<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: June 30, 2000 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 June 30, 2000
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations- 4
Three and Nine Months Ended June 30, 2000 and 1999
Condensed Consolidated Balance Sheets- 5
June 30, 2000 and September 30, 1999
Condensed Consolidated Statements of Cash Flows- 6
Nine Months Ended June 30, 2000 and 1999
Notes to Condensed Consolidated Financial Statements 7 - 10
Item 2. Management's Discussion and Analysis of 11 - 15
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II. OTHER INFORMATION
Item 3. Defaults Upon Senior Securities 16
Item 6. Exhibits and Reports on Form 8-K 16
2
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MEDIQ INCORPORATED AND SUBSIDIARIES
Quarter Ended June 30, 2000
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 Nine Months Ended
June 30, June 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Rental $ 34,050 $ 39,670 $ 113,889 $122,288
Sales 12,949 12,848 47,398 28,925
Other 4,419 4,005 12,985 9,311
-------- -------- --------- --------
51,418 56,523 174,272 160,524
Expenses of Operations:
Cost of sales 11,160 10,197 39,872 22,589
Operating 17,571 19,592 53,535 55,638
Selling 4,515 7,062 18,069 20,128
General and administrative 8,290 6,005 22,737 18,380
Restructuring charges 3,000 -- 5,800 --
Depreciation and amortization 12,416 11,301 34,392 31,600
-------- -------- -------- --------
56,952 54,157 174,405 148,335
-------- -------- -------- ---------
Operating Income (5,534) 2,366 (133) 12,189
Other (Charges) and Credits:
Interest expense (16,147) (13,956) (47,810) (40,768)
Other-net 767 72 908 465
-------- -------- -------- --------
Loss before Income Taxes (20,914) (11,518) (47,035) (28,114)
Income Tax (Benefit) Expense 17 (2,396) 62 (8,152)
-------- -------- -------- --------
Net Loss (20,931) (9,122) (47,097) (19,962)
Dividends on Preferred Stock (5,747) (4,802) (16,773) (13,900)
-------- -------- -------- --------
Net Loss Attributable to Common Shareholders $(26,678) $(13,924) $(63,870) $(33,862)
======== ======== ======== ========
Basic and Diluted Net Loss Per Share
Attributable to Common Shareholders $ (23.91) $ (12.86) $ (57.13) $ (31.44)
======== ======== ======== ========
Weighted Average Number of Common Shares
Outstanding, Basic and Diluted 1,116 1,083 1,118 1,077
======== ======== ======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
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MEDIQ INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
----------- ------------
(Unaudited) (See note below)
<S> <C> <C>
Assets
Current Assets:
Cash $ 4,539 $ 9
Accounts receivable (net of allowance of $17,695 and
$24,435, respectively) 43,012 53,836
Inventories 17,185 17,313
Other current assets 1,513 5,006
--------- ---------
Total Current Assets 66,249 76,164
Property, Plant and Equipment 101,766 112,233
Goodwill (net of accumulated amortization of $29,722 and
$23,212, respectively) 136,182 142,002
Deferred Financing Costs (net of accumulated amortization
of $4,998 and $3,207, respectively) 16,580 18,322
Other Assets 13,130 12,872
--------- ---------
Total Assets $ 333,907 $ 361,593
========= =========
Liabilities and Stockholders' Deficiency
Current Liabilities:
Current portion of long term debt $ 580,265 $ 567,884
Accounts payable 18,473 17,502
Accrued expenses 16,016 16,316
Accrued interest 14,135 8,457
Other current liabilities 918 1,138
--------- ---------
Total Current Liabilities 629,807 611,297
Senior Debt 1,707 557
Subordinated Debt -- --
Deferred Income Taxes 1,779 1,779
Other Liabilities 10,106 6,748
Mandatorily Redeemable Preferred Stock 144,154 130,955
Stockholders' Deficiency (453,646) (389,743)
--------- ---------
Total Liabilities and Stockholders' Deficiency $ 333,907 $ 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>
Nine Months Ended June 30,
2000 1999
--------- ---------
<S> <C> <C>
Cash Flows From Operating Activities
Net loss $ (47,097) $ (19,962)
Adjustments to reconcile net loss to net cash
provided by operating activities 65,077 26,099
--------- ---------
Net cash provided by operating activities 17,980 6,137
Cash Flows From Investing Activities
Purchases of equipment (15,254) (16,231)
Acquisitions -- (82,947)
Other (188) 328
---------- ---------
Net cash used in investing activities (15,442) (98,850)
Cash Flows From Financing Activities
Borrowings 9,000 93,000
Debt repayments (6,974) (1,400)
Other (34) (1,298)
--------- ---------
Net cash provided by financing activities 1,992 90,302
--------- ---------
Increase in cash 4,530 (2,411)
Cash:
Beginning balance 9 2,411
--------- ---------
Ending balance $ 4,539 $ --
========= =========
Supplemental disclosure of noncash investing and financing
Activities:
Equipment financed under capital leases $ 2,624 $ --
========= =========
Capital stock issued in an acquisition $ -- $ 10,000
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
6
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MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A - Condensed Consolidated Financial Statements
The condensed consolidated balance sheet as of June 30, 2000, the
condensed consolidated statements of operations for the three and nine months
ended June 30, 2000 and the condensed consolidated statement of cash flows for
the nine months ended June 30, 2000 have been prepared by the Company, without
audit. In the opinion of management, all adjustments (consisting only of normal,
recurring adjustments) necessary to present fairly the financial position,
results of operations and cash flows at June 30, 2000 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 June 30, 2000 are not
necessarily indicative of the operating results for the full year.
The condensed consolidated statements of operations for the three and
nine months ended June 30, 1999 and the condensed consolidated statement of cash
flows for the nine months ended June 30, 1999 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
7
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such 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
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 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 June 30,
2000 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 has 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.
The Company has 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>
June 30, September 30,
2000 1999
-------------- ----------------
(in thousands)
<S> <C> <C>
Raw materials $ 1,554 $ 1,825
Finished goods 24,566 23,488
-------- ---------
26,120 25,313
Reserves for excessive quantities and obsolescence (8,935) (8,000)
--------- ----------
$ 17,185 $ 17,313
======== =========
</TABLE>
As of June 30, 2000 and September 30, 1999, the Company has an
additional $4.9 million and $2.5 million, respectively, 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
<PAGE>
Note D - Property, Plant and Equipment
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
------------- -----------------
(in thousands)
<S> <C> <C>
Rental equipment $ 262,796 $ 267,906
Equipment and fixtures 18,200 17,626
Building and improvements 7,582 8,599
Land 149 149
-------------- --------------
288,727 294,280
Less accumulated depreciation and amortization (186,961) (182,047)
----------- -----------
$ 101,766 $ 112,233
========== ==========
</TABLE>
Historically, the Company reviews its rental equipment fleet for
excessive quantities and obsolescence. Beginning in the second quarter of fiscal
2000, the Company has taken a more aggressive approach to such review, and is
either selling or disposing of rental units at a higher pace than in previous
years.
Note E - Restructuring Charges
In March 2000, the Company recorded a $2.8 million restructuring charge
for severance and related costs. Such charge resulted from the implementation of
phase one of a strategic initiative to streamline the organization, the goal of
which is to increase operational response and efficiency. The Company recorded
an additional charge for severance and related costs of $3.0 million in June
2000 for phase two of the strategic initiative and $.3 million in august 2000
for phase three. As a result, 280 positions have been combined or eliminated in
phase one and two of the strategic initiative. Through June 30, 2000, the
Company had paid $1.1 million pursuant to the restructuring charges.
Note F - Professional Fees
In the third quarter of fiscal 2000, the Company began to incur costs
for consultants representing the Company and the lenders under the credit
facility. Such consultants were performing legal, accounting and investment
banking services for their respective constituents to evaluate the Company's
capital structure and complete the Company's fiscal 1999 and 2000 securities
filings. All of these projects are still in process as of September 30, 2000.
The Company incurred $1.1 million for these costs in the third quarter and such
costs were charged to general and administrative expenses in the Condensed
Consolidated Statement of Operations. The Company can not estimate the total
costs to be incurred to complete these projects.
Note G - 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 and
nine months ended June 30, 2000 and 1999 because they were antidilutive. The
number of options outstanding at June 30, 2000 and 1999 were 46,707 and 51,853,
respectively, and the number of warrants outstanding at June 30, 2000 and 1999
was 91,209.
Note H - 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.
9
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Note I - Subsidiary Dividend and Funding Restriction
As of June 30, 2000, 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, $97.5 million of long-term debt and $9.8 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 J - 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.
10
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion addresses the financial condition of the
Company as of June 30, 2000 and the results of operations for the three and nine
months periods ended June 30, 2000 and 1999, 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
11
<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 June 30,
2000 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 has 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.
The Company has 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 nine months of
fiscal 2000 was $18.0 million compared to net cash provided by operating
activities in the first nine months of fiscal 1999 of $6.1 million. The
improvement 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 operations and the sale of rental equipment, to
meet a portion of its principal and interest payments, fund capital expenditures
and working capital, and to provide for other general corporate purposes during
the first nine months of fiscal 2000. Due to the defaults under the credit
facility, there is no availability under the revolving credit facility at June
30, 2000. 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.
12
<PAGE>
Results of Operations
Total revenues for the third quarter fiscal 2000 were $51.4 million
compared to $56.5 million for the third quarter fiscal 1999, a decrease of $5.1
million, or 9.0%. Rental revenues decrease $5.6 million partially offset by
increased sales of parts and disposables of $.1 million and increased biomedical
repair, CAMP, logistical services and consulting revenues (other revenue) of $.4
million. Total revenues for the first nine months of fiscal 2000 were $174.3
million compared to $160.5 million for the first nine months of fiscal 1999, an
increase of $13.8 million, or 8.6%. Revenue growth was attributed to increased
sales of parts and disposables of $18.5 million and increased biomedical repair,
CAMP, logistical services and consulting revenues (other revenue) of $3.7
million, partially offset by a decrease in rental revenues of $8.4 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 fiscal quarter for the parts and disposable business to be less than the
comparable period in fiscal 1999, but to be flat with the level reached in the
third quarter. The fourth quarter fiscal 2000 reduction from fiscal 1999 is 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 decreased $.1 million and increased $1.3
million for the three and nine months ended June 30, 2000, respectively, over
the comparable period in the prior fiscal year. The revenues for the nine months
ended June 30, 2000 increased primarily as a result of incremental revenues
provided by the biomedical repair business acquired from HTD and internal
growth. The third quarter revenues were impacted by the loss of biomedical
revenues associated with customer Y2K issues in fiscal 1999 mostly offset by
incremental revenues from the HTD acquisition and internal growth. CAMP revenue
increased $.2 million in each of the first three fiscal quarters compared to the
first three quarters in fiscal 1999 due to internal growth. Consulting revenues
decreased $.4 million and increased $1.4 million for the three and nine months
ended June 30, 2000, respectively, over the comparable period in the prior
fiscal year. The increase for the nine months ended June 30, 2000 was due to
internal growth. The decrease in the third quarter was due to the closing of the
consulting division effective June 30, 2000 as a result of the sale of certain
assets of such division on June 1, 2000. Logistical services revenue increased
$.8 million in the third quarter compared to the prior year fiscal period, while
increasing $1.1 million for the nine months ended June 30, 2000. Such increase
was due to increased volume as a result of the addition of a new services
agreement. Exclusive of consulting revenues, the Company expects other revenue
to continue to increase in the fourth quarter of fiscal 2000 over the comparable
period in the prior fiscal year.
Rental revenues declined $5.6 million and $8.4 million for the three
and nine months ended June 30, 2000, respectively, when compared to the
comparable periods in the prior fiscal year. The Company continues to experience
significant rental rate pressure on its medical equipment and support surface
products which is the primary reason for the decline in rental revenues. Average
price for the medical equipment rental business declined 7%, 12% and 14% in the
first, second and third fiscal quarters, respectively, when compared to the same
periods in the prior fiscal year. Partially offsetting the effects of the price
reductions, average units on rent increased 7% in the first quarter and 5% in
the second quarter over the comparable periods in fiscal 1999, while average
units on rent in the third quarter remained flat. The increased volume in the
first and second quarters of fiscal 2000 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. Medical equipment rental revenues decreased $3.7 million in the
third quarter of fiscal 2000 compared to the third quarter of fiscal 1999, and
decreased $4.4 million for the nine months ended June 30, 2000.
Average price for the support surface rental businesses declined 15%,
19% and 18% in the first, second and third quarters of fiscal 2000,
respectively, compared to the same periods in the prior fiscal year. Partially
offsetting the price decreases, average units on rent increased 14% and 6% for
the first and second quarters, respectively, of fiscal 2000, while decreasing 3%
in the third quarter. Support surface rental revenues decreased $1.9 million and
$4.0 million in the three and nine months ended June 30, 2000, respectively,
compared to the same periods in the prior fiscal year.
The Company expects rental revenues in the fourth quarter of fiscal
2000 to be slightly higher than rental revenue in fiscal 1999, due principally
to the higher level of reserves recorded in fiscal 1999 for credit memos.
However, the Company expects average unit volume and average price for both
rental businesses to be down from historical levels, although average price is
expect to stabilize compared to average price in May and June 2000.
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Overall gross margin on the sale businesses dropped from 22% in the
first nine months of fiscal 1999 to 16% in the first nine months of fiscal 2000,
and overall gross margins on the sale businesses were 21% and 14% in the third
quarters of fiscal 1999 and 2000, respectively. The decrease in gross margin is
primarily due to competitive pricing pressures. Gross margins on the parts and
disposables sale business dropped from 16% to 13% in the third quarter of fiscal
1999 and 2000, respectively, while gross margins on the sale of equipment
dropped from 33% to 17%. The Company expects overall gross margins on the sale
businesses to be flat in the next fiscal quarter compared to the third quarter
of fiscal 2000.
Operating, selling, and general and administrative expenses decreased
$2.3 million in the third quarter of fiscal 2000 compared to the third quarter
of fiscal 1999. Such expenses were flat for the nine months ended June 30, 2000.
The decrease is a result of strategic initiatives to streamline the organization
and increase operational efficiency, and due to the significantly higher levels
of reserves for bad debts and excess and obsolete inventories recorded in the
same periods in fiscal 1999. In addition, in the third quarter of fiscal 2000,
the Company also incurred $1.1 million in charges associated with consultants
hired by the Company and the lenders to the credit facility to evaluate the
Company's capital structure and complete the Company's fiscal 1999 and 2000
securities filings. Such costs are included in general and administrative
expenses. The Company recorded a restructuring charge for severance and related
costs of $2.8 million and $3.0 million in the second and third quarters of
fiscal 2000, respectively, associated with the Company's strategic initiative.
The Company expects costs to continue to decline in the fourth quarter of fiscal
2000 as a result of two reductions in force implemented during the latter half
of the second and third fiscal quarters, the reduction in force implemented in
August 2000, and the significantly higher levels of reserves for bad debts,
excess and obsolete inventories and other items recorded in fiscal 1999.
Depreciation and amortization increased by $2.8 million in the first nine months
of 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.
Operating income/loss exclusive of depreciation and amortization is
known as EBITDA. EBITDA for the three months ended June 30, 2000 and 1999 was
$6.9 million and $13.7 million, respectively, and $34.2 million and $43.8
million for the nine months then ended. EBITDA for fiscal 2000 included
restructuring charges of $5.8 million ($2.8 million and $3.0 million recorded in
second and third quarters, 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. The Company
expects fourth quarter EBITDA to be higher than the comparable amount from
fiscal 1999 due to the higher level of reserves for bad debts, excess and
obsolete inventories and other items recorded in fiscal 1999.
Interest expense was $16.1 million and $47.8 million for the three and
nine months ended June 30, 2000 compared to $14.0 million and $40.8 million for
the comparable periods in the prior year. The increase in interest expense was
principally due to higher levels of debt outstanding and increased interest
rates, including default rates of interest on amounts outstanding under the
credit facility. The cash portion of interest expense was $8.8 million and $26.8
for the three and nine months ended June 30, 2000. The remaining interest
expense represents non-cash accretion on the 13% discount debentures, 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 default rates of interest on
amounts outstanding under the credit agreement.
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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 and nine
months ended June 30, 2000 were $5.7 million and $16.8 million, respectively,
compared to $4.8 million and $13.9 million in the corresponding prior year
periods. 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 and nine months ended June 30, 2000 there was a net loss
attributable to common shareholders of $26.7 million and $63.9 million,
respectively. 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.
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.
Beginning January 2000, and as a result of the defaults under the credit
facility, the Company's only interest rate option is prime, the Company is
incurring default rates of interest which are two percentage points over the
Company's historical interest rates, and the Company is no longer permitted to
borrow at LIBOR. As of June 30, 2000, all amounts borrowed under the credit
facility bear interest at prime plus the applicable margin, and at defaults
rates of interest.
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 June 30, 2000
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 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 forecast
indicates that the Company has 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 17.
(b) Reports on Form 8-K
During the quarter ended June 30, 2000, the Company filed reports on
Form 8-K on May 5, 2000 and May 22, 2000. The May 5, 2000 report
updated the information disclosed in the reports on Form 8-K filed on
January 13, 2000 and February 15, 2000. The January 8K and the February
8K disclosed that the Company would not file its Annual Report on Form
10-K for the year ended September 30, 1999 and its Quarterly Report on
Form 10-Q for the three months ended December 31, 1999 timely. The May
22, 2000 report on Form 8-K disclosed that the Company would not file
its Quarterly Report on Form 10-Q for the three months ended March 31,
2000 timely, and disclosed the reasons why therein.
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MEDIQ INCORPORATED AND SUBSIDIARIES
Quarter Ended June 30, 2000
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEDIQ Incorporated
--------------------------
(Registrant)
October 2, 2000 /s/ Kenneth K. Kreider
--------------- ----------------------------------
(Date) Kenneth K. Kreider
Senior Vice President and
Chief Financial Officer
17
