December 31, 1999 have been prepared by the Company, without audit.
In the opinion of management, all adjustments (consisting only of normal,
recurring adjustments) necessary to present fairly the financial position,
results of operations and cash flows at December 31, 1999 and for all periods
presented have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These condensed consolidated
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's September 30, 1999 Annual Report on
Form 10-K. The results of operations for the period ended December 31, 1999 are
not necessarily indicative of the operating results for the full year.
The condensed consolidated statements of operations and cash flows for
the three months ended December 31, 1998 were derived from the Company's Form
10-Q/A filed with the Securities and Exchange Commission on July 20, 2000.
Certain reclassifications have been made to conform prior year balances
to the current year presentation.
Note B - Default of Indebtedness and Going Concern
MEDIQ/PRN Life Support Services, Inc., a wholly owned subsidiary of the
Company, is in default of a number of covenants under its $325 million Senior
Secured Credit Facility, including timely filing of financial information for
fiscal 1999 and fiscal 2000, meeting certain financial ratios, and the
non-payment of certain interest and principal. Potential additional events of
default may also exist. 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 and
MEDIQ/PRN are also in violation of a number of covenants under the indentures
for the Company's 13% Senior Discount Debentures due 2009 and 7.5% Exchangeable
Debentures due 2003, and MEDIQ/PRN's 11% Senior Subordinated Notes due 2008. The
indentures contain cross default provisions that accelerate debt outstanding
under each instrument in the event that outstanding debt under any other loan
arrangement is in default and thereby accelerated.
Pursuant to a letter dated May 25, 2000, the lenders to the credit
facility 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. The indenture to the 11%
notes permits the lenders under the 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. 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
such interest constitutes a default under the credit facility. In addition,
7
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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
payable July 21, 2000; $1.1 million payable August 18, 2000; and $1.1 million
payable September 15, 2000. Such deferment constitutes a default under the
credit facility. MEDIQ/PRN has made all of the deferred payments. The Company's
next significant payment of principal and interest is due September 30, 2000, is
pursuant to the credit facility, and aggregates $11.3 million, excluding default
interest of $1.5 million. On October 2, 2000, MEDIQ/PRN paid $8.0 million in
normal interest costs, prime plus the applicable margin, pursuant to such
payment. MEDIQ/PRN has no plans at this time to pay the principal of $3.3
million or the default interest. The non-payment of the principal and default
interest constitutes defaults under the credit facility.
While the credit facility is in default, the ultimate disposition of
the debt outstanding thereunder, as well as the debt outstanding under the
various indentures, is not under the control of the Company. As a result, all
outstanding principal under the credit facility and the indentures at December
31, 1999 was classified as a current liability.
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.
The Company's current cash forecast indicates that the Company may have
short-term and long-term cash flow deficiencies for funding timely principal and
interest payments. 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.
During July 2000, the Company engaged a financial advisor to evaluate
its strategic alternatives. Upon completion of that analysis, the Company will
commence 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. Upon completion of the evaluation of its strategic alternatives, the
Company also intends to have discussions with the holders of the 11% notes. The
Company can not predict what may result from such discussions.
Note C - Inventory
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
----------- -------------
(in thousands)
<S> <C> <C>
Raw materials $ 1,727 $ 1,825
Finished goods 27,818 23,488
-------- ---------
29,545 25,313
Reserves for excessive quantities and obsolescence (8,262) (8,000)
--------- ----------
$ 21,283 $ 17,313
======== =========
</TABLE>
As of December 31, 1999 and September 30, 1999, 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 within one year of the balance
sheet date.
8
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Note D - Loss Per Share
Options and warrants to purchase shares of the Company's Common Stock
were excluded from the computation of diluted loss per share for the three
months ended December 31, 1999 and 1998 because they were antidilutive. The
number of options outstanding at December 31, 1999 and 1998 were 53,470 and
51,611, respectively, and the number of warrants outstanding at December 31,
1999 and 1998 was 91,209.
Note E - Derivative Terminations
In connection with the defaults under the credit facility, MEDIQ/PRN
was notified by the counterparties to its collar agreements and its interest
rate swap that such arrangements would be terminated. The Company received $1.6
million in connection with the terminations, and such proceeds were utilized to
repay indebtedness under the credit facility.
Note F - Subsidiary Dividend and Funding Restriction
As of December 31, 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, $91.5 million of long-term debt and $7.4 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 credit
facility, MEDIQ/PRN is no longer permitted to fund the obligations and expenses
of MEDIQ.
Note G - Business Segment Data
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 based upon the type of
product or service provided. Such segment classification is utilized solely in
the determination of revenue. 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.
9
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion addresses the financial condition of the
Company as of December 31, 1999 and the results of operations for the three
month periods ended December 31, 1999 and 1998, and addresses other
circumstances through, or that could be reasonably expected at, August 15, 2000.
This discussion should be read in conjunction with the financial statements
included elsewhere herein and the Management's Discussion and Analysis and
financial statement sections of the Company's Annual Report on Form 10-K for the
year ended September 30, 1999.
The following information contains forward-looking statements. 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 that 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.
Seasonality
In the past, the Company's rentals have been somewhat seasonal, with
demand historically peaking during periods of increased hospital census, which
generally occur in the winter months during the Company's second fiscal quarter.
Liquidity and Capital Resources
Default of Indebtedness and Going Concern
MEDIQ/PRN Life Support Services, Inc., a wholly owned subsidiary of the
Company, is in default of a number of covenants under its $325 million Senior
Secured Credit Facility, including timely filing of financial information for
fiscal 1999 and fiscal 2000, meeting certain financial ratios, and the
non-payment of certain interest and principal. Potential additional events of
default may also exist. 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 and
MEDIQ/PRN are also in violation of a number of covenants under the indentures
for the Company's 13% Senior Discount Debentures due 2009 and 7.5% Exchangeable
Debentures due 2003, and MEDIQ/PRN's 11% Senior Subordinated Notes due 2008. The
indentures contain cross default provisions that accelerate debt outstanding
under each instrument in the event that outstanding debt under any other loan
arrangement is in default and thereby accelerated.
Pursuant to a letter dated May 25, 2000, the lenders to the credit
facility 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. The indenture to the 11%
notes permits the lenders under the 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. 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
such interest constitutes a default under the credit facility. In addition,
MEDIQ/PRN notified the lenders for the credit facility that the Company intended
10
<PAGE>
to defer the principal payment of $3.3 million due June 30, 2000 to $1.1 million
payable July 21, 2000; $1.1 million payable August 18, 2000; and $1.1 million
payable September 15, 2000. Such deferment constitutes a default under the
credit facility. MEDIQ/PRN has made all of the deferred payments. The Company's
next significant payment of principal and interest is due September 30, 2000, is
pursuant to the credit facility, and aggregates $11.3 million, excluding default
interest of $1.5 million. On October 2, 2000, MEDIQ/PRN paid $8.0 million in
normal interest costs, prime plus the applicable margin, pursuant to such
payment. MEDIQ/PRN has no plans at this time to pay the principal of $3.3
million or the default interest. The non-payment of the principal and default
interest constitutes defaults under the credit facility.
While the credit facility is in default, the ultimate disposition of
the debt outstanding thereunder, as well as the debt outstanding under the
various indentures, is not under the control of the Company. As a result, all
outstanding principal under the credit facility and the indentures at December
31, 1999 was classified as a current liability.
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.
The Company's current cash forecast indicates that the Company may have
short-term and long-term cash flow deficiencies for funding timely principal and
interest payments. 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.
During July 2000, the Company engaged a financial advisor to evaluate
its strategic alternatives. Upon completion of that analysis, the Company will
commence 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. Upon completion of the evaluation of its strategic alternatives, the
Company also intends to have discussions with the holders of the 11% notes. The
Company can not predict what may result from such discussions.
Liquidity and Capital Resources
Net cash provided by operating activities in the first quarter fiscal
2000 was $1.3 million compared to cash used in operating activities in the first
quarter fiscal 1999 of $13.6 million. Such reduction is primarily attributable
to implementation of cash management strategies to improve cash collections and
extend cash payments, partially offset by increased investment in inventories to
support the sale businesses.
The Company used $9.0 million of its revolving credit facility, along
with cash flow generated from the sale of rental equipment, to meet interest
payments, fund capital expenditures and working capital, and to provide for
other general corporate purposes during the first quarter fiscal 2000. Due to
the defaults under the credit facility, there is no availability under the
revolving credit facility at December 31, 1999. Absent the default under the
credit facility, there would be $2.8 million of availability under the revolving
credit facility as of August 15, 2000.
11
<PAGE>
Results of Operations
Total revenues for the first quarter fiscal 2000 were $62.5 million
compared to $50.9 million for the first quarter fiscal 1999, an increase of
$11.6 million, or 22.8%. Revenue growth was attributed to increased sales of
parts and disposables of $11.1 million and increased biomedical repair, CAMP and
consulting revenues (other revenue) of $1.6 million, partially offset by a
decrease in rental revenues of $1.1 million.
The increase in sales revenue resulted primarily from the incremental
effects of the June 1999 acquisition of HTD Corporation that expanded the
Company's disposable products business. The Company expects revenues over the
next two fiscal quarters for the parts and disposable business to continue to be
ahead of historical levels, although only slightly in the third quarter, but
decline from the level reached in the first quarter due to the loss of a major
customer for non-payment issues, the loss of a significant product and reduced
volume. The Company lost the product when the manufacturer decided to provide
the product directly to the market instead of using independent distributors.
Biomedical repair revenue increased $.6 million due primarily to
incremental revenues provided by the biomedical repair business acquired from
HTD and internal growth. CAMP revenue increased $.2 million and consulting
revenues increased $.8 million due to internal growth. The Company expects other
revenue to continue to increase over the next two quarters due to the effects of
the HTD acquisition and internal growth.
Rental revenues declined $1.1 million primarily due to the support
surface rental business. Revenues from the medical equipment rental business
remained flat. The Company continues to experience significant rental rate
pressure on its medical equipment and support surface products. Average price
for the medical equipment and support surface rental businesses declined 7% and
15%, respectively, in the first quarter of fiscal 2000 compared to the same
period in the prior year. Offsetting the price decreases, average units on rent
increased 7% and 14% for the medical equipment and support surface rental
business, respectively. The increased volume is due to the effects of the fiscal
1999 acquisitions and, to a lesser extent, internal growth. In addition, the
Company's largest revenue share agreement was terminated in June 1999, the
effects of which were mitigated by the increased volume from the fiscal 1999
acquisitions.
The Company expects average units volume for both rental businesses to
either exceed or approximate historical levels over the next two quarters.
However, the Company expects average price for both rental businesses to
continue to decline from historical levels due primarily to competition from
other rental providers. The Company expects the effects of the pricing pressures
to be more pervasive than the effects of the volume increases and, therefore,
the Company expects rental revenue to decrease from historical levels over the
next two quarters.
Overall, gross margins on the sale business dropped from 25% to 17%
from first quarter to1999 to 2000, predominantly resulting from competitive
pricing pressures. Gross margins on the parts and disposable sales business
declined from 19% to 16%, while the equipment sales business dropped from 45% to
21%. The Company expects gross margin over the next two fiscal quarters to
decline significantly from comparable periods in fiscal 1999 and to decline from
the level reached in the first quarter of fiscal 2000.
The other expenses of operations, operating, selling and general and
administrative, were relatively flat between the first fiscal quarters of fiscal
2000 and 1999. Exclusive of non-recurring restructuring charges, the Company
expects such costs to increase slightly in the second fiscal quarter due to the
seasonal nature of the business, and then to decline in the third and fourth
fiscal quarters as a result of three reductions in force implemented during the
latter half of the second, third and fourth fiscal quarters, and the
significantly higher levels of reserves for bad debts and excess and obsolete
inventories recorded in fiscal 1999. Depreciation and amortization increased by
$1.1 million in the first quarter fiscal 2000 compared to the comparable period
in the prior fiscal year. Such increase resulted from additional depreciable
rental equipment purchased, rental equipment obtained in acquisitions, and
increased amortization related to the goodwill recognized on acquisitions in
fiscal 1999.
12
<PAGE>
Operating income/loss exclusive of depreciation and amortization is
known as EBITDA. EBITDA for the three months ended December 31, 1999 and 1998
was $15.0 million and $13.7 million, respectively. 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. In each of the
next two fiscal quarters, the Company expects EBITDA to be less than the
comparable amounts from fiscal 1999.
Interest expense was $14.9 million in the three months ended December
31, 1999 compared to $13.3 million for the prior year period. Interest expense
increased by $1.6 million in the quarter principally due to higher levels of
debt outstanding and increased interest rates. The cash portion of interest
expense was $9.8 million for the three months ended December 31, 1999. The
remaining interest expense represents non-cash accretion on the 13% discount
debentures, the portion of interest expense on the 11% notes to be deferred
pursuant to the payment blockage letter dated May 25, 2000, and amortization of
deferred debt issuance costs. The Company expects interest expense to increase
over the next several quarters due to increases in the prime rate of interest
and due to default rates of interest on amounts outstanding under the credit
agreement.
Although the Company has generated a net loss, which should give rise
to net operating loss carryforwards, and therefore income tax benefits, the
Company has recorded a valuation allowance equal to the federal and state income
tax benefits due to the uncertainty of the Company's future ability to recognize
such benefits.
Accreted but unpaid dividends on preferred stock for the three months
were $5.5 million compared to $4.6 million in the corresponding prior year
period. These amounts reflect accretion of dividends on the three cumulative
preferred stock series issued in connection with the Company's recapitalization
in May 1998.
For the three months ended December 31, 1999 there was a net loss
attributable to common shareholders of $16.3 million. The Company expects to
continue to report a net loss attributable to common shareholder for the
foreseeable future
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.
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ITEM 3. 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.
There were no material changes during the three months ended December 31, 1999
in the Company's interest rate risk impacting cash flows or in the way the
Company managed this risk. Beginning January 2000, and as a result of the
defaults under the credit facility, the Company's only interest rate option is
prime plus the applicable margin.
To mitigate a portion of the interest rate risk, MEDIQ/PRN had two
interest rate collars and an interest rate swap. Due to the defaults under the
credit facility, the interest rate collars and the interest rate swap were
terminated in May and June 2000.
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MEDIQ INCORPORATED AND SUBSIDIARIES
Quarter Ended December 31, 1999
PART II. OTHER INFORMATION
Item 3. Defaults Upon Senior Securities.
At the filing date of this report, MEDIQ/PRN Life Support Services,
Inc., a wholly owned subsidiary of MEDIQ Incorporated is in default of a number
of covenants under its $325 million Senior Secured Credit Facility including
timely filing of financial information in fiscals 1999 and 2000, meeting certain
financial ratios, and the non-payment of certain principal and interest. In
addition, the Company and MEDIQ/PRN are in violation of a number of covenants
under the indentures for the Company's 13% Senior Discount Debentures due 2009
and 7.5% Exchangeable Debentures due 2003, and MEDIQ/PRN's 11% Senior
Subordinated Notes due 2008. The debt outstanding under the credit facility is
subject to acceleration upon demand by the lenders to the facility. The
indentures to the 13% discount debentures, 11% 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.
As of the filing date of this report, MEDIQ/PRN had not paid certain
amounts due under the credit facility, as follows: $1.8 million and $1.5 million
of default interest due June 30, 2000 and September 30, 2000, respectively; and
$3.3 million of principal due September 30, 2000. The Company has not paid $20
thousand of interest due on the 7.5% exchangeable debentures due in July 2000.
In addition, pursuant to a letter dated May 25, 2000, the lenders to the credit
facility 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. The indenture to the 11%
notes permits the lenders under the 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. 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 Company's current cash flow forecast
indicates that the Company may have short-term and long-term cash flow
deficiencies for funding timely principal and interest payments.
See Management's Discussion and Analysis of Financial Condition and
Results of Operations and Note B to the Condensed Consolidated Financial
Statements for further information on the foregoing matter.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule appears on page 16.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1999.
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MEDIQ INCORPORATED AND SUBSIDIARIES
Quarter Ended December 31, 1999
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEDIQ Incorporated
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(Registrant)
October 2, 2000 /s/ Kenneth K. Kreider
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(Date) Kenneth K. Kreider
Senior Vice President and
Chief Financial Officer
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