UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarter ended: June 30, 1999 Commission File Number: 1-11286
MEDIQ/PRN Life Support Services, Inc.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-3692387
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One MEDIQ Plaza, Pennsauken, New Jersey 08110
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 662-3200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such requirements
for the past 90 days. YES X NO
--- ---
As of August 9, 1999, there were 1,000 shares of Common Stock, par value $10
outstanding and owned by MEDIQ Incorporated.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)(a)
AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE
FORMAT.
<PAGE>
MEDIQ/PRN LIFE SUPPORT SERVICES, INC. AND SUBSIDIARIES
Quarter Ended June 30, 1999
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations- 4
Three and Nine Months Ended June 30, 1999 and 1998
(Unaudited)
Condensed Consolidated Balance Sheets- 5
June 30, 1999 (Unaudited) and
September 30, 1998
Condensed Consolidated Statements of Cash Flows- 6
Nine Months Ended June 30, 1999 and 1998
(Unaudited)
Notes to Condensed Consolidated Financial 7 - 8
Statements (Unaudited)
Item 2. Management's Narrative Analysis of
Results of Operations 9 - 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
2
<PAGE>
MEDIQ/PRN LIFE SUPPORT SERVICES, INC. AND SUBSIDIARIES
Quarter Ended June 30, 1999
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
3
<PAGE>
MEDIQ/PRN LIFE SUPPORT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------------- --------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Rental $ 41,602 $ 33,707 $128,743 $103,700
Sales 12,848 6,692 28,925 20,671
Other 4,005 2,404 9,311 7,549
-------- -------- -------- --------
58,455 42,803 166,979 131,920
Costs and Expenses:
Cost of sales 10,197 5,455 22,589 16,725
Operating 17,823 14,415 48,117 42,864
Selling 7,062 3,912 20,128 11,469
General and administrative 6,005 4,788 18,380 14,553
Merger charges -- 34,204 -- 34,567
Depreciation and amortization 11,301 15,064 31,600 31,650
-------- -------- -------- --------
52,388 77,838 140,814 151,828
-------- -------- -------- --------
Operating Income (Loss) 6,067 (35,035) 26,165 (19,908)
Other (Charges) and Credits:
Interest expense (11,152) (5,954) (32,644) (12,693)
Other - net 72 235 465 714
-------- -------- -------- --------
Loss from Continuing Operations before
Income Taxes and Extraordinary Item (5,013) (40,754) (6,014) (31,887)
Income Tax Benefit (1,037) (15,155) (1,386) (11,193)
-------- -------- -------- --------
Loss before Extraordinary Item (3,976) (25,599) (4,628) (20,694)
Extraordinary Item - Early Retirement of Debt
(net of taxes) -- (4,098) -- (4,098)
-------- -------- -------- --------
Net Loss $ (3,976) $(29,697) $ (4,628) $(24,792)
======== ======== ======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE>
MEDIQ/PRN LIFE SUPPORT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
--------- --------------
(Unaudited) (See note below)
<S> <C> <C>
Assets
Current Assets:
Cash $ -- $ 2,227
Accounts receivable (net of allowance of $9,370 and
$11,432, respectively) 75,148 52,659
Inventories 27,321 21,820
Other current assets 11,436 6,643
--------- ---------
Total Current Assets 113,905 83,349
Property, Plant and Equipment (net of accumulated depreciation
and amortization of $180,647 and $155,749, respectively) 111,040 103,917
Goodwill (net of accumulated amortization of $21,201
and $16,658, respectively) 153,200 91,121
Deferred Financing Costs (net of accumulated amortization
of $2,172 and $664, respectively) 15,858 16,146
Other Assets 10,352 7,354
--------- ---------
Total Assets $ 404,355 $ 301,887
========= =========
Liabilities and Stockholder's Deficiency
Current Liabilities:
Accounts payable $ 20,631 $ 14,152
Accrued expenses 14,602 17,597
Other current liabilities 1,156 281
Current portion of long term debt 8,273 2,037
--------- ---------
Total Current Liabilities 44,662 34,067
Senior Debt 286,026 199,928
Subordinated Debt 190,000 190,000
Deferred Income Taxes 16,637 16,986
Other Liabilities 35 504
Stockholder's Deficiency (133,005) (139,598)
--------- ---------
Total Liabilities and Stockholder's Deficiency $ 404,355 $ 301,887
========= =========
</TABLE>
Note: The balance sheet at September 30, 1998 has been condensed from the
audited financial statements at that date.
See Notes to Condensed Consolidated Financial Statements
5
<PAGE>
MEDIQ/PRN LIFE SUPPORT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended June 30,
1999 1998
--------- ---------
<S> <C> <C>
Cash Flows From Operating Activities
Net loss $ (3,976) $ (24,792)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities 11,037 19,020
--------- ---------
Net cash provided by (used in) operating activities 7,061 (5,772)
Cash Flows From Investing Activities
Purchases of equipment (18,254) (17,909)
Acquisitions (82,947) (11,032)
Other 312 3,260
--------- ---------
Net cash used in investing activities (100,889) (25,681)
Cash Flows From Financing Activities
Borrowings 93,000 151,499
Issuance of subordinated notes -- 190,000
Debt repayments (1,400) (133,872)
Deferred financing fees (1,220) (16,270)
Advances from (to) MEDIQ - net 1,221 (154,308)
--------- ---------
Net cash provided by financing activities 91,601 37,049
--------- ---------
(Decrease) increase in cash (2,227) 5,596
Cash:
Beginning balance 2,227 3,472
--------- ---------
Ending balance $ -- $ 9,068
========= =========
Noncash investing and financing activity:
Advance from parent for capital stock of parent issued
in an acquisition $ 10,000 --
=========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
6
<PAGE>
MEDIQ/PRN LIFE SUPPORT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A - Condensed Consolidated Financial Statements
The condensed consolidated balance sheet as of June 30, 1999 and the condensed
consolidated statements of operations and cash flows for the three and nine
months ended June 30, 1999 and 1998 have been prepared by the Company, without
audit. In the opinion of management, all adjustments (consisting only of normal,
recurring adjustments) necessary to present fairly the financial position,
results of operations and cash flows at June 30, 1999 and for all periods
presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These condensed consolidated financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's September 30, 1998 Annual Report on Form 10-K.
The results of operations for the period ended June 30, 1999 are not necessarily
indicative of the operating results for the full year.
The Company is a wholly owned subsidiary of MEDIQ Incorporated ("MEDIQ").
Certain reclassifications have been made to conform prior year balances to the
current year presentation.
Note B - Inventory
The components of inventory were as follow:
June 30, September 30,
1999 1998
-------- ------------
(in thousands)
Raw materials $ 1,587 $ 2,791
Finished goods 25,734 19,029
-------- ---------
$ 27,321 $ 21,820
======== ========
Note C - Long Term Debt
In May 1999, the Company amended its $325.0 million credit agreement with Banque
Nationale de Paris ("BNP") by reducing the borrowing capacity under the
acquisition facility from $75.0 million to $50.0 million and establishing a
subfacility B under the revolving credit facility with a borrowing capacity of
$25.0 million. Borrowings under subfacility B bear interest at a floating rate
based upon, at the Company's option, (i) the higher of the prime rate of BNP or
the Federal funds effective rate plus 0.5%, plus a margin of 1.0% or (ii) the
London Interbank Offered Rate, plus a margin of 2.25%. Principal amounts
outstanding on November 30, 1999 under subfacility B will amortize quarterly
starting March 31, 2000 in increasing increments as scheduled in the modified
credit agreement. Any remaining principal balance is due on the facility's
termination date of June 30, 2004. Other terms and conditions of subfacility B
are generally the same as those existing for the acquisition and revolving
credit facilities. The Company was charged a fee of approximately $1.0 million
to effect the amendment to the credit agreement. This fee is being amortized
over the remaining term of the facilities of approximately five years.
In June 1999, the Company borrowed $22.2 million available under the $50.0
million acquisition facility, $25.0 million under subfacility B and
approximately $2.5 million under the revolving credit facility to fund the cash
portion of the acquisition of HTD Corporation ("HTD"). (see Note D)
7
<PAGE>
Note D - Acquisition
On June 15, 1999, the Company acquired all of the issued and outstanding common
stock of HTD and certain of its subsidiaries pursuant to an Agreement and Plan
of Merger dated June 14, 1999. Total consideration paid by the Company was
approximately $59.7 million, comprising $49.7 million in cash and $10.0 million
aggregate value of capital stock of MEDIQ. HTD specialized in sales of
disposable products, rentals of movable medical equipment and biomedical repair
services to the acute care, alternate care and home care marketplaces. Following
the acquisition, HTD was merged into the Company. Contemporaneously with the
Company's acquisition of HTD, HTD sold to an unrelated third party its
subsidiaries not acquired by the Company.
The acquisition of HTD was accounted for by the purchase method and,
accordingly, the cost of the acquisition was allocated to the assets acquired
and liabilities assumed based on their estimated fair values on May 28, 1999,
the effective date of the acquisition for accounting purposes. Accordingly,
operations of HTD were included in the Company's results of operations effective
May 28, 1999. The excess of the cost over the estimated fair values of net
assets acquired of $41.5 million was recorded as goodwill amortizable on a
straight line basis over 20 years. The following pro forma financial information
presents the consolidated results of operations of the Company as if the
acquisition had occurred on October 1 of the respective periods presented. This
unaudited pro forma information is presented for comparative purposes only and
does not necessarily reflect the results of operations of the Company had the
acquisition existed on the prescribed dates.
Nine Months Ended June 30,
1999 1998
-------- ----------
unaudited
(in thousands)
Revenues $214,955 $173,230
Loss before extraordinary item (3,760) (22,768)
Net loss (3,760) (26,866)
The initial allocation of the cost of the HTD acquisition and the associated
goodwill was estimated based on information currently available. The final
allocation of the acquisition cost is contingent upon determinations and
valuations not yet completed. The Company is unable to predict at this time
whether any adjustments that may occur will have a material effect on the
allocation.
Note E - Equity
In partial funding of the HTD acquisition, MEDIQ issued its capital stock valued
at $10.0 million. This was considered as an advance to the Company in this
amount. Advances from MEDIQ are classified as a component of the Company's
equity as a contribution to capital.
Note F - Income Taxes
The estimated annual effective income tax rate for fiscal 1999 was 23.0% at June
30, 1999. This rate is lower than the overall statutory rate for the Company of
40.0% due to estimated nondeductible costs associated with the Company's
acquisitions and valuation allowances against net operating losses available for
state income taxes. These items lower the tax benefit associated with the
expected annual tax loss. The annual effective rate was adjusted in the third
quarter from the rate estimated at March 31, 1999 as a result of adjustments in
the third quarter for the estimated impacts of increased nondeductible goodwill
and other costs related to acquisitions made in fiscal 1999.
8
<PAGE>
Item 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
The following discussion addresses the financial condition of the Company as of
June 30, 1999 and results of operations for the three and nine months ended June
30, 1999 and 1998. This discussion should be read in conjunction with the
financial statements included elsewhere herein and the Management's Discussion
and Analysis and Financial Statement sections of the Company's Annual Report on
Form 10-K for the year ended September 30, 1998.
The following information contains forward looking statements, within the
meaning of the Private Securities Litigation Reform Act of 1995, that are
subject to risks and uncertainties. Although the Company believes that its
expectations are based on reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from its expectations. Readers are cautioned
not to place undue reliance on these forward looking statements, which speak
only as of the date of this report.
Seasonality
In the past, the Company's rentals have been somewhat seasonal, with demand
historically peaking during periods of increased hospital census, which
generally occur in the winter months during the Company's second fiscal quarter.
Results of Operations
Fiscal 1999 Compared to Fiscal 1998
Changes for the current year periods are with respect to the corresponding prior
year periods unless otherwise indicated.
Total revenues increased in the third quarter of fiscal 1999 by $15.7 million,
or 36.6%, to $58.5 million, and increased in the nine months ended June 30, 1999
by $35.1 million, or 26.6%, to $167.0 million. The increased revenues in each
period reflect increases in all of the Company's revenue segments - rental,
sales and other. The increase in rental revenue resulted from the Company's
acquisitions in the last year. The increase in sales and other revenues resulted
from both internal growth and the Company's acquisitions. The Company's
acquisitions accounted for approximately $13.1 million and $31.0 million of the
total revenue increase in the third quarter and nine months periods,
respectively, while internal growth accounted for approximately $2.4 million and
$4.1 million, respectively.
The Company's acquisitions prior to HTD focused on expanding the Company's
rental revenues, principally support surfaces. The acquisition of HTD focused on
expanding the parts and disposables business while also contributing to
increases in rental and biomedical repair (other) revenues. The Company
anticipates that the HTD acquisition will provide incremental annual revenues of
approximately $60.0 million and that the three other acquisitions made by the
Company in fiscal 1999 will provide incremental annual revenues of approximately
$11.0 million. However, there is no assurance that such annual revenues from any
of these acquisitions will materialize.
It is not practicable for the Company to fully remove the effects of
acquisitions when analyzing revenues because customer bases of the Company and
businesses acquired are largely common and because of the effects of product
migration by customers that often follows acquisitions.
Total costs and expenses, exclusive of depreciation and amortization and
applicable nonrecurring items, increased in the third quarter fiscal 1999 by
$12.2 million, or 43.8%, to $41.1 million, and increased in the nine months
fiscal 1999 by $26.6 million, or 31.1%, to $112.2 million. Included in the
current year periods is a $2.0 million additional bad debt charge related to the
aging of support surfaces receivables. Also included in the current nine months
period is a reduction of expense from a recovery of $3.0 million for a
settlement of disputed items related to an acquisition that had been reserved
for by the Company in the last fiscal year. Included in the prior year periods
are nonrecurring merger charges of $34.2 million and $34.6 million,
respectively. The increases, as adjusted, in the current year periods were broad
based and associated with the increased operational requirements of the Company
as a result of actual and anticipated growth in business. The increase in Cost
of Sales in each current year
9
<PAGE>
Results of Operations (continued)
period correlates with the increase in Sales in each respective period. Sales
margin was 20.6% and 21.9% in the third quarter and nine months of fiscal 1999,
respectively, compared to 18.5% and 19.1% in the respective prior year periods.
The changes in the current year periods were primarily attributable to changes
in the product mix of parts and disposables and equipment. Selling expenses in
the third quarter fiscal 1999 increased $3.2 million, or 80.5%, to $7.1 million,
and in the nine months fiscal 1999 increased $8.7 million, or 75.5%, to $20.1
million. The increase in each period was due to increased rental/sales support
related to the Company's expanding operations for support surfaces rentals and
parts and disposables. The Company recently reduced the number of sales
personnel in its support surfaces business as a result of the leveling in the
growth curve of support surfaces. The total of operating expenses and general
and administrative expenses, exclusive of the applicable settlement recovery,
increased in the third quarter fiscal 1999 by $4.6 million, or 24.1%, to $23.8
million, and increased in the nine months fiscal 1999 by $12.1 million, or
21.0%, to $69.5 million. These increases, as adjusted, were primarily due to:
(i) the additional bad debt charge; (ii) increased infrastructure costs
associated with larger and expanded operational requirements connected with the
actual and anticipated growth in the business; (iii) increased equipment service
requirements associated with a larger and expanded product fleet and (iv)
management fees resulting from the Company's merger.
Depreciation and amortization, exclusive of the depreciation reserve in the
amount of $6.0 million to write down certain under utilized equipment to net
realizable values recorded in the third quarter of the prior year, increased in
the third quarter fiscal 1999 by $2.2 million, or 24.7%, to $11.3 million, and
increased in the nine months fiscal 1999 by $6.0 million, or 23.2%, to $31.6
million. These increases, as adjusted, resulted from additional depreciable
equipment purchased and obtained in acquisitions and increased goodwill
associated with the Company's acquisitions since May 1998.
Operating margin for the nine months fiscal 1999, exclusive of applicable
nonrecurring items, was 13.9% compared to 15.7% for the corresponding prior year
period. The decrease was primarily due to the additional bad debt charge,
increased infrastructure costs in support of the actual and anticipated growth
in business and depreciation and amortization in the current period exceeding
increased revenues in the same period. Operating margin for the third quarter
fiscal 1999 was 10.4% compared to 12.1% for the corresponding prior year period,
exclusive of nonrecurring items. This decrease reflects the additional bad debt
charge offset in part by the higher margins on the rentals of support surfaces,
such rentals having increased as a percentage of total revenues in the current
period business mix.
Earnings before interest, taxes, depreciation, amortization and other charges
and credits ("EBITDA"), exclusive of applicable nonrecurring items, were $17.4
million and $54.8 million in the third quarter and nine months of fiscal 1999,
respectively, compared to $14.2 million and $46.3 million in the respective
corresponding prior year periods. Although EBITDA is a widely accepted financial
indicator of a company's ability to service indebtedness, it should not be
considered as an alternative to income from operations or to cash flows from
operating activities, and should not be construed as an indication of a
company's performance or as a measure of liquidity.
Interest expense was $11.2 million and $32.6 million in the third quarter and
nine months of fiscal 1999, respectively, compared to $6.0 million and $12.7
million in the respective corresponding prior year periods. The increases in the
current year periods were principally due to the amount of time the
substantially higher level of debt incurred in connection with the Company's
recapitalization and an acquisition in May 1998 was outstanding during each
period, and the additional debt undertaken in fiscal 1999 to fund acquisitions.
The cash portion of this interest expense was $10.6 million and $30.8 million
for the third quarter and nine months of fiscal 1999, respectively. The
remaining interest expense primarily represented noncash amortization of
deferred debt issuance costs.
The estimated annual effective income tax rate associated with the loss from
continuing operations for the nine months fiscal 1999 was 23.0%. This rate is
lower than the overall statutory rate of 40% for the Company due to estimated
nondeductible costs associated with the Company's acquisitions and valuation
allowances against net operating losses available for state income taxes. The
effective rate for the nine months fiscal 1999 is estimated to be more
reflective of the expected annual effective tax
10
<PAGE>
Results of Operations (continued)
rate for all of fiscal 1999. This rate was adjusted in the third quarter from
the estimated annual effective rate for the six months fiscal 1999 due to
adjustments for the estimated impacts of increased nondeductible goodwill and
other costs related to acquisitions made in fiscal 1999.
11
<PAGE>
MEDIQ/PRN LIFE SUPPORT SERVICES, INC. AND SUBSIDIARIES
Quarter Ended June 30, 1999
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As reported in the Company's most recent Form 10-K, the Company filed a
complaint against Siemens Medical Systems, Inc. ("Siemens") in connection with
Siemens' attempted termination of a distribution agreement between the parties.
Siemens filed a motion to dismiss the complaint, which was denied. Discovery has
not yet commenced.
On July 8, 1999, SizeWise Rentals, Inc. ("SizeWise") filed a suit against the
Company in the United States District Court, District of Kansas. The suit is in
connection with the purported termination by SizeWise of a rental arrangement
with the Company due to an alleged breach of the arrangement by the Company. The
complaint seeks a declaratory judgment and damages. The Company believes that
the allegations in the complaint are without merit and intends to vigorously
defend this case. Based on the information currently available, the Company
believes that resolution of the suit will not have a material adverse effect on
the operations or financial condition of the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule appears on page 14.
(b) Reports on Form 8-K
The Company filed the following report on Form 8-K during the quarter
ended June 30, 1999:
Date of Earliest Event Requiring a Report: June 15, 1999
Date of Filing: June 28, 1999
Items Reported: Item 2 and Item 7
Subject: Acquisition of HTD.
12
<PAGE>
MEDIQ/PRN LIFE SUPPORT SERVICES, INC. AND SUBSIDIARIES
Quarter Ended June 30, 1999
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEDIQ/PRN Life Support, Services, Inc.
--------------------------------------
(Registrant)
August 16, 1999 /s/ Jay M. Kaplan
- --------------- --------------------------------------
(Date) Jay M. Kaplan
Senior Vice President-Finance,
Treasurer and Chief Financial Officer
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 84,518
<ALLOWANCES> 9,370
<INVENTORY> 27,321
<CURRENT-ASSETS> 113,905
<PP&E> 291,687
<DEPRECIATION> 180,647
<TOTAL-ASSETS> 404,355
<CURRENT-LIABILITIES> 44,662
<BONDS> 476,026
0
0
<COMMON> 0
<OTHER-SE> (133,005)
<TOTAL-LIABILITY-AND-EQUITY> 404,355
<SALES> 28,925
<TOTAL-REVENUES> 166,979
<CGS> 22,589
<TOTAL-COSTS> 140,814
<OTHER-EXPENSES> (465)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,644
<INCOME-PRETAX> (6,014)
<INCOME-TAX> (1,386)
<INCOME-CONTINUING> (4,628)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,628)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
