UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: September 30, 1998 Commission File Number: 1-11286
MEDIQ/PRN Life Support Services, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 95-3692387
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One MEDIQ Plaza, Pennsauken, New Jersey 08110
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 662-3200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
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As of December 7, 1998, there were 1,000 shares of Common Stock, par value $10
per share, outstanding and owned by MEDIQ Incorporated. Accordingly, there is no
practicable manner to obtain an aggregate market valuation.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS I(1)(a)
and (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE
FORMAT.
Exhibit Index appears on page 42.
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Some of the information presented in this Form 10-K constitutes forward
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. 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.
PART I
ITEM 1. BUSINESS
MEDIQ/PRN Life Support Services, Inc. and subsidiaries (the "Company") is a
wholly owned subsidiary of MEDIQ Incorporated ("MEDIQ"). The Company has wholly
owned subsidiaries, substantially all of which were contributed by MEDIQ to the
Company as a result of the Merger (discussed below). The Company's only
operating subsidiary is MEDIQ Management Services, Inc. All other subsidiaries
are inactive or have minimal activity.
Organization
Merger, Restructuring, Refinancing and Recapitalization. Pursuant to the
terms of an Agreement and Plan of Merger dated January 14, 1998, as amended
between MEDIQ and MQ Acquisition Corporation ("MQ"), on May 29, 1998, MQ was
merged with and into MEDIQ (the "Merger") with MEDIQ continuing as the surviving
corporation (the "Surviving Corporation"). MQ was organized by Bruckmann,
Rosser, Sherrill & Co., L.P. ("BRS") solely to effect the Merger and acquire,
together with other investors, a controlling interest in MEDIQ. In connection
with the consummation of the Merger, a corporate restructuring took place in
which MEDIQ contributed the capital stock of all of its subsidiaries other than
the Company to the Company.
The aggregate consideration paid in connection with the Merger was
approximately $390.8 million, which included $20.0 million of Series A 13.0%
Cumulative Compounding Preferred Stock, par value $.01 per share of the
Surviving Corporation. In addition, in connection with the Merger (i) certain
premerger controlling stockholders of MEDIQ converted a portion of their
preferred equity in MEDIQ into $14.5 million of common and preferred equity of
the Surviving Corporation, (ii) certain management personnel of MEDIQ and the
Company and certain other persons invested $4.2 million in common and preferred
equity of the Surviving Corporation and (iii) BRS and certain individuals and
entities affiliated with BRS, certain funds affiliated with Ferrer Freeman
Thompson & Co. LLC and Galen Partners, III L.P. purchased $109.5 million of
common and preferred equity of MQ which was converted into capital stock of the
Surviving Corporation.
Simultaneously with the Merger, a refinancing was undertaken in which (i)
MEDIQ sold 140,885 units, each unit consisting of senior discount debentures and
warrants to purchase Common Stock of the Surviving Corporation for gross
proceeds of $75.0 million, (ii) the Company entered into a new senior secured
credit facility amounting to $325.0 million, (iii) the Company sold $190.0
million principal amount of senior subordinated notes and (iv) all indebtedness
of the Company except approximately $2.0 million of the Company's capital leases
was repaid.
For accounting purposes the Merger was treated as a recapitalization. The
historical basis of MEDIQ's and the Company's assets and liabilities was not
affected.
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General
The Company operates the largest critical care, life support and other
movable medical equipment ("Medical Equipment") rental business in the United
States. Through its national distribution network, the Company serves more than
5,000 hospitals, alternate care and home care providers, nursing homes and other
health care providers nationwide. The Company rents over 650 different types of
Medical Equipment, including adult and infant ventilators, adult, infant,
neonatal and fetal monitors, infusion and suction pumps, incubators, infant
warmers, pulse oximeters, sequential compression devices and oxygen
concentrators. In addition, the Company rents therapeutic support surfaces,
overlays and mattresses ("Support Surfaces").
In addition to its core rental business, the Company sells a variety of
disposable products, accessories and repair parts ("Parts and Disposables") to
its customers primarily for use with the types of Medical Equipment and Support
Surfaces that it rents. Additionally, the Company provides several outsourcing
services ("Outsourcing Services") to health care providers. The Company's
Outsourcing Services and sales of Parts and Disposables complement the Company's
core rental business, as they enable the Company to generate incremental
revenues within an existing customer relationship and leverage the Company's
extensive distribution network and broad customer base.
The Company believes that rentals of Medical Equipment and Support Surfaces
and outsourcing of non-core functions of hospitals and other health care
providers have benefited from certain industry trends. In recent years,
hospitals have faced increasing pressure to reduce operating costs and capital
expenditures, while continuing to offer state-of-the-art health care. Equipment
rental programs can be more cost effective for health care providers than the
purchase or lease of Medical Equipment and Support Surfaces because they enable
health care providers to incur the cost for equipment only when demand for such
equipment exists, thus increasing the providers' equipment utilization rates,
decreasing their overall cost structure and/or minimizing technological
obsolescence of equipment. Additionally, by outsourcing activities such as asset
management and repair and maintenance to third parties, hospitals and other
health care providers can reduce operating costs and increase efficiency.
Rentals. The Company rents its Medical Equipment and Support Surfaces
inventory to customers through 101 branch locations in major metropolitan areas
nationwide. Such locations operate 24 hours a day, 365 days a year, with
deliveries of patient ready equipment typically made to customers within two
hours of a request. The Company's customers receive a full range of rental and
related services, including equipment delivery, inspection, maintenance, repair
and documentation. The acquisition by the Company of SpectraCair in September
1997, CH Industries in May 1998 and National Patient Care in June 1998 broadened
its equipment rental product lines to include rentals of Support Surfaces. See
"Acquisitions" for additional information on these acquisitions.
In addition to standard rentals, the Company has entered into several
revenue share arrangements with original equipment manufacturers ("OEMs") in
which the Company rents Medical Equipment and Support Surfaces and sells
disposable products produced by the OEMs to the Company's customers. Because the
OEMs own the equipment and/or disposable products, such arrangements permit the
Company to generate additional revenues without any additional capital or
inventory investments.
Parts and Disposables. The Company sells a variety of Parts and Disposables
to its customers, primarily for use with the types of Medical Equipment and
Support Surfaces it rents. The sales of such Parts and Disposables complement
the Company's Medical Equipment and Support Surfaces rental business. The
Company distributes products to its customers to enable them to fill smaller
turnaround needs more quickly and to smaller health care providers who do not
meet minimum order requirements of major medical supply distributors. The
Company currently supplies disposable products through a leased, centralized
distribution center located in Salt Lake City, Utah, through a Company operated
facility in Pennsauken, New Jersey and in certain instances from branch office
locations. The Company also sells repair parts to its customers for the repair
of their owned equipment.
Outsourcing Services. To address the needs of hospitals and other health
care providers to better manage their assets and increase profits, the Company
offers customers the following Outsourcing
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Services: (i) a Comprehensive Asset Management Program ("CAMP") which analyzes
the critical care equipment activity of a customer and provides a variety of
logistics and outsourcing services designed to manage, track and service the
customer's movable medical equipment; (ii) a biomedical service which provides
inventories, safety inspections, preventive maintenance and repairs for most
movable critical care equipment; (iii) a logistics and distribution service to
assist equipment manufacturers in reducing their distribution costs through
utilization of the Company's nationwide branch office network; (iv) a medical
gas supply program designed to complement the Company's respiratory equipment
rentals and provide "one stop" service to health care providers in a fragmented
market; and (v) a health care consulting and management service designed to
assist the Company's customers in the management of their businesses.
The Company was incorporated under the laws of the State of Delaware in
1992. The principal executive offices of the Company are located at One MEDIQ
Plaza, Pennsauken, New Jersey 08110, and its telephone number is (609) 662-3200.
Acquisitions
On May 29, 1998, the Company purchased specified assets and rights from CH
Industries, Inc. ("CHI"), certain of its subsidiaries (including CH Medical,
Inc.) and certain other parties related to the manufacture, sale and rental of
specialty beds and Support Surfaces (the "CH Medical Business"). The purchase
price was $48.5 million in cash (subject to adjustment based on closing net
asset covenants), including related costs and expenses, and assumption of
certain obligations related to the CH Medical Business. CHI developed various
medical products utilized in patient care treatment and therapy. In addition to
its development of medical products, CHI was a national sales, rental and
service corporation specializing in patient beds, overlays, mattress replacement
systems, pressure relieving pads and surfaces and other therapeutic support
surfaces, with approximately 75 business locations nationwide. CHI developed,
among other things, technology used in the manufacture of beds and frameless
systems for hospitals, extended care facilities and homes to effectively treat
the severe conditions and complications inherent to patients who are bed
confined. Its product offerings included a complete line of portable pressure
relieving products to provide hospitals and extended care facilities with an
array of bed therapies in a cost effective manner.
On June 26, 1998, the Company acquired certain assets of National Patient
Care Systems, Inc. ("NPC") for $11.0 million in cash, including related costs
and expenses, and contingent consideration of up to $2.8 million payable over
the next two years if certain revenue targets are achieved. NPC was a provider
of air support therapy rental equipment including frameless and framed
integrated bed systems.
Industry Overview
The United States health care system includes a variety of health care
providers such as acute care hospitals, nursing homes, surgicenters, sub-acute
care facilities, specialty clinics and home health care providers. These health
care providers normally spend substantial sums on obtaining capital equipment,
including movable medical equipment. Hospitals have a number of options in
obtaining this equipment, including purchase, lease and rental. Historically,
hospitals favor the purchase option in meeting a substantial portion of their
movable medical equipment needs. However, the Company believes that a variety of
trends favor a rental alternative to purchase or lease, including the
substantial cost containment pressures under which health care providers
currently operate.
The cost containment pressures on health care providers have increased
greatly during the past decade as a result of Federal regulations that have
significantly affected the extent of reimbursement under Medicare's prospective
payment system. Changes to the Medicare program adopted in 1991, which are being
phased in over a 10 year period, call for medical equipment cost reimbursement
at rates established by the Health Care Financing Administration that may or may
not reflect health care
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providers actual equipment costs. The Company believes that the current reform
efforts will focus on cost containment in health care and may reduce levels of
reimbursement by Medicare as well as other third party payors. The Company
believes that other third party payors of medical expenses have followed or will
follow the Federal government in limiting reimbursement for medical equipment
costs through measures including preferred provider arrangements, discounted fee
arrangements and capitated (fixed patient care reimbursement) managed care
arrangements. Moreover, the Company believes that various current legislative
proposals will continue the momentum toward health care related consolidations,
acceleration of managed care and the formation of integrated delivery systems
and that the cost containment pressures on health care providers will continue
to intensify.
As a result of these cost containment pressures, the Company believes that
health care providers will increasingly seek to reduce their capital
expenditures, including expenditures on movable medical equipment. Because the
Medicare system is, to an increasing extent, reimbursing health care providers
at fixed rates unrelated to actual capital costs, hospitals and other health
care providers have an incentive to manage their capital costs more efficiently.
Providers may better manage their capital costs by replacing fixed capital costs
with variable operating costs. In the case of movable medical equipment, these
fixed costs include equipment acquisition costs and the substantial costs
associated with servicings necessary to maintain the equipment. Consequently,
many entities may elect to rent equipment, rather than incur the substantial
capital related costs associated with owning or leasing equipment for which they
may not be reimbursed during non use periods.
Medical Equipment and Support Surfaces Rentals
The Company operates the largest Medical Equipment rental business in the
United States, serving more than 5,000 hospitals, alternate care and home care
providers, nursing homes and other health care providers nationwide. The Company
believes it offers the broadest selection of Medical Equipment for rent in the
country, and believes it is better positioned than any of its rental competitors
to be a "single source" supplier of Medical Equipment to its customers. The
Company offers its customers a wide selection of rental programs including (i)
daily, weekly or monthly rentals with fixed rate terms, (ii) longer term rentals
with pricing related to the length of the rental term and (iii) usage rentals on
a per use, per hour or per day basis.
The Company rents its inventory to customers through 101 branch office
locations in major metropolitan areas nationwide. This extensive geographic
presence enables the Company to service national chains as well as local and
regional facilities. The Company's locations operate 24 hours a day, 365 days a
year, with deliveries of patient ready equipment typically made to customers
within two hours of a request. The Company's customers receive a full range of
rental and related support services, including equipment delivery, inspection,
maintenance, repair and documentation, from the Company's staff of experienced
biomedical technicians and customer service representatives.
Convenient Service. Medical Equipment and Support Surfaces inventories are
maintained at each Company location. The Company utilizes a centralized order
entry and dispatching system. Most orders nationwide are received by telephone
at the Company's Pennsauken, New Jersey headquarters, and scheduling and routing
of equipment delivery is made from this site. Upon return, equipment is
inspected, cleaned and tested at the branch location before being designated as
available for rental. Routine service and repair work is performed at each local
branch office. If major service or repair is necessary, the equipment is shipped
to one of the Company's two repair facilities in Pennsauken, New Jersey and
Santa Fe Springs, California. The Company's state-of-the-art information and
inventory systems have the capacity to track essential activities, including
equipment availability, training, repair and maintenance, delivery and pickup,
pre-delivery inspections, major inspections and call backs.
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Diverse Product Offering. The Company's inventory includes equipment used
in respiratory care, emergency, neonatal intensive care, medical and surgical
intensive care, central supply and sterile processing and distribution,
biomedical engineering, surgery, labor and delivery and anesthesia/recovery. The
Company rents over 650 types of equipment and believes it offers the most
complete selection of Medical Equipment for rent in the country. The following
is a list of the principal types of Medical Equipment available:
Adult, Infant and Portable Ventilators Oxygen Concentrators
Compressors/Nebulizers/Pulmonary Aids Defibrillators
Continuous Passive Motion Machines Cold Therapy Units
Cribs and Bassinets Scales
Heat Therapy Units Hypo/Hyperthermia Units
Incubators/Isolettes Infant Warmers
Monitors Pediatric Aerosol Tents
Nasal CPAP and BiPap Units Pressure Reduction Units
Phototherapy and Bilirubin Lamps Pulse Oximeters
Sequential and Uniform Compression Devices Infusion Pumps
Suction Units Telemetry Units
In addition to the above, the Company also provides Support Surfaces on a
rental basis to health care providers through its MEDIQ/FST division. MEDIQ/FST
supplies Support Surfaces that are installed on top of standard hospital beds.
MEDIQ/FST's products are utilized in the treatment of bedridden patients where
Support Surfaces are employed to treat problems such as skin ulcers. Presently,
most health care providers rent specialized beds to treat these problems, and
rental of such beds can be expensive. The Company believes that MEDIQ/FST's
products match the clinical efficacy of the specialized beds at substantially
lower prices. MEDIQ/FST has recently expanded its product line to include
additional specialized products designed for obese patients (bariatrics),
specialized seating products and passive restraint systems. As health care
providers continue to face margin pressure and more revenues become capitated
and fee-for-service based, the Company believes MEDIQ/FST can provide a lower
cost, clinically equivalent alternative.
OEM Partnerships. In addition to standard Medical Equipment and Support
Surfaces rentals, the Company has entered into several revenue share
arrangements with OEMs in which the Company rents movable medical equipment and
sells disposable products produced by the OEMs to the Company's customers. The
Company pays the OEMs a fee based upon a percentage of the amount billed to the
customer. Under such arrangements, because the OEMs own the equipment and/or
disposable products, the Company is able to generate additional revenues without
any additional capital or inventory investments.
Sales of Parts and Disposables
The Company sells a variety of Parts and Disposables to its customers
primarily for use with the types of Medical Equipment and Support Surfaces it
rents. The sales of such Parts and Disposables complement the Company's rental
business. The Company distributes products to its existing rental customers to
enable them to fill smaller turnaround needs more quickly and to smaller health
care providers that do not meet minimum order requirements of major medical
supply distributors. The Company currently supplies disposable products
primarily through the Salt Lake City, Utah and Pennsauken, New Jersey locations.
The Company maintains a base level of disposable products inventory at each
branch office to provide immediate delivery of certain products on an emergency
basis. The
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Company also sells repair parts to customers for the repair of their owned
equipment. This enables the Company to generate incremental revenues within an
existing customer relationship. To support the growth of its Parts and
Disposables business, the Company has a sales and marketing operation
incorporating telephone sales, direct mail and trade publication advertising.
Outsourcing Services
To enable health care providers to better manage their assets and increase
profitability, the Company offers a range of Outsourcing Services. Each
Outsourcing Service leverages the Company's extensive distribution network and
broad customer base. These services include (i) CAMP, which analyzes the
critical care equipment activity of a customer and provides a variety of
consulting services designed to manage, track and service the customer's movable
medical equipment, (ii) a biomedical service which provides inventories, safety
inspections, preventive maintenance and repairs for most critical care equipment
through a team of experienced biomedical technicians, (iii) a logistics and
distribution service to assist equipment manufacturers in reducing their
distribution costs through utilization of the Company's nationwide branch office
network, (iv) a medical gas supply program designed to complement the Company's
respiratory equipment rentals and (v) a health care consulting and management
service designed to assist the Company's customers in the management of their
businesses.
Asset Management. The Company's CAMP programs enable clients to contract
with the Company to supply all elements of their critical care equipment
management needs. CAMP includes a variety of consulting services for patient
care equipment, including providing on site personnel, equipment processing,
maintenance, patient billing, documentation and tracking services. CAMP
contracts are typically three to five years in duration.
CAMP focuses on increasing the utilization of hospital owned assets. Under
CAMP, the Company's asset management team and the customer determine benchmarks
and goals to be met. The Company thereafter conducts quarterly business reviews
to assess progress and provides the customer with detailed documentation
regarding equipment utilization trends, thereby greatly aiding in capital budget
planning. CAMP customers benefit through the reduction of central supply and
biomedical staff (some of whom may be employed by the Company in its outsourcing
programs), lower equipment maintenance expenses, the reduction of capital
expenditures related to equipment, increased equipment utilization and an
increase in captured patient charges. Even with a highly capitated payer mix, a
portion of this revenue may be recovered by the customer for other uses.
Additionally, CAMP provides hospital customers with clear cost data which can
assist in negotiations with managed care contracts.
The Company also offers its CAMP Plus logistics program that provides
similar management services for multi site health care networks to manage,
service and transport movable patient care equipment. A proprietary bar code
based asset management system provides customers optimum utilization of owned
equipment. This system provides information used to track equipment, capture
lost patient charges, control inventory and equipment migration, reduce the need
for supplemental rentals and manage overall capital planning. The Company also
has programs in which it acquires all or some of the customer's equipment and
rents the equipment back to the customer, eliminating the customer's burdens of
ownership, underutilization and seasonal usage.
Biomedical Services. The Company performs inventories, safety inspections,
preventative maintenance and repairs for most brands and models of Medical
Equipment and Support Surfaces owned by the Company, health care organizations
and other third parties through a team of experienced biomedical technicians.
Service and repairs can be performed on site. Pick up and delivery is also
available for servicing at any of the Company's branch locations or two major
service centers.
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Other Services. The Company offers a logistics and distribution service to
health care providers and equipment manufacturers to reduce their distribution
costs through utilization of the Company's national branch office network.
The Company also offers a medical gas administrative management service to
health care providers to enable such providers to centralize the purchasing
function for bulk liquid oxygen, portable and semiportable oxygen containers and
high pressure gas cylinders for a variety of medical gas products. Health care
facilities traditionally purchase medical gases from a large number of local
suppliers. The market is fragmented, and historically there has been a lack of
price stability. Health care providers have been unable to purchase these gases
on a cost effective basis, and often pay different prices for the same product
in different locations. This program offers competitive pricing and price
standardization for many locations, elimination of multiple local vendor
contracts, reduction in the time to process supplier invoices and improved
purchasing efficiencies with a single source contract.
MEDIQ Management Services provides consulting services to the acute care
hospital industry and provides management services to several diagnostic imaging
centers. This business primarily works with clients in the mid-Atlantic states
providing consulting services ranging from logistics to corporate planning.
MEDIQ Management Services also serves as an internal consultant for the Company
in integrating the Company's product offerings, extracting synergies from
complementary businesses and maximizing utilization of the Company's established
infrastructure.
Quality Assurance
Quality control, quality assurance and risk management procedures are
conducted for all of the Company's Medical Equipment and Support Surfaces by
trained biomedical technicians to ensure compliance with safety, testing and
performance standards at all branch offices. All Medical Equipment and Support
Surfaces are serviced and tested prior to delivery to customers in accordance
with the Company's Safety and Performance Inspection Program, which is primarily
derived from the Emergency Care Research Institute's programs. Most types of
Medical Equipment and Support Surfaces rented by the Company require routine
servicing at scheduled intervals based upon hours of usage or passage of time,
including complete testing and inspection of all components that may need to be
replaced or refurbished. Routine servicing is conducted by the Company's trained
personnel at all of its branch locations. Major repairs are performed by its
biomedical equipment technicians at the Pennsauken, New Jersey and Santa Fe
Springs, California facilities.
Customers
The Company's customer base is composed of proprietary national and
regional hospital chains ("National Providers"), group purchasing organizations
("GPOs") and acute and non-acute health care facilities and organizations. In
total, the Company services more than 5,000 hospitals, alternate care and home
care providers, nursing homes and other health care providers. For fiscal 1998,
no single account represented 10% or more of total revenues.
National Provider contracts generally require that associated individual
hospitals fill their rental needs with the Company, although the level of
compliance by local providers varies among the contracts. The Company also
contracts with GPOs, which provide their members the opportunity to purchase or
rent products at reduced prices. The GPOs do not require members to purchase or
rent from a particular supplier to the GPO, and many health care providers are
members of more than one GPO.
Competition
The movable medical equipment rental industry is highly competitive and the
Company, which operates throughout the United States, encounters competition in
all locations in which it operates.
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Competition is generated from (i) national, regional and local medical equipment
rental and leasing companies and medical equipment distributors which rent
medical equipment to health care providers, (ii) medical equipment manufacturers
which sell medical equipment directly to health care providers and which the
Company believes generate the strongest competition and (iii) general leasing
and financing companies and financial institutions, such as banks, which finance
the acquisition of medical equipment by health care providers. The Company
believes that key factors influencing the decision in selecting a medical
equipment rental vendor include availability and quality of medical equipment,
service and price. The Company faces competitive pressure in all of its markets
from existing competitors and from the potential entry by new competitors.
Suppliers
The Company acquires substantially all of its Medical Equipment, Support
Surfaces and Parts and Disposables from approximately 100 suppliers. The Company
has entered into two long term agreements to purchase approximately $14.5
million of equipment and parts and disposable products over the next fiscal
year. The Company is not dependent upon any single supplier and believes that
alternative purchasing sources of Medical Equipment, Support Surfaces and Parts
and Disposables are available to the Company.
The Company is currently in dispute with one of the vendors with whom it
has a significant long term agreement. The vendor wishes to terminate the
agreement, but the Company intends to vigorously defend its rights under the
agreement. Although the Company does not know the ultimate outcome of such
dispute, the Company believes any such resolution will not have a material
adverse effect on the Company's results of operations. (See Footnote J to the
Consolidated Financial Statements included elsewhere herein.)
Segments
The Company operates primarily in one business segment. The Company rents
Medical Equipment and Support Surfaces and distributes a variety of disposable
products, accessories and repair parts used with the equipment and surfaces it
rents. In fiscal 1998, this segment represented more than 90% of the Company's
consolidated revenues and assets.
Employees
As of September 30, 1998 there were 1,271 employees. None of the Company's
employees are subject to a collective bargaining agreement. The Company believes
that its relations with employees are satisfactory.
Governmental Regulation
The Company's businesses are subject to Federal, state and local laws,
rules and regulations relating to the operation of such businesses.
The Company's customers are subject to documentation and safety reporting
standards with respect to the medical equipment they use, including standards
established by the following organizations and laws: the Joint Commission on
Accreditation of Healthcare Organizations, the Association for Advancement of
Medical Instrumentation and the Safe Medical Devices Act of 1990. Some states
and municipalities also have similar standards and laws. The Company's CAMP
programs help customers meet documentation and reporting needs under these
standards and laws. As a provider of services related to these needs, the
Company may be subject to liability for violating, directly or indirectly, these
standards and laws.
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Manufacturers and certain providers of the Company's Medical Equipment and
Support Surfaces are subject to regulation by agencies and organizations such as
the Food and Drug Administration ("FDA"), Underwriters Laboratories, the
National Fire Protection Association and the Canadian Standards Association. The
FDA regulates companies which manufacture, prepare, propagate, compound or
process medical devices. Device manufacturers must comply with registration and
labeling regulations, submit premarket notifications or obtain premarketing
approvals, comply with medical device reporting, tracking and post market
surveillance regulations and device good manufacturing practices ("GMPs") and
are subject to FDA inspection. The GMP regulations specify the minimum standards
for the manufacture, packing, storage and installation of medical devices, and
impose certain record keeping requirements. The FDA currently does not regulate
as device manufacturers the Company or organizations which provide similar
services as the Company. However, any company which services, repairs or
reconditions medical devices could be subject to regulatory action by the FDA if
its activities cause the devices to become adulterated or mislabeled. In
addition, no assurance can be given that in the future the FDA will not regulate
as device manufacturers companies such as the Company, which acquire ownership
of devices, recondition or rebuild such devices and rent them to customers or
which service, repair or recondition devices owned by others. The foregoing laws
and regulations that are directly applicable to manufacturers of medical
equipment became applicable to the Company upon acquisition of CH Medical. In
November 1998, the Company closed the manufacturing facility and operation it
acquired from CH Medical and now purchases the products from an independent
third party.
Federal laws and regulations generally prohibit the offer, payment,
solicitation or receipt of any form of remuneration in return for referring or
arranging for the referral of a person for the furnishing or arranging for the
furnishing of items or services reimbursable under the Medicare or Medicaid
programs, or in return for the purchase, lease or order or arranging or
recommending purchasing, leasing or ordering of any item or service reimbursable
under Medicare or Medicaid. In addition, Federal law and regulations also
generally prohibit physicians from referring patients to entities with which the
physicians have financial relationships, including ownership interests and
compensation arrangements. Various exceptions are contained in Federal laws and
regulations. Many states have similar anti-kickback and anti-referral laws and
regulations, and similar laws barring or restricting referrals. Noncompliance
with Federal and state anti-kickback and anti-referral laws and regulations can
result in criminal and civil penalties and exclusion from participation in
Medicare and Medicaid programs.
The Company enters into various contractual and other arrangements with
health care providers and other persons who are subject to the laws and
regulations referred to above, and who are possibly in a position to refer or
arrange for the referral of business to the Company. In addition, as a health
care provider reimbursed under the Medicare and Medicaid programs, the Company
is subject to the foregoing anti-kickback and anti-referral laws and
regulations. The Company believes that its operations comply in all material
respects with all applicable anti-kickback, anti-referral and similar laws and
regulations.
The Company's business may be significantly affected by, and the success of
its growth strategies may depend on, the availability and nature of
reimbursements to hospitals and other health care providers for their medical
equipment costs under Federal programs such as Medicare, and by other third
party payors. Under this system of reimbursement, Medicare related equipment
costs are reimbursed in a single, fixed rate, per discharge reimbursement. As a
result of the prospective payment system, the manner in which hospitals incur
equipment costs (whether through purchase, lease or rental) does not impact the
extent of hospitals' reimbursement. Because the Medicare system, to an
increasing extent, reimburses health care providers at fixed rates unrelated to
actual equipment costs, hospitals have an incentive to manage their capital
related costs more efficiently and effectively. The Company believes that
hospitals will continue to benefit from cost containment and cost efficiency
measures, such as converting existing fixed equipment costs to variable costs
through rental and equipment management programs.
In addition, the Company is subject to Federal, state and local laws, rules
and regulations relating to the protection of the environment, including laws,
rules and regulations governing the use, management and disposal of hazardous
and nonhazardous substances. As the owner and operator of real
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property, the Company could become subject to liability under certain
environmental laws for the cleanup of contaminated properties relating to
current or historical operations. The Company is not aware of any such
threatened or pending cleanup liabilities, and believes that it complies with
all applicable environmental laws.
Seasonality
The Company's business is seasonal with demand historically peaking during
periods of increased hospital census, which generally occurs in the winter
months during the Company's second fiscal quarter.
ITEM 2. PROPERTIES
The Company's principal facility, containing 116,400 square feet, is
located in Pennsauken, New Jersey, where the Company's corporate offices and a
portion of its operating activities are located. Major repairs of Medical
Equipment and Support Surfaces are also performed at this facility as well as at
a 18,700 square foot leased maintenance facility located in Santa Fe Springs,
California. The Company operates through 101 branch office locations in major
metropolitan areas nationwide. Eighty-eight of these sites contain office and
warehouse space and are leased by the Company. The remaining 13 office locations
are operated by independent distributors. None of the leases are with parties
affiliated with the Company. The Company believes that the properties owned and
leased by it are adequate for its operations.
ITEM 3. LEGAL PROCEEDINGS
In July 1998, MEDIQ Mobile X-Ray Services, Inc., whose assets were sold in
November 1996 and as a result of the reorganization is now a subsidiary of the
Company, was notified that it is the subject of an investigation by the
Department of Justice and the Office of the Inspector General of the Department
of Health and Human Services. The Company has not yet been informed of the
nature or scope of the investigation.
On October 16, 1998 the Company filed a complaint in the Superior Court of
New Jersey, Camden County against Siemens Medical Systems, Inc. in connection
with the latter's attempted termination of a Distribution Agreement between the
parties. The lawsuit seeks declaratory relief and monetary damages for breach of
contract, common law fraud, breach of the implied covenant of fair dealing and
statutory violations. The litigation is in its preliminary stages.
Other than the foregoing matter, the Company is not a party to any material
pending legal proceedings. The Company is subject to ordinary litigation
incidental to the conduct of its businesses and the ownership of its properties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The information called for by this item has been omitted pursuant to
General Instruction I(2)(c) of Form 10-K.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
All of the Company's outstanding shares of common stock are owned by MEDIQ.
The indenture related to the Company's 11% Senior Subordinated Notes due 2008
and the credit agreement related to the Company's bank facility have covenants
restricting the payment of dividends. For the year ended September 30, 1998, the
Company did not declare nor pay any dividends. Currently, the most restrictive
covenant precludes the payment of dividends.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The information called for by this item has been omitted pursuant to
General Instruction I(2)(a) of Form 10-K.
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Pursuant to General Instruction I(2)(a) of Form 10-K, the following
narrative analysis of the results of operations is presented in lieu of
Management's Discussion and Analysis of Financial Condition and Results of
Operations. The following discussion should be read in conjunction with the
Company's consolidated financial statements and notes thereto contained
elsewhere herein.
General
MEDIQ/PRN Life Support Services, Inc. (the "Company") is a wholly owned
subsidiary of MEDIQ Incorporated ("MEDIQ"). MEDIQ is a holding company whose
only substantial asset is its investment in the Company. MEDIQ is dependent on
distributions from the Company to meet its cash flow needs. The Company has
wholly owned subsidiaries, of which MEDIQ Management Services, Inc. is the only
operating subsidiary.
On May 29, 1998, pursuant to the terms of an Agreement and Plan of Merger
dated January 14, 1998, as amended, between MEDIQ and MQ Acquisition Corporation
("MQ"), MQ was merged into MEDIQ (the "Merger") with MEDIQ continuing as the
surviving corporation (the "Surviving Corporation"). MQ was a Delaware
corporation organized by Bruckmann, Rosser, Sherrill & Co., L.P. ("BRS") and
certain other investors solely to effect the Merger. The aggregate consideration
paid in connection with the Merger was approximately $390.8 million, which
amount included $20.0 million of Series A 13.0% Cumulative Compounding Preferred
Stock. In addition, in connection with the Merger (i) certain pre-Merger
controlling stockholders of MEDIQ converted 1,000,000 shares of their preferred
equity in MEDIQ into shares of Series B 13.25% Cumulative Compounding Perpetual
Preferred Stock and shares of Common Stock of the Surviving Corporation, (ii)
certain members of MEDIQ's and the Company's management and certain other
persons invested $4.2 million in common and preferred equity of MEDIQ and (iii)
BRS, certain entities and individuals affiliated with BRS and certain funds
affiliated with Ferrer Freeman Thompson & Co. LLC and Galen Partners III, L.P.
purchased $109.5 million of common and preferred equity of MQ which was
converted into capital stock of MEDIQ. The transaction has been accounted for as
a recapitalization.
In connection with the Merger, (i) MEDIQ contributed certain of its assets
and liabilities including the capital stock of all of the subsidiaries of MEDIQ
other than the Company to the Company, (ii) MEDIQ sold 140,885 units, each unit
consisting of one 13% Senior Discount Debenture due 2009 with a principal amount
at maturity of $1,000 ("Discount Debentures") and one warrant to purchase 0.6474
of a share of Common Stock for gross proceeds aggregating $75.0 million, (iii)
the Company entered into a new $325.0 million Senior Secured Credit Facility, as
amended, (the "New Credit Facility") with a syndicate of banks, (iv) the Company
sold $190.0 million aggregate principal amount of 11% Senior Subordinated Notes
due 2008 (the "Notes") and (v) all indebtedness of the Company except $2.0
million of capital leases was repaid.
On May 29, 1998, the Company purchased specified assets and rights of CH
Industries, Inc., certain subsidiaries (including CH Medical, Inc.) and certain
other parties (the "CH Medical Business") for a purchase price of $48.5 million
in cash (subject to adjustment based on closing net asset covenants), including
related costs and expenses, and the assumption of certain specified obligations
related to the CH Medical Business. The Company financed the purchase price and
related costs and expenses for the acquisition of the CH Medical Business with
the proceeds from Term Loans under the New Credit Facility.
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<PAGE>
On June 26, 1998, the Company acquired certain assets of National Patient
Care Systems, Inc. ("NPC") for $11.0 million in cash, including related costs
and expenses, and contingent consideration of up to $2.8 million payable over
the next two years if certain revenue targets are achieved by NPC.
The Company intends to continue to seek to expand its business through
strategic acquisitions and partnerships. The Company believes that there
currently exist ample opportunities for other potential
acquisitions/partnerships. However, no assurance can be given that other
acquisitions/ partnerships will be consummated or that any consummated will be
successful. Moreover, such opportunities may not be available in the future.
The Company markets its products and services to a variety of health care
and related businesses, primarily acute and sub-acute healthcare providers,
nursing homes and home health care companies. In recent years, these industries
have undergone dramatic consolidation and change, which will likely continue.
Although the Company is seeking to emphasize its ability to provide cost
effective products and services to these health care institutions in response to
a perception that such institutions are outsourcing increasing amounts of their
operations, there can be no assurance that this strategy will be successful.
The health care industry is subject to extensive governmental regulation,
licensure and prescribed operating procedures. This industry continues to
receive significant public attention, and there have been renewed efforts for
increased governmental regulation or oversight into various aspects of the
industry. Continued acceptance of the Company's services and products by
customers will depend, to a very significant degree, upon whether these services
and products will be in compliance with applicable regulations or will assist
health care providers in complying with such regulations. The Company closely
monitors such regulations and designs services and products accordingly. A
substantial change in the level or substance of regulations, or the enactment of
new or more stringent regulations, could have a material adverse effect on the
Company.
There are widespread efforts to control health care costs in the United
States. As an example, The Balanced Budget Act of 1997 significantly reduces
Federal spending on Medicare and Medicaid over the next five years by reducing
annual payment updates to acute care hospitals, changing payment systems for
both skilled nursing facilities and home health care services from cost based to
prospective payment systems, eliminating annual payment updates for durable
medical equipment and allowing states greater flexibility in controlling
Medicaid costs at the state level. The Company cannot reliably predict the
timing of when, or the exact effect which, these or similar initiatives could
impact the pricing and profitability of, or demand for, the Company's products.
Moreover, certain provisions of The Balanced Budget Act of 1997, such as the
changes in the way Medicare Part A reimburses skilled nursing facilities, may
change the way the Company's customers make renting and purchasing decisions,
and could have a material adverse effect. The Company also believes it is likely
that efforts by governmental and private payors to contain costs through managed
care and other efforts and to reform health systems will continue. There is no
assurance that current or future initiatives will not have a material adverse
effect on the Company.
The Company's products are rented and sold principally to health care
providers who receive reimbursement for the products and services they provide
from various public and private third party payors, including Medicare, Medicaid
and private insurance programs. With the acquisition of the CH Medical Business,
the Company also acts as a supplier of durable medical equipment under Federal
law and, as such, furnishes products directly to customers and bills third party
payors. As a result, the demand for the Company's products in any specific care
setting is dependent in part on the reimbursement policies of the various payors
in that setting. In order to be reimbursed, the products generally must be found
to be reasonable and necessary for the treatment of medical conditions and must
otherwise fall within the payor's list of covered services. In light of
increased controls on Medicare spending, there is no assurance of the outcome of
future coverage or payment decisions for any of the Company's products by
governmental or private payors. If providers and other users of the Company's
products and services are unable to obtain sufficient reimbursement, a material
adverse impact may result.
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Results of Operations
Fiscal 1998 revenues were $180.9 million compared to $156.2 million, an
increase of 16%. The revenue growth was attributable to a 15% increase in rental
revenue and a 40% increase in sales, offset by a 14% decrease in other revenue.
The growth in rental revenue is primarily attributable to the acquisitions of
SpectraCair in September 1997, and the CH Medical Business and NPC in May and
June 1998, respectively. These three acquisitions solidly established the
Company in the therapeutic support surface rental business. Rental revenue
related to medical equipment remained flat with the prior year, with increased
revenues related to revenue share activities offset by decreases in the core
rental business. The increases in revenue share activities related to increased
volume primarily with existing customers. The decrease in the core rental
business was principally attributable to a shift from rental to purchase by one
of the Company's significant home care customers in the fourth quarter of fiscal
1997. The 1998 growth in sales revenue related to increased volume in the sales
of parts, disposables and equipment, revenue share activities and growth in
sales of medical gases which the Company initiated in the fourth quarter of
fiscal 1997. The 1998 decrease in other revenue was primarily attributable to
the discontinuance of logistics services provided to SpectraCair by the Company
as a result of its acquisition in September 1997 and a reduction in consulting
services, partially offset by increased revenues from biomedical repair services
and asset management projects.
Currently, the Company is in a dispute with a significant vendor. The
vendor wishes to terminate a contract with the Company and the Company intends
to vigorously defend its rights under the contract. As such, the Company has
filed a complaint in the Superior Court of New Jersey to protect its rights
under the contract. Pursuant to the contract, the Company purchases parts and
disposables and re-sells such products. The Company recognized $10.3 million in
revenues in fiscal 1998 pursuant to this activity. The vendor also contended the
Company was in arrears on its payments to the vendor. The Company has reviewed
its internal books and records and disagrees with the vendor. However, the
Company paid the vendor the alleged arrearage in order that the vendor could not
contend the Company was in breach under the contract. The two parties have
agreed to attempt to work out the dispute prior to litigation. The Company
believes any such resolution will not have a material adverse effect on the
Company results of operations.
The operating loss for fiscal 1998 of $18.9 million includes charges of
$35.0 million related to the Merger and the acquisition of the CH Medical
Business in May 1998, a $3.4 million charge related to acquired receivables and
a $6.0 million depreciation reserve to write down certain under utilized rental
equipment to net realizable value. Exclusive of the items noted above, 1998
operating income decreased $3.1 million to $25.5 million principally as a result
of investments in sales and operational personnel to facilitate the growth in
support surfaces, disposable sales and outsourcing activities and increased
depreciation and amortization expenses related to capital equipment purchases
and the acquisitions.
EBITDA is defined as income from continuing operations before interest,
taxes, depreciation and amortization. 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.
Exclusive of the charges noted above, adjusted EBITDA for 1998 increased
$2.3 million to $61.2 million principally as a result of the items discussed
above. The adjusted EBITDA margin for 1998 decreased to 34% from 38% primarily
attributable to the growth in sales and revenue share activities that have lower
margins than the Company's core rental businesses and increases in selling and
operating expenses.
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Interest expense increased 40% to $23.7 million principally as a result of
the substantial increase in debt incurred in connection with the Merger and the
acquisition of the CH Medical Business and the termination of existing interest
rate hedging contracts.
On June 5, 1998, pursuant to the change of control provisions of the
indenture for MEDIQ's 7.50% Exchangeable Subordinated Debentures due 2003
("Exchangeable Debentures"), MEDIQ made a tender offer to repurchase the $10.1
million remaining outstanding balance. On July 3, 1998, MEDIQ redeemed $9.5
million of the Exchangeable Debentures pursuant to the tender offer and received
621,830 shares of NutraMax Products, Inc. ("NutraMax") common stock from escrow.
Pursuant to the terms of the Company's stock purchase agreement with NutraMax,
the Company returned the shares to NutraMax and received a $5.6 million cash
payment on its note receivable from NutraMax. The Company recorded a gain of
$1.1 million on this transaction as a result of recognizing substantially all of
the remaining discount on the note.
The Company's effective tax rate was disproportionate compared to the
statutory rate as a result of the nondeductibility of certain goodwill
amortization and the nonrecognition for state income tax purposes of certain
operating losses.
As a result of the refinancing which occurred related to the Merger, the
Company has recognized an extraordinary charge of $6.2 million ($4.3 million net
of tax) as a result of the write off of deferred financing fees for the debt
repaid.
Liquidity and Capital Resources
The Company's principal capital requirements are to fund working capital
needs, meet required debt payments, fund capital expenditures and complete
planned maintenance and expansion. Management anticipates that the Company's
operating cash flow, together with available borrowings under the New Credit
Facility, will be sufficient to meet its working capital, capital expenditure
and debt service requirements for the foreseeable future.
In order to finance a portion of the cash consideration paid pursuant to
the Merger, the Company entered into a $325.0 million New Credit Facility that
replaced its former credit facility. The New Credit Facility consists of three
facilities: (i) an eight year senior secured $200.0 million term loan facility
(the "Term Loan Facility"); (ii) a six year revolving credit facility not to
exceed $50.0 million (the "Revolving Credit Facility"); and (iii) a six year
senior secured acquisition facility not to exceed $75.0 million (the
"Acquisition Facility"). Loans made under the Term Loan Facility are referred to
herein as "Term Loans", advances made under the Revolving Credit Facility are
referred herein as "Revolving Loans" and loans made under the Acquisition
Facility are referred to herein as "Acquisition Loans".
Borrowings under the New Credit Facility bear interest at a floating rate
based upon, at the Company's option, (i) the higher of the prime rate of Banque
Nationale de Paris or the Federal funds effective rate plus 0.5% plus, in the
case of the Term Loans, a margin equal to 1.5%, and in the case of the Revolving
Loans and the Acquisition Loans, a margin equal to 1.0% or (ii) the London
Interbank Offered Rate ("LIBOR") plus, in the case of the Term Loans, a margin
equal to 2.75%, and in the case of the Revolving Loans and Acquisition Loans, a
margin equal to 2.25%. In addition, the Company is required to pay commitment
fees equal to 0.5% per year of the undrawn portion of the commitments in respect
of the facilities. The New Credit Facility contains provisions under which
commitment fees and margins on interest rates under the facilities will be
adjusted in increments based on certain performance goals.
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<PAGE>
As of September 30, 1998, there were no borrowings outstanding under the
Revolving Credit Facility or Acquisition Facility. All $200.0 million was
outstanding under the Term Loan Facility. Principally, all of the outstanding
balance under the Term Loan Facility bears interest at LIBOR plus 2.75%, or
8.50%. On December 10, 1998, the interest rate on the Term Loan Facility was
reduced to 7.88% as a result of a reduction in LIBOR. Such rate will be in
effect until June 10, 1999 when it will be adjusted to the then current LIBOR or
prime rate.
The Term Loans amortize on a quarterly basis commencing September 30, 1999.
Principal amounts outstanding under the Revolving Credit Facility are due and
payable in full at maturity. Principal amounts, if any, outstanding under the
Acquisition Facility on November 30, 1999 will amortize on a quarterly basis.
The Term Loans, Revolving Loans and Acquisition Loans are subject to mandatory
prepayments and reductions in the event of certain extraordinary transactions or
issuances of debt and equity by the Company or any Facility Guarantor (as
defined in the Credit Agreement). Such loans are required to be prepaid with 75%
of the Excess Cash Flow (as defined in the Credit Agreement) of the Company or,
if the Company's ratio of funded debt to pro forma EBITDA for the preceding
twelve month period is less than 5.0 to 1.0, 50% of such Excess Cash Flow.
At September 30, 1998, pursuant to the terms of the New Credit Facility
and/or the indentures for the Notes and the Discount Debentures (the
"Indentures"), the availability under the Revolving Credit Facility and the
Acquisition Facility was limited to $29.8 million and $50.0 million,
respectively.
The New Credit Facility contains representations and warranties, financial
and non-financial covenants, events of default and other provisions customary
for credit facilities of this type. The Company paid certain syndication and
administration fees, reimbursed certain expenses and provided certain
indemnities, in each case which are customary for credit facilities of this
type.
In July 1998, the Company terminated its existing interest rate hedging
contracts at a cost of approximately $.6 million which was reflected as interest
expense in the Company's fourth quarter. In addition, the Company entered into
new interest rate hedging contracts. On a notional amount of $100.0 million, the
Company fixed its LIBOR rate at 5.35% until July 2003 as long as the three month
LIBOR rate does not exceed 6.25%. The Company must pay the actual LIBOR rate
when LIBOR exceeds 6.25%. In order to mitigate its interest rate exposure for
LIBOR rates above 6.25%, the Company obtained zero cost collars with notional
amounts aggregating $100.0 million with ceiling rates of 7.00% and a weighted
average floor rate of 5.03%.
The Notes in the aggregate principal amount of $190.0 million are unsecured
senior subordinated obligations of the Company and mature on June 1, 2008. The
Notes bear interest at the rate of 11% per year, payable to holders of record at
the close of business on the May 15 or November 15 immediately preceding the
interest payment date on June 1 and December 1, commencing December 1, 1998.
The interest rate on the Notes was subject to increase in certain
circumstances if the Company did not file a registration statement providing for
a registered exchange offer for the Notes or if the registration statement was
not declared effective on a timely basis or if certain other conditions were not
satisfied. The Company filed such registration statement and completed such
exchange offer in a timely manner in November 1998.
The New Credit Facility and the Indentures include significant operating
and financial restrictions, such as limits on the Company's ability to incur
indebtedness, create liens, sell assets, engage in mergers or consolidations,
make investments and capital expenditures and pay dividends. The Company has
substantial consolidated indebtedness. In addition, the Company expects to incur
additional indebtedness in connection with its strategy of pursuing strategic
acquisitions and expanding through internal growth. Such high leverage has
important consequences for the Company, including the following: (a) the
Company's ability to obtain additional financing for such acquisitions, working
capital, capital expenditures or other purposes may be impaired or any such
financing may not be on
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terms favorable to the Company; (b) interest expense may reduce the funds that
would otherwise be available to the Company for its operations and future
business opportunities; (c) a substantial decrease in net operating cash flows
or an increase in expenses of the Company could make it difficult for the
Company to meet its debt service requirements or pay dividends or force it to
modify its operations; (d) substantial leverage may place the Company at a
competitive disadvantage and may make it more vulnerable to a downturn in its
business or the economy generally; (e) certain of such indebtedness of the
Company is at variable rates of interest, which causes the Company to be
vulnerable to increases in interest rates; (f) certain of such indebtedness is
secured by substantially all the assets of the Company and its subsidiaries,
possibly reducing its ability to obtain additional financing; and (g) the
Company may be hindered in its ability to adjust rapidly to changing market
conditions.
Relationship with MEDIQ
MEDIQ is a holding company whose only substantial asset is its investment
in the Company. As such, and as permitted by the Company's debt agreements, the
Company will be required to fund the obligations of MEDIQ. As of September 30,
1998, MEDIQ had $3.0 million of current liabilities which will need to be paid
by the Company in fiscal 1999. Additionally, MEDIQ does not have any current
operating costs and expenses except cash interest of approximately $40,000 on
the Exchangeable Debentures. Subsequent to fiscal 1999, the Company and MEDIQ do
not anticipate the need for the Company to fund any significant expenditures of
MEDIQ until fiscal 2003 when the Exchangeable Debentures become due and the
Discount Debentures begin to pay cash interest. Currently, the Discount
Debentures are deeply discounted and do not pay cash interest.
Market Risk Sensitivity
In the fourth quarter of 1998 and in accordance with the terms of the New
Credit Agreement, the Company entered into three interest rate swap contracts
("Swap Contracts"). The Swap Contracts hedge the Company's interest rate
exposure and terminate in fiscal 2003. The Company did not enter into the Swap
Contracts for trading or speculative purposes.
In connection with the Merger, principally all of the Company's outstanding
debt was repaid or refinanced. A comparison of the effects of material changes
in interest rates from September 30, 1997 to September 30, 1998 is not
meaningful.
The information below summarizes the Company's market risks associated with
debt obligations and Swap Contracts outstanding as of September 30, 1998. Fair
values of debt instruments included herein have been determined based on quoted
market prices where available. The fair values of interest rate instruments are
the estimated amounts the Company would expect to pay to terminate the Swap
Contracts. The information presented below should be read in conjunction with
Notes H and I to the Company's Consolidated Financial Statements.
For debt obligations, the table presents principal cash flows and related
interest rates by fiscal year of maturity. Fixed interest rates disclosed
represent the weighted average rates for the Company's capital leases, except
where noted. Variable interest rates disclosed represent the weighted average
rates of the portfolio at September 30, 1998. For interest rate swaps, the table
presents notional amounts and related interest rates by fiscal year of maturity.
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Expected Fiscal Year of Maturity
(in thousands, except percentages)
<TABLE>
<CAPTION>
Debt 1999 2000 2001 2002 2003 Thereafter Total FV
- ---- ------ ------ ------ ------ ------ ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate $1,537 $ 262 $ 166 -- -- $190,000 (a) $191,965 $179,615
Average interest rate 9.61% 8.86% 8.08% -- -- 11.00%(a)
Variable rate $ 500 $2,000 $2,000 $2,000 $2,000 $191,500 $200,000 $200,000
Average interest rate 8.50% 8.50% 8.50% 8.50% 8.50% 8.50%
Interest
Rate Collars
- ------------
Notional amount $100,000 $100,000 $ (2,183)
Cap 7.00% 7.00%
Floor 5.03% 5.03%
</TABLE>
- ----------
(a) Represents the Company's Notes.
In July 1998, the Company entered into an interest rate swap agreement in
the notional amount of $100.0 million. The swap effectively fixes the Company's
borrowing rate on $100.0 million of the Term Loan Facility at 5.35% until July
2003 as long as the three month LIBOR rate does not exceed 6.25%. If the three
month LIBOR rate exceeds 6.25%, the swap temporarily terminates until the three
month LIBOR rate drops back below 6.25%. The anniversary dates for determining
the three month LIBOR rate are the closest business day to January 3, April 3,
July 3 and October 3 in each year. On the latest anniversary date, October 5,
1998, the three month LIBOR rate was 5.31%. The estimated cost to terminate this
swap is $2.9 million.
New Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") issued SFAS No. 130,
"Reporting Comprehensive Income," which will result in disclosure of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general purpose financial statements. The Company is not
required to adopt this standard until fiscal 1999. At this time, the Company has
not determined the impact the adoption of this standard will have on the
Company's financial statements.
FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," which establishes standards for the way public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company is not required to adopt this
standard until fiscal 1999. At this time, the Company has preliminarily
determined that it only operates in one business segment.
In February 1998, FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits". This statement, which improves
disclosure about pensions and other postretirement benefits, is effective for
fiscal years beginning after December 15, 1997. The Company does not believe the
adoption of this standard will have a material impact on the Company's financial
statements.
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In July 1998, FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities". This statement, which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments imbedded in other contracts, and for hedging activities,
is effective for fiscal years beginning after June 15, 1999. At this time, the
Company has not determined the impact the adoption of this standard will have on
the Company's financial statements.
Year 2000
The Company continues to evaluate the risks associated with its operations
as a result of Year 2000 compliant issues. The Company has evaluated these risks
on three levels: internal and existing computer programs and applications;
Medical Equipment and Support Surface rental equipment; and customers and
suppliers. In evaluating these risks, the Company has considered the material
implications of each of these items on its operations on and subsequent to
January 1, 2000. The Company's internal business information systems have been
analyzed for Year 2000 compliance and are believed to be Year 2000 compliant.
The Company utilizes certain third party network equipment and software
products, which may or may not be Year 2000 compliant. While delays in the
implementation of the Year 2000 solutions for such systems which may not be Year
2000 compliant could adversely effect the Company's operations, at this time,
the Company believes that resolutions of this Year 2000 issue will not have a
material adverse effect on the Company's operations or results of operations.
A significant portion of the Company's revenues and operating income are
directly related to the Company's ability to rent its Medical Equipment and
Support Surfaces. Should a material portion of such equipment not be Year 2000
compliant, there could be a material adverse effect on the Company's results of
operations. The Company has initiated formal communications with the equipment
manufacturers for products the Company maintains in its inventory to determine
the extent to which the Company's rental equipment may be vulnerable to Year
2000 issues. To date, approximately 95% of the equipment manufacturers have
responded to the Company's requests. For manufacturers that have not yet
responded, the Company has a formal follow up plan that is currently in process.
The Company expects to complete its evaluation process of its Medical Equipment
and Support Surface rental fleets by March 31, 1999. To date, based on responses
from the equipment manufacturers, the Company believes it will be required to
spend approximately $4.0 million to bring its entire rental fleet into Year 2000
compliance. The Company anticipates that all known modifications required to
make its entire rental fleet Year 2000 compliant will be completed by September
30, 1999. Currently, the Company is not able to estimate the costs associated
with Year 2000 issues for Medical Equipment and Support Surface products whose
manufacturers have not yet replied.
Although the Company has significant relationships with its customers and
suppliers, the Company has determined that no one individual customer or
supplier could create a material adverse effect as a result of being Year 2000
noncompliant. However, should a number of individual customers be noncompliant,
there could be a material adverse effect on the Company's operations and results
of operations.
Should a material portion of the Company's Medical Equipment and Support
Surface rental fleets fail to become Year 2000 compliant, an interruption in or
a failure of certain normal business activities or operations could occur. In
addition, there can be no assurance that the systems of other companies on which
the Company relies will be timely converted to be Year 2000 compliant and,
therefore, not have a material adverse effect on the Company.
The Company has not yet prepared any contingency plan for dealing with a
worst case scenario, but anticipates it will do so by the end of fiscal 1999.
The cost of compliance and the date on which the projects will be completed
are based on estimates, which were derived utilizing numerous assumptions of
future events including the continued
20
<PAGE>
availability of certain resources and other factors. However, there can be no
assurance that these estimates will be achieved. Actual results could differ
materially from the projections. Specific factors that might cause a material
change include, but are not limited to, the availability and cost of personnel
trained in this area, the ability to obtain all necessary components or upgrade
parts and similar uncertainties.
Once a significant portion of the Company's medical equipment and support
surface rental fleets are in compliance with Year 2000 issues, the Company
believes it has significantly reduced the possibility of significant
interruptions of normal operations.
The above discussion contains forward looking statements that are subject
to risks and uncertainties. Readers are cautioned not to place undue reliance on
these forward looking statements, which speak only as of the date of this
report. The Company undertakes no obligations to publicly release any revision
to these forward looking statements to reflect events or circumstances after the
date of this report.
21
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
Independent Auditors' Report 23
Consolidated Statements of Operations -
Three Years Ended September 30, 1998 24
Consolidated Balance Sheets - September 30, 1998 and 1997 25
Consolidated Statements of Stockholder's Equity (Deficiency) -
Three Years Ended September 30, 1998 26
Consolidated Statements of Cash Flows -
Three Years Ended September 30, 1998 27
Notes to Consolidated Financial Statements 28-40
22
<PAGE>
Independent Auditors' Report
MEDIQ/PRN Life Support Services, Inc.
Pennsauken, New Jersey
We have audited the accompanying consolidated balance sheets of MEDIQ/PRN
Life Support Services, Inc. and subsidiaries as of September 30, 1998 and 1997,
and the related consolidated statements of operations, stockholder's equity
(deficiency), and cash flows for each of the three years in the period ended
September 30, 1998. Our audits also include the financial statement schedule
listed in the index at Item 14(a)(2). These financial statements and the
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of MEDIQ/PRN Life Support
Services, Inc. and subsidiaries as of September 30, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 1998 in conformity with generally accepted
accounting principles. Also, in our opinion, the financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
December 30, 1998
23
<PAGE>
MEDIQ/PRN LIFE SUPPORT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------
1998 1997 1996
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Revenues:
Rental $ 142,736 $ 124,316 $ 114,275
Sales 27,928 19,922 11,696
Other 10,252 11,915 10,858
--------- --------- ---------
180,916 156,153 136,829
Costs and Expenses:
Cost of sales 22,659 16,334 9,534
Operating 63,072 46,139 47,934
Selling 16,590 13,353 8,795
Management fees to parent 208 3,341 920
General and administrative 20,586 18,048 9,629
Merger and acquisition charges 35,021 -- --
Depreciation and amortization 41,692 30,333 30,105
--------- --------- ---------
199,828 127,548 106,917
--------- --------- ---------
Operating (Loss) Income (18,912) 28,605 29,912
Other (Charges) and Credits:
Interest expense (23,708) (16,912) (20,478)
Interest income 943 985 49
Other - net 1,124 6,989 589
--------- --------- ---------
(Loss) Income from Continuing Operations before
Income Taxes (40,553) 19,667 10,072
Income Tax (Benefit) Expense (12,257) 7,438 4,201
--------- --------- ---------
Loss from Continuing Operations before
Discontinued Operations and Extraordinary Item (28,296) 12,229 5,871
Discontinued Operations:
Income from operations (net of income taxes of $3,027) -- -- 5,596
Gain (Loss) on disposal (net of income taxes of
$24,548 in 1997 and $(3,427) in 1996) -- 36,432 (6,681)
--------- --------- ---------
-- 36,432 (1,085)
--------- --------- ---------
(Loss) Income before Extraordinary Item (28,296) 48,661 4,786
Extraordinary (Loss) Gain - Early Retirement of Debt
(net of income taxes of $(1,863) in 1998,
$(5,172) in 1997 and $(9) in 1996) (4,346) (7,757) (17)
--------- --------- ---------
Net (Loss) Income $ (32,642) $ 40,904 $ 4,769
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
24
<PAGE>
MEDIQ/PRN LIFE SUPPORT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
-------------------------
1998 1997
--------- ---------
(in thousands)
<S> <C> <C>
Assets
Current Assets:
Cash $ 2,227 $ 3,472
Accounts receivable (net of allowance of $11,432 in
1998 and $4,077 in 1997) 52,659 39,686
Inventories 21,820 13,047
Deferred income taxes 5,221 2,010
Other current assets 1,422 1,183
--------- ---------
Total Current Assets 83,349 59,398
Property, Plant and Equipment - net 103,917 113,589
Goodwill - net 91,121 57,056
Deferred Financing Costs - net 16,146 7,034
Other Assets 7,354 10,215
--------- ---------
Total Assets $ 301,887 $ 247,292
========= =========
Liabilities and Stockholder's Equity (Deficiency)
Current Liabilities:
Accounts payable $ 14,152 $ 8,791
Accrued expenses 17,597 20,605
Other current liabilities 281 669
Current portion of long term debt 2,037 16,115
--------- ---------
Total Current Liabilities 34,067 46,180
Senior Debt 199,928 119,664
Subordinated Debt 190,000 --
Deferred Income Taxes 16,986 28,385
Other Liabilities 504 990
Commitments and Contingencies (Note J) -- --
Stockholder's Equity (Deficiency):
Common stock ($10 par value: authorized 2 shares;
issued and outstanding 1) 10 10
Capital in excess of par value 24,112 86,457
(Accumulated deficit) Retained earnings (28,124) 53,924
Advances to parent (135,596) (88,318)
--------- ---------
Total Stockholder's Equity (Deficiency) (139,598) 52,073
--------- ---------
Total Liabilities and Stockholder's Equity (Deficiency) $ 301,887 $ 247,292
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
25
<PAGE>
MEDIQ/PRN LIFE SUPPORT SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
Common Stock (Accumulated
------------------- Capital in Deficit)
Shares Excess of Retained Advances
Issued Amount Par Value Earnings to Parent
------ ------ ---------- ------------ ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance October 1, 1995 1 $ 10 $164,661 $ 3,728 $(112,515)
Net income 4,769
Increase in advances to parent-net (9,470)
Dividends (65,699) 4,561 57,575
------ ------ -------- -------- ---------
Balance September 30, 1996 1 10 98,962 13,058 (64,410)
Net income 40,904
Increase in advances to parent-net (24,346)
Repurchase of warrants (12,500)
Dividends (5) (38) 438
------ ------ -------- -------- ---------
Balance September 30, 1997 1 10 86,457 53,924 (88,318)
Net loss (32,642)
Increase in advances to parent-net (159,045)
Capitalization of advances (62,361) (49,406) 111,767
Other 16
------ ------ -------- -------- ---------
Balance September 30, 1998 1 $ 10 $ 24,112 $(28,124) $(135,596)
====== ====== ======== ======== =========
</TABLE>
See Notes to Consolidated Financial Statements
26
<PAGE>
MEDIQ/PRN LIFE SUPPORT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------
1998 1997 1996
--------- --------- --------
Cash Flows From Operating Activities (in thousands)
- ------------------------------------
<S> <C> <C> <C>
Net (loss) income $ (32,642) $ 40,904 $ 4,769
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 41,692 30,333 30,105
Provision for deferred income taxes (14,296) (790) 1,026
(Income) loss from discontinued operations -- (36,432) 1,085
Extraordinary item - early retirement of debt 6,209 2,457 25
Gain on sale of Cardinal stock -- (9,213) --
Other 952 1,625 (1,705)
Increase (decrease), net of effects from acquisitions:
Accounts receivable - net (8,529) (4,871) (1,215)
Inventories (6,504) (6,397) (2,433)
Accounts payable 4,775 (1,351) 2,444
Accrued expenses (2,099) 4,330 (74)
Deferred income taxes (314) (9,048) (4,046)
Other current assets and liabilities 603 (2,613) (64)
--------- --------- --------
Net cash (used in) provided by operating activities (10,153) 8,934 29,917
Cash Flows From Investing Activities
- ------------------------------------
Purchase of equipment (20,022) (15,458) (18,073)
Acquisitions (59,468) (1,915) --
Collection of notes receivable 7,862 -- --
Proceeds from sale of discontinued operations -- 130,159 --
Other 753 1,201 2,719
--------- --------- --------
Net cash (used in) provided by investing activities (70,875) 113,987 (15,354)
Cash Flows From Financing Activities
- ------------------------------------
Borrowings 390,000 214,000 12,010
Debt repayments (134,348) (247,032) (16,574)
Advances to parent (159,029) (67,854) (9,223)
Repurchase of warrants -- (12,500) --
Deferred financing fees (16,840) (8,874) --
--------- --------- --------
Net cash provided by (used in) financing activities 79,783 (122,260) (13,787)
--------- --------- --------
(Decrease) increase in cash (1,245) 661 776
Cash:
Beginning balance 3,472 2,811 2,035
--------- --------- --------
Ending balance $ 2,227 $ 3,472 $ 2,811
========= ========= ========
Supplemental disclosure of cash flow information:
Interest paid $ 15,998 $ 18,101 $ 18,473
========= ========= ========
Supplemental disclosure of non cash investing and financing activities:
Equipment financed with long term debt and capital leases $ 534 -- $ 840
========= ========= ========
</TABLE>
See Notes to Consolidated Financial Statements
27
<PAGE>
Note A - Summary of Significant Accounting Policies
Description of operations - MEDIQ/PRN Life Support Services, Inc. (the
"Company") is a wholly owned subsidiary of MEDIQ Incorporated ("MEDIQ"). The
Company has wholly owned subsidiaries of which MEDIQ Management Services, Inc.
is the only operating subsidiary. The Company rents movable critical care and
life support medical equipment and support surfaces, distributes disposable
products, accessories and repair parts used with the types of equipment and
support surfaces it rents and provides outsourcing services to its customers in
the healthcare industry throughout the United States.
Principles of consolidation - The consolidated financial statements include
the accounts of MEDIQ/PRN Life Support Services, Inc. and its subsidiaries.
Investments in companies owned 20% to 50% were accounted for under the equity
method of accounting. Investments in discontinued operations are stated at the
lower of cost or net realizable value. In consolidation, all significant
intercompany transactions and balances are eliminated.
On May 20, 1998, MEDIQ completed a restructuring by contributing all of its
subsidiaries except the Company to the Company. The reorganization was accounted
for in a manner similar to a pooling of interests. Accordingly, the Company's
consolidated financial statements include the accounts of MEDIQ's former
subsidiaries for all periods presented.
The subsidiaries contributed were (i) MEDIQ Management Services, Inc., (ii)
MEDIQ Investment Services, Inc., (iii) MEDIQ Imaging Services, Inc. and (iv)
MEDIQ Mobile X-Ray Services, Inc. MEDIQ Management Services, Inc. is the only
operating subsidiary of the Company. Certain nonoperating entities that had been
dissolved into MEDIQ in fiscal 1996 and 1997 were also treated as contributed
for all periods presented.
Inventories - Inventories, which consist primarily of disposable products,
repair parts and raw materials for rental equipment, are stated at the lower of
cost (first-in, first-out method) or market.
Property, plant and equipment - Rental equipment, machinery and equipment,
buildings and improvements and land are recorded at cost. Capital leases are
recorded at the lower of fair market value or the present value of future lease
payments. The Company provides straight line depreciation and amortization over
the estimated useful lives (rental equipment and machinery and equipment - 2 to
10 years and buildings and improvements - 10 to 25 years).
Goodwill - The cost of acquired businesses in excess of the fair value of
net assets is amortized on a straight line basis primarily over 20 years.
Accumulated amortization was $16.7 million and $12.3 million as of September 30,
1998 and 1997, respectively. Amounts accumulated through the respective dates
are adjusted for associated write offs.
Deferred financing costs - Costs incurred in the issuance of long term debt
are amortized on a straight line basis over the term of the related debt
instrument. Accumulated amortization was $.7 million and $1.3 million as of
September 30, 1998 and 1997, respectively. Amounts accumulated through the
respective dates are adjusted in association with the early retirement of the
related debt instruments.
Carrying value of long term assets - The Company evaluates the carrying
value of long term assets, including rental equipment, goodwill and other
intangible assets, based upon current and anticipated undiscounted cash flows,
and recognizes an impairment when it is probable that such estimated cash flows
will be less than the carrying value of the asset. Measurement of the amount of
impairment, if any, is based upon the difference between carrying value and fair
value.
28
<PAGE>
Note A - Summary of Significant Accounting Policies (Continued)
Revenue recognition - Rental revenue is recognized in accordance with the
terms of the related rental agreement and/or the usage of the related rental
equipment. Revenues from other activities are recognized as services are
rendered, income is earned or products are shipped.
The Company entered into several revenue share arrangements with original
equipment manufacturers ("OEMs") whereby the Company rents moveable medical
equipment and support surfaces and sells disposable products owned by the OEMs
to the Company's customers. Under these arrangements, the Company bills the
customer and pays the OEMs a fee based upon a percentage of the amount billed.
The Company bears the risk of loss relating to the equipment and collection of
revenue. Revenue related to the rental equipment owned by the OEMs is included
in rental revenue while the related fees are reflected in operating expenses.
Revenue related to the sale of the OEMs' disposable products is included in
sales while the related fees are reflected in cost of goods sold.
Income taxes - The Company is included in the consolidated Federal tax
return of MEDIQ. The Company's provision or benefit is determined as if all tax
credits and losses are utilized currently. Calculation of the Company's income
taxes on a separate return basis would not result in any change to the amounts
reflected in the consolidated financial statements.
Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results may differ from those
estimates and assumptions.
Earnings per share - All of the Company's Common Stock is owned by MEDIQ.
As such, the Company does not present earnings per share information in
accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per share".
Reclassification of accounts - Certain reclassifications have been made to
conform prior years' balances to the current year presentation.
Note B - Acquisitions
On May 29, 1998, the Company purchased specified assets and rights of CH
Industries, Inc. ("CHI"), certain subsidiaries (including CH Medical, Inc.) and
subsidiaries and certain other parties (the "CH Medical Business") for a
purchase price of $48.5 million in cash (subject to adjustment based on closing
net asset adjustments), including related costs and expenses, and the assumption
of certain specified obligations related to the CH Medical Business (the "CH
Medical Acquisition"). The Company financed the purchase price and related costs
and expenses of the CH Medical Acquisition with the proceeds from Term Loans
under the Senior Secured Credit Facility (see Note H). CHI developed various
medical products utilized in patient care treatment and therapy. In addition to
its development of medical products, CHI was a national sales, rental and
service corporation specializing in patient beds, overlays, mattress replacement
systems, pressure relieving pads and surfaces and other therapeutic support
services. CHI developed, among other things, technology used in the manufacture
of beds and frameless systems for hospitals, extended care facilities and homes
to effectively treat the severe conditions and complications inherent to
patients who are bed confined.
On June 26, 1998, the Company acquired certain assets of National Patient
Care Systems, Inc. ("NPC") for $11.0 million in cash, including related costs
and expenses, with contingent consideration of up to $2.8 million payable over
the next two years if certain revenue targets are achieved by NPC. NPC is a
provider of air support therapy rental equipment including frameless and framed
integrated bed systems.
29
<PAGE>
Note B - Acquisitions (Continued)
Both acquisitions were accounted for by the purchase method of accounting
and, accordingly, the purchase price was allocated to the assets acquired based
on their estimated fair values on the date of purchase. The excess of the
purchase price over the estimated fair values of the net assets acquired, $27.9
million for the CH Medical Business and $9.0 million for NPC, was recorded as
goodwill and is being amortized on a straight line basis over twenty years. In
connection with the CH Medical Business, the Company acquired five patents. Such
patents were issued between September 1990 and February 1995. The Company has
assigned a value to the patents based on its best estimate until a valuation is
completed by an independent appraiser. Although the Company is unable to predict
whether there will be an adjustment, if any, as a result of such valuation, the
Company does not believe there will be any material adverse effect on the
Company's results of operations. The Company incurred $2.6 million of costs
related to severance and future purchase commitments as a result of the
acquisition of the CH Medical Business. Such costs are reflected as Merger and
Acquisition charges in the Consolidated Statement of Operations.
Currently, the Company is in negotiations with CHI to resolve proposed
closing net asset adjustments and guaranteed current asset realization. The
Company cannot determine at this time the amount of funds, if any, it will
ultimately receive as a result of such negotiations. The Company believes that
the results of such negotiations will not have a material adverse effect on its
financial position or results of operations.
The operations of the CH Medical Business and NPC are included in the
Company's Consolidated Statement of Operations from their respective acquisition
dates. The following pro forma financial information presents the consolidated
results of operations of the Company as if the acquisitions had occurred on
October 1 of the respective periods. The unaudited pro forma information is
presented for comparative purposes only and does not necessarily reflect the
results of operations of the Company had the acquisitions been made on such
date.
Year Ended September 30,
--------------------------
1998 1997
-------- ---------
(in thousands)
(Unaudited)
Revenues $207,814 $195,745
(Loss) income from continuing operations (32,371) 6,904
Net (loss) income (36,717) 35,579
On September 18, 1997, the Company acquired the remaining 50% interest in
its SpectraCair Joint Venture ("SpectraCair") from a subsidiary of Huntleigh
Healthcare ("Huntleigh") for $1.9 million in cash and the assumption of
Huntleigh's portion of the outstanding debt of SpectraCair. The acquisition was
accounted for under the purchase method of accounting and, accordingly, the
purchase price was allocated to assets acquired and liabilities assumed based on
their estimated fair market values at the date of the acquisition. The excess of
the purchase price over the estimated fair values of the net assets acquired was
not material.
Note C - Dispositions
In December 1996, the Company sold to NutraMax Products, Inc. ("NutraMax")
all of the shares of NutraMax common stock owned by the Company and recognized
an after tax gain of $4.8 million. The Company received from NutraMax $19.9
million in cash and an interest bearing promissory note in the amount of $16.4
million. The shares sold were placed in escrow in support of MEDIQ's 7.50%
Exchangeable Subordinated Debentures ("Exchangeable Debentures"). The note is
payable when the shares are delivered to NutraMax upon release from escrow.
NutraMax shares are released from escrow upon the purchase or redemption of the
Exchangeable Debentures by MEDIQ. In the event the
30
<PAGE>
Note C - Dispositions (Continued)
Exchangeable Debentures are exchanged into shares of NutraMax, the note is
reduced on a pro rata basis. The note does not bear a market rate of interest
for its full term and, accordingly, the note was discounted to $13.6 million.
Repurchases of Exchangeable Debentures by MEDIQ in fiscal 1997 and 1998 resulted
in the release from escrow and delivery of NutraMax common shares to NutraMax.
Accordingly, the Company received $10.5 million and $5.6 million in cash on the
note and recognized gains of $1.8 million and $1.1 million in 1997 and 1998,
respectively. These gains are reflected in Other-net within Other Charges and
Credits in the Consolidated Statement of Operations. At September 30, 1998, the
balance of the note receivable was $.2 million.
In May 1997, the Company sold the stock of Health Examinetics, Inc. for
approximately $1.7 million, consisting of $.1 million in cash and an interest
bearing promissory note in the amount of $1.6 million. The note bears interest
at 7% per annum and matures in April 2003. Interest only is due on the note for
the first eighteen months. Quarterly principal and interest payments commence on
January 1, 1999. The sale resulted in an after tax charge of $1 million, which
was in addition to the estimated net loss on the disposal recorded in fiscal
1996. The charge is netted in Gain on Disposal within Income from Discontinued
Operations in the Consolidated Statement of Operations.
In November 1996, the Company sold substantially all of the assets of MEDIQ
Mobile X-Ray Services, Inc. to a subsidiary of Integrated Health Services, Inc.
("IHS"). The consideration received was $5.3 million in cash and shares of IHS
common stock valued at $5.2 million, with potential for additional cash
consideration based upon the occurrence of certain future events. In July 1997,
the Company sold the IHS shares at an amount approximating carrying value. Also,
in fiscal 1997 the Company received approximately $1.1 million in additional
cash consideration.
In October 1996, PCI Services, Inc. ("PCI") was acquired by Cardinal
Health, Inc. ("Cardinal"). In that transaction, the Company received 1,449,000
shares (adjusted for stock split) of Cardinal stock in exchange for its 46%
ownership interest in PCI. The Company recognized an after tax gain of $32.6
million on this transaction as a component of Income from Discontinued
Operations in the Consolidated Statement of Operations. The Company sold its
Cardinal shares in January 1997 for $88.4 million and used the proceeds to
reduce debt.
Revenues from discontinued operations (excluding equity investees) were
$2.5 million in 1997 and $28.5 million in 1996. No revenues were recorded in
1998.
Note D - Nonrecurring Charges
On May 29, 1998, MEDIQ merged with another company, with MEDIQ being the
surviving corporation. Certain costs incurred to effect the merger were recorded
by the Company. Such costs aggregated $32.4 million and were charged to expense
as Merger and Acquisition Charges in the Consolidated Statement of Operations.
The costs consisted of $19.7 million related to the exercise of stock options
outstanding at the date of the Merger, $6.7 million in incentive bonuses paid in
connection with the merger and a one time $6.0 million management fee.
In February 1997, MEDIQ entered into an agreement with Universal Hospital
Services, Inc. ("UHS") to acquire the outstanding shares of UHS. Including the
assumption of debt, the total purchase price was to be $138.0 million. In July
1997, MEDIQ and UHS were informed by the Federal Trade Commission ("FTC") that
it was to take legal action to block the proposed transaction. Facing the
likelihood of a protracted proceeding before the FTC, the uncertainty of the
outcome and the costs associated with continuing to defend against the FTC, in
September 1997 the Company and UHS mutually terminated the proposed acquisition.
The Company wrote off $4.0 million ($2.4 million net of taxes) of deferred
acquisition and financing costs related to the proposed acquisition which is
included in Other-net within Other Charges and Credits in the Consolidated
Statement of Operations.
31
<PAGE>
Note E - Inventory
September 30,
------------------------
1998 1997
-------- --------
(in thousands)
Raw materials $ 2,791 $ --
Finished goods 19,029 13,047
-------- --------
$ 21,820 $ 13,047
======== ========
Note F - Property, Plant and Equipment
September 30,
------------------------
1998 1997
-------- --------
(in thousands)
Rental equipment $236,828 $229,095
Equipment and fixtures 14,561 12,787
Building and improvements 8,128 7,589
Land 149 149
-------- --------
259,666 249,620
Less accumulated depreciation and amortization 155,749 136,031
-------- --------
$103,917 $113,589
======== ========
Depreciation and amortization expense related to property, plant and
equipment was $36.9 million, $26.5 million and $26.3 million in 1998, 1997 and
1996, respectively. Fiscal 1998 included a $6.0 million charge to write down
certain under utilized rental equipment to net realizable value.
Note G - Accrued Expenses
September 30,
------------------------
1998 1997
-------- --------
(in thousands)
Interest $ 8,078 1,978
Payroll and related taxes 2,490 3,588
Commissions 1,876 1,693
Severance 1,038 2,431
Government investigations -- 4,200
Insurance 1,433 1,960
Other 2,682 4,755
-------- --------
$ 17,597 $ 20,605
======== ========
Note H - Long Term Debt
September 30,
------------------------
1998 1997
-------- --------
(in thousands)
Senior Debt:
Term loans $200,000 $128,933
Revolving credit -- 3,500
Capital lease obligations payable
in varying installments through
2001 at fixed rates from 8.1% to 13.6% 1,965 3,346
-------- --------
201,965 135,779
Less current portion 2,037 16,115
-------- --------
$199,928 $119,664
======== ========
September 30,
------------------------
1998 1997
-------- --------
(in thousands)
Subordinated Debt:
11% senior subordinated notes due 2008 $190,000 $ --
======== =========
32
<PAGE>
Note H - Long Term Debt (Continued)
To finance a portion of the cash consideration pursuant to MEDIQ's merger
and the CH Medical Acquisition and pay off certain outstanding debt, the Company
undertook a refinancing consisting of: (i) a $325.0 million Senior Secured
Credit Facility ("New Credit Facility") and (ii) $190.0 million principal amount
of 11% Senior Subordinated Notes due 2008 ("Notes"). The New Credit Facility
replaced a $260.0 million facility formerly in place.
The New Credit Facility is secured by a (i) first priority lien and
security interests in substantially all tangible and intangible assets of the
Company and its subsidiaries presently owned and subsequently acquired or
organized, (ii) first priority pledge of all capital stock of the Company's
subsidiaries presently owned and subsequently acquired or organized and (iii)
mortgage on the Company's corporate headquarters building and certain personal
property therein. Also, each subsidiary of the Company presently owned and
subsequently acquired or organized is a party to and an unconditional guarantor
under the New Credit Facility.
The New Credit Facility consists of (i) an eight year senior secured $200.0
million term loan facility (the "Term Loan Facility"), (ii) a six year revolving
credit facility not to exceed $50.0 million (the "Revolving Credit Facility")
and (iii) a six year senior secured acquisition facility not to exceed $75.0
million (the "Acquisition Facility"). The Acquisition Facility is available
through November 1999. Amounts borrowed under the Term and Acquisition
Facilities and repaid may not be reborrowed. Amounts borrowed under the
Revolving Credit Facility and repaid may be reborrowed.
Borrowings under the New Credit Facility bear interest at a floating rate
based upon, at the Company's option, (i) the higher of the prime rate of Banque
Nationale de Paris or the Federal funds effective rate plus 0.5% plus, in the
case of the Term Loans, a margin equal to 1.5%, and in the case of the Revolving
Loans and the Acquisition Loans, a margin equal to 1.0% or (ii) the London
Interbank Offered Rate ("LIBOR") plus, in the case of the Term Loans, a margin
equal to 2.75%, and in the case of the Revolving Loans and Acquisition Loans, a
margin equal to 2.25%. At September 30, 1998, borrowings under the Term Loan
Facility principally bear interest at 8.50%. On December 10, 1998, the interest
rate was reduced to 7.88% as a result of a reduction in LIBOR. Such rate will be
in effect until June 10, 1999, when it will be adjusted to the then current
LIBOR or prime rate. In addition, commitment fees are required at 0.5% per year
of the undrawn portion of the commitments in respect of the facilities. The New
Credit Facility contains provisions under which commitment fees and margins on
interest rates under the facilities will be adjusted in increments based on
meeting certain performance goals.
Principal amounts outstanding under the Revolving Credit Facility are due
and payable in full at maturity. The Term Loans amortize on a quarterly basis
commencing September 30, 1999. Principal amounts outstanding under the
Acquisition Facility on November 30, 1999 will amortize on a quarterly basis.
The Term, Revolving and Acquisition Loans are subject to mandatory prepayments
and reductions in the event of certain extraordinary transactions or issuances
of debt and equity by the Company or any of its subsidiary guarantors. Such
loans are required to be prepaid with 75% of the excess cash flow (as defined in
the New Credit Agreement) of the Company or, if the Company's ratio of funded
debt to pro forma earnings before interest, taxes, depreciation and amortization
for the preceding 12 month period is less than 5.0 to 1.0, 50% of such excess
cash flow.
At September 30, 1998, pursuant to the terms of the New Credit Facility
and/or the indentures for the Notes and MEDIQ's 13% Senior Discount Debentures
due 2009 ("Discount Debentures"), availability under the Revolving Credit
Facility and the Acquisition Facility was limited to $29.8 million and $50.0
million, respectively.
The Notes, issued on May 29, 1998, are unsecured obligations of the Company
maturing on June 1, 2008 and bear interest at 11% per year payable on June 1 and
December 1. The Notes are
33
<PAGE>
Note H - Long Term Debt (Continued)
supported by unconditional guaranties of each of the Company's subsidiaries
presently owned and subsequently acquired or organized. Commencing June 1, 2003,
the Notes may be redeemed at the Company's option at prices specified in the
indenture. Prior to June 1, 2001, the Company may at its option redeem a limited
amount of the Notes at a redemption price of 111%, plus accrued and unpaid
interest, with proceeds from a public offering of equity securities. In the
event of a change in control of the Company, the Company may be required to
repurchase Notes at a redemption price of 101%, plus accrued and unpaid
interest. The Notes are subordinate to senior indebtedness of the Company and
its subsidiaries, including obligations under the New Credit Facility.
Term loans and revolving credit advances outstanding at the date of MEDIQ's
merger were repaid with proceeds from the refinancing described above. As a
result of such refinancing, the Company recognized an extraordinary loss of $4.3
million (net of tax of $1.9 million) related to the write off of deferred
financing costs.
During 1998, weighted average interest rates incurred under the New Credit
Facility were 8.64% for the Term Facility and 9.50% for the Revolving Credit
Facility. No borrowings were made under the Acquisition Facility. Weighted
average interest rates incurred in 1998 under the previous credit arrangements
were 7.79% and 8.50% on respective term loans and 9.00% on revolving credit
advances. Aggregate commitment fees incurred under all facilities in 1998 were
$.4 million.
The New Credit Facility and the indenture to the Notes include significant
operating and financial restrictions, such as limits on the Company's ability to
incur indebtedness, create liens, sell assets, engage in mergers and
consolidations, make investments and capital expenditures and pay dividends.
Maturities of long term debt in the next five years are: $2.0 million in
1999; $2.3 million in 2000; $2.2 million in 2001; and $2.0 million in each of
2002 and 2003.
Note I - Financial Instruments
The Company utilizes interest rate swap contracts to manage interest rate
exposure. The principal object of such contracts is to minimize the risks and/or
costs associated with financial activities. The Company does not use swap
contracts for trading or other speculative purposes. The counterparties to these
arrangements are a diverse group of major financial institutions. The Company is
exposed to credit loss in the event of nonperformance by these counterparties.
The Company does not anticipate nonperformance by the counterparties.
The Company enters into interest rate swap and interest rate collar
contracts to reduce the impact of changes in interest rates on its floating rate
debt. The swap contracts exchange floating rate for fixed interest payments
periodically over the life of the contracts without the exchange of the
underlying notional amounts. The notional amounts of swap contracts are used to
measure interest to be paid or received and do not represent the amount of
exposure to credit loss. For swap contracts that effectively hedge interest rate
exposures, the net cash amounts paid or received on the contract are accrued and
recognized as an adjustment to interest expense.
In July 1998, the Company entered into a new interest rate swap agreement
in the notional amount of $100.0 million. The swap effectively fixes the
Company's borrowing rate on $100.0 million of the Term Loan Facility at 5.35%
until July 2003 as long as the three month LIBOR rate does not exceed 6.25%. If
the three month LIBOR rate exceeds 6.25%, the swap temporarily terminates until
the three month LIBOR rate drops back below 6.25%. The Company must pay the
actual LIBOR rate when LIBOR exceeds 6.25%. The anniversary dates for
determining the three month LIBOR rate are the closest business day to January
3, April 3, July 3 and October 3 in each year. On the latest
34
<PAGE>
Note I - Financial Instruments (Continued)
anniversary date, October 5, 1998, the three month LIBOR rate was 5.31%. The
estimated cost to terminate this swap at September 30, 1998 was $2.9 million.
In order to mitigate its interest rate exposure for LIBOR rates above
6.25%, the Company obtained zero cost collars with notional amounts aggregating
$100.0 million with ceiling rates of 7.00% and a weighted average floor rate of
5.03%. The collars are in effect until July 2003. The estimated cost to
terminate this collar at September 30, 1998 was $2.2 million.
In July 1998, the Company terminated previously existing interest rate
hedging contracts at a cost of approximately $.6 million, which was reflected as
interest expense.
Note J - Commitments and Contingencies
Leases - The Company leases certain equipment, automobiles and office
space. The future minimum lease payments under noncancelable operating leases
and capital leases are as follows:
Capital Operating
Year Ending September 30, Leases Leases
- ------------------------- ------- ---------
(in thousands)
1999 $1,845 $ 5,294
2000 345 3,968
2001 312 2,601
2002 -- 1,572
2003 and thereafter -- 778
------ -------
Total minimum lease payments 2,502 $14,213
=======
Less amount representing interest 537
------
Present value of minimum lease payments $1,965
======
Total rent expense under operating leases was $5.7 million, $5.6 million
and $5.1 million in 1998, 1997 and 1996, respectively. Certain leases, which are
for terms of up to five years, contain options to renew for additional periods.
At September 30, 1998, rental equipment and machinery and equipment
included assets under capitalized lease obligations of $7.0 million, less
accumulated amortization of $3.0 million.
Purchase commitments - The Company entered into two long term agreements to
purchase approximately $14.5 million of products in the next fiscal year. The
Company purchased $13.8 million, $1.2 million and $5.9 million under purchase
commitment agreements in 1998, 1997 and 1996, respectively.
Employment agreements - The Company maintains employment agreements with
its two Executive Officers and certain officers of its subsidiaries. Such
agreements, which automatically renew each year unless terminated as described
in the agreement, provide for minimum salary levels, adjusted annually in
accordance with Company policy, as well as for incentive bonuses that are
payable if specified management goals are attained. A majority of the employment
agreements contain provisions for severance payments unless the individual is
terminated for cause or resigns. As of September 30, 1998, the aggregate minimum
commitment under these employment agreements, excluding bonuses, was
approximately $6.3 million.
Management agreement - As a result of MEDIQ's merger, the Company entered
into a management agreement with certain investors of MEDIQ for them to provide
business and organizational strategy, financial and investment management and
merchant and investment banking services. The annual management fee is the
greater of $1.0 million or 1.5% of EBITDA (as defined in the agreement). The
Company paid $.3 million under the management agreement in 1998.
35
<PAGE>
Note J - Commitments and Contingencies (Continued)
Investigations and legal proceedings - In July 1998, MEDIQ Mobile X-Ray
Services, Inc., whose assets were sold in November 1996 and as a result of the
reorganization is now a subsidiary of the Company, was notified that it is the
subject of an investigation by the Department of Justice and the Office of the
Inspector General of the Department of Health and Human Services. The Company
has not yet been informed of the nature or scope of the investigation.
MEDIQ Imaging Services, Inc., the assets of which were sold by the Company
in August 1995, was the subject of a civil investigation by the United States
Attorney's Office for the District of New Jersey and the Department of Health
and Human Services. The investigation focused on advice given by certain MEDIQ
Imaging employees to physician customers of MEDIQ Imaging relating to the
reassignment of certain Medicare claims. The Company and MEDIQ Imaging
voluntarily reported the issue to the United States Government in January 1995
after learning that the advice given by the employees may have been inconsistent
with the regulations relating to reassignment. The Company and MEDIQ Imaging
cooperated in the investigation and denied any wrongdoing. In December 1997, the
Company reached a settlement with the United States Government for $4.2 million,
which was fully reserved as of September 30, 1997. The settlement represents the
repayment of alleged excess Medicare reimbursements.
On June 12, 1996, the Company, ATS Medical Services, Inc. ("ATS") and MEDIQ
Mobile X-Ray Services, Inc. were sued in United States District Court for the
Middle District of Pennsylvania by former employees of ATS. The lawsuit alleges
that the former employees were wrongfully terminated and asserts claims pursuant
to the whistleblower provision of the False Claims Act and the Pennsylvania Wage
Payment and Collection Law. In December 1997, the Company, without admission of
guilt and desiring to avoid the expense of further litigation, reached a
settlement, the amount of which was immaterial to the Company's financial
statements.
The Company has pending other legal claims incurred in the normal course of
business which the Company believes will not have material effect on the
consolidated financial statements.
Vendor dispute - Currently, the Company is in a dispute with a significant
vendor. The vendor wishes to terminate a contract with the Company and the
Company intends to vigorously defend its rights under the contract. As such, the
Company has filed a complaint in the Superior Court of New Jersey to protect its
rights under the contract. Pursuant to the contract, the Company purchases parts
and disposables and re-sells such products. The Company recognized $10.3 million
in revenues in fiscal 1998 pursuant to this activity. The vendor also contended
the Company was in arrears on its payments to the vendor. The Company has
reviewed its internal books and records and disagrees with the vendor. However,
the Company paid the vendor the alleged arrearage in order that the vendor could
not contend the Company was in breach under the contract. The two parties have
agreed to attempt to work out the dispute prior to litigation. The Company
believes any such resolution will not have a material adverse effect on the
Company results of operations.
Reimbursements - The Company's products are rented and sold principally to
health care providers who receive reimbursement for the products and services
they provide from various public and private third party payors, including
Medicare, Medicaid and private insurance programs. With the acquisition of the
CH Medical Business, the Company also acts as a supplier of durable medical
equipment under Federal law and, as such, furnishes products directly to
customers and bills third party payors. As a result, the demand for the
Company's products in any specific care setting is dependent in part on the
reimbursement policies of the various payors in that setting. In order to be
reimbursed, the products generally must be found to be reasonable and necessary
for the treatment of medical conditions and must otherwise fall within the
payor's list of covered services. In light of increased controls on Medicare
spending, there is no assurance of the outcome of future coverage or payment
decisions for any of the Company's products by governmental or private payors.
If providers and other
36
<PAGE>
Note K - Fair Value of Financial Instruments
users of the Company's products and services are unable to obtain sufficient
reimbursement, a material adverse impact may result.
Estimated fair value of financial instruments is provided in accordance
with the requirements of SFAS No. 107, "Disclosures About Fair Value of
Financial Instruments". The estimated fair value amounts have been determined by
the Company using available market information and appropriate methodologies.
However, considerable judgment is necessarily required in interpreting market
data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that the Company
could realize in a current market exchange.
The use of different market assumptions and/or estimation methodologies may
have a material effect on the estimated fair value amounts.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Accounts receivable and accounts payable - The carrying amounts of these
items are an estimate of their fair values at September 30, 1998.
Long term debt (excluding capital lease obligations) - Interest rates that
are currently available to the Company for issuance of debt with similar
terms and remaining maturities are used to estimate fair value. The
carrying amount and estimated fair value of long term debt are $392.0
million and $379.6 million, respectively.
Interest rate instruments - The fair values are the estimated amounts that
the Company would receive or pay to terminate the agreements at September
30, 1998, taking into account current interest rates and the current
creditworthiness of the counterparties. At September 30, 1998, the notional
amounts were $200 million, there was no carrying value and the fair value
was $5.1 million, which represents the cost to settle these instruments.
The fair value estimates presented herein are based on information
available to management as of September 30, 1998, and have not been
comprehensively revalued for purposes of these financial statements since that
date. Current estimates of fair value may differ significantly from the amounts
presented herein.
37
<PAGE>
Note L - Income Taxes
Income tax (benefit) expense relating to continuing operations consisted
of:
Year Ended September 30,
---------------------------------------
1998 1997 1996
-------- ------- ------
(in thousands)
Current:
Federal $ -- $ 8,177 $2,903
State 176 51 272
-------- ------- ------
176 8,228 3,175
-------- ------- ------
Deferred:
Federal (12,433) (629) 866
State -- (161) 160
-------- ------- ------
(12,433) (790) 1,026
-------- ------- ------
Total income tax (benefit) expense $(12,257) $ 7,438 $4,201
======== ======= ======
The differences between the Company's income tax (benefit) expense and the
income tax (benefit) expense computed using the Federal income tax rate were:
Year Ended September 30,
---------------------------------------
1998 1997 1996
-------- ------- ------
(in thousands)
Statutory federal tax (benefit)
expense $(13,788) $ 6,687 $ 3,425
State income taxes, net of federal
income taxes 116 (72) 285
Goodwill amortization 916 349 338
Other items - net 499 474 153
-------- ------- -------
Income tax (benefit) expense $(12,257) $ 7,438 $ 4,201
======== ======= =======
Significant components of the Company's deferred tax assets and liabilities
were:
September 30,
-----------------------
1998 1997
------- -------
Liabilities: (in thousands)
Depreciation $27,139 $27,989
Intangible assets 2,543 2,050
Accrued expenses 1,944 1,917
Prepaid expenses 48 117
Other 117 768
------- -------
Gross deferred tax liabilities 31,791 32,841
Assets:
Net operating and capital loss
carry forwards 5,228 3,003
Tax credit carry forwards 208 208
Accrued expenses and reserves 9,110 4,906
Intangible assets 2,853 364
Other 7,855 988
------- -------
Gross deferred tax assets 25,254 9,469
Valuation allowance (5,228) (3,003)
------- -------
20,026 6,466
------- -------
Net deferred tax liability $11,765 $26,375
======= =======
38
<PAGE>
Note L - Income Taxes (Continued)
At September 30, 1998, the Company had a receivable for income taxes from
MEDIQ of $9.3 million, and tax credits of approximately $.2 million that expire
through 2003. State net operating losses of $87.1 million expire in varying
amounts through 2018, and are fully reserved in the valuation allowance.
Note M - Related Party Transactions
Management fees to MEDIQ - MEDIQ is a nonoperating holding company which
derives all of its revenue from management fees charged to the Company. The
management fees were based upon the level of services provided by MEDIQ. Actual
costs for these services cannot be reasonably estimated for the Company on a
stand alone basis. The Company incurred management fees of $.2 million, $3.3 and
$.9 million in fiscal 1998, 1997 and 1996, respectively.
Pension plan - The Company participates in a noncontributory pension plan
maintained by MEDIQ which provides retirement benefits to substantially all of
the Company's employees. Employees generally are eligible to participate in the
plan after one year of service and become fully vested after five years of
service. The plan provides defined benefits based on years of credited service
and compensation. The Company makes contributions that are sufficient to fully
fund its actuarially determined costs, generally equal to the minimum amounts
required by ERISA. The Company made contributions to the pension plan of $.4
million in each of 1998, 1997 and 1996.
Advances to MEDIQ - The Company advances funds to MEDIQ for debt service
including interest payments, pension contributions, Federal income tax payments
and miscellaneous corporate expenditures and, in 1998, to effect MEDIQ's merger.
Amounts advanced to MEDIQ totaled $135.6 million and $88.3 million at September
30, 1998 and 1997, respectively. These advances are classified as a component of
Stockholder's Equity (Deficiency) due to their related party nature and the lack
of financial resources of MEDIQ to repay such advances. During 1998 in
connection with MEDIQ's merger, the Company capitalized $111.8 million in
advances.
MEDIQ does not have any current operating costs and expenses except cash
interest of approximately $40,000 on the 7.50% Exchangeable Subordinated
Debentures due 2003 ("Exchangeable Debentures"). As of September 30, 1998, MEDIQ
had $3.0 million of current liabilities that will need to be paid by the Company
in fiscal 1999. Subsequent to fiscal 1999, the Company and MEDIQ do not
anticipate the need for the Company to fund any significant expenditures of
MEDIQ until fiscal 2003 when MEDIQ's Exchangeable Debentures become due and
MEDIQ's Discount Debentures begin to pay cash interest. Currently, the Discount
Debentures are deeply discounted and do not pay cash interest.
MEDIQ's assets consist primarily of its investment in the Company. As of
September 30, 1998, MEDIQ's remaining liabilities consist primarily of the
amounts due to the Company, $.5 million of Exchangeable Debentures, $77.6
million of Discount Debentures, $113.0 million of mandatorily redeemable
preferred stocks (including accrued and unpaid dividends) and approximately $1.3
million of accrued expenses and other liabilities. Accordingly, the Company will
be required to fund such amounts to MEDIQ in order for MEDIQ to meet its
obligations.
Note N - Business Segment Data
The Company operates primarily in one business segment. The Company rents
movable medical equipment and support surfaces on a short term basis nationwide
and distributes a variety of disposable products, accessories and repair parts
used with the types of equipment it rents. This segment represents more than 90%
of the consolidated revenues and assets exclusive of corporate assets.
Note O - New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income," which will result in disclosure of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general purpose financial statements. The Company is not
required to adopt this standard until fiscal 1999. At this time, the Company has
not determined the impact the adoption of this standard will have on the
Company's financial statements.
39
<PAGE>
Note O - New Accounting Pronouncements (Continued)
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes standards for the way
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. The Company is not
required to adopt this standard until fiscal 1999. At this time, the Company has
preliminarily determined that it only operates in one business segment.
In February 1998, FASB issued SFAS No. 132 "Employers' Disclosures about
Pensions and Other Postretirement Benefits". This statement, which improves
disclosure about pensions and other postretirement benefits, is effective for
fiscal years beginning after December 15, 1997. The Company does not believe the
adoption of this standard will have a material impact on the Company's financial
statements.
In July 1998, FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities". This statement, which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments imbedded in other contracts, and for hedging activities,
is effective for fiscal years beginning after June 15, 1999. At this time, the
Company has not determined the impact the adoption of this standard will have on
the Company's financial statements.
Note P - Subsidiary Guarantor Summarized Financial Information
The wholly owned consolidated subsidiaries of the Company (the "Subsidiary
Guarantors") each jointly and severally guarantee the Company's Notes on a full
and unconditional basis. The Company does not presently have any non guarantor
subsidiaries. The Company believes that the contribution by the Subsidiary
Guarantors to the financial position and results from continuing operations of
the consolidated group is not material. Accordingly, the separate financial
statements of the Subsidiary Guarantors are not included.
Summarized combined financial information for the Subsidiary Guarantors
was:
September 30,
-------------------------
1998 1997
------- -------
(in thousands)
Balance Sheet Data:
Current assets $ 2,105 $ 2,579
Noncurrent assets 113 6,903
Current liabilities 1,353 6,593
Year Ended September 30,
---------------------------------
1998 1997 1996
------- ------- -------
(in thousands)
Income Statement Data:
Revenues $ 2,774 $ 3,294 $ 3,820
Operating income (loss) 66 (87) (138)
(Loss) income from continuing
operations (182) 6,648 992
Net (loss) income (182) 43,080 (110)
In 1997, the Subsidiary Guarantors recognized a $6.1 million net gain on
the sale of certain assets and a $37.1 million net gain on the disposal of
discontinued operations.
40
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
The information called for by Items 10, 11, 12 and 13 has been omitted
pursuant to General Instruction I(2)(c) of Form 10-K.
41
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements and Supplementary Data Page
----
Report of Independent Auditors 23
Consolidated Statement of Operations 24
Consolidated Balance Sheets 25
Consolidated Statements of Stockholder's Equity (Deficiency) 26
Consolidated Statements of Cash Flows 27
Notes to Consolidated Financial Statements 28-40
The response to this portion of Item 14 is submitted as a
separate section of this report.
(a)(2) Financial Statement Schedules
Included in Part IV of this report:
Schedule II - Valuation and Qualifying Accounts and Reserves
Other Schedules are omitted because they are not applicable.
(a)(3) Exhibits
<TABLE>
<CAPTION>
Exhibit Description Incorporation Reference
- ------- ----------- -----------------------
<S> <C> <C>
2.1 Agreement and Plan of Merger Exhibit 2.1 to Schedule 13D
among Cardinal Health, Inc., filed by Cardinal Health,
Panther Merger Corp., PCI Services,Inc. July 29, 1996.
Inc. and MEDIQ dated July 23, 1996.
2.2 Amended and restated Stock Purchase Exhibit 2(a) to Annual Report on
Agreement among MEDIQ, MEDIQ Investment Form 10-K filed by NutraMax Products, Inc.
Services, Inc. and NutraMax Products, for the fiscal year ended September 28, 1996.
Inc. dated November 20, 1996
2.3 Affiliate Letter to Cardinal Health, Exhibit 4 to Current Report on Form 8-K
Inc. from MEDIQ dated August 16, filed by MEDIQ October 21, 1996.
1996.
2.4 Asset Purchase Agreement by and Exhibit 2.5 to Annual Report on
among MEDIQ Mobile X-Ray Services, Form 10-K filed by MEDIQ on
Inc., MEDIQ and Symphony Diagnostic December 30, 1996.
Services No. 1, Inc. dated
November 6, 1996.
2.5 Agreement and Plan of Merger between Annex A of the Proxy Statement/Prospectus
MQ Acquisition Corp and MEDIQ dated included in Registration Statement
January 14, 1998, as amended April 27, No. 333-46233 filed by MEDIQ on February 13, 1998.
1998
2.6 Asset Purchase Agreement among CH Exhibit 2 to Current Report on Form 8-K
Medical, Inc., MEDIQ/PRN Life Support filed by MEDIQ on April 28, 1998.
Services, Inc. and the other parties
Named therein dated April 24, 1998.
3.1 Certificate of Incorporation. Filed herewith.
</TABLE>
42
<PAGE>
(a)(3) Exhibits (continued)
<TABLE>
<CAPTION>
Exhibit Description Incorporation Reference
- ------- ----------- -----------------------
<S> <C> <C>
3.2 By-Laws. Filed herewith.
4.1 Credit Agreement among MEDIQ/PRN Exhibit 4.3 to Current Report on
Life Support Services, Inc., the Form 8-K filed by MEDIQ on January 15, 1998.
Lender Parties party thereto, Banque
Nationale de Paris, NationsBank, N.A.
and Credit Suisse First Boston dated
May 29, 1998.
4.2 Indenture dated as of May 15, 1998 Exhibit 4.2 to Current Report on Form 8-K
among MEDIQ/PRN Life Support Services, filed by MEDIQ on June 15, 1998.
Inc., the Subsidiary Guarantors and
United States Trust Company of New York
for 11% Senior Subordinated Notes due
2008, Form of Old Note and Form of
New Note.
4.3 Registration Rights Agreement dated Exhibit 4.5 to Current Report on Form 8-K
May 21, 1998 among MEDIQ, MEDIQ/PRN filed by MEDIQ on June 15, 1998.
Life Support Services, Inc., Subsidiary
Guarantors, Credit Suisse First Boston,
NationsBanc Montgomery Securities LLC and
Banque Nationale de Paris.
4.4 Registration Rights Agreement dated Exhibit 4.6 to Current Report on Form 8-K
as of May 29, 1998 among MEDIQ, MEDIQ/PRN filed by MEDIQ on June 15, 1998.
Life Support Services, Inc., the investors
named therein and MQ Acquisition
Corporation.
4.5 Asset Purchase Agreement dated June 26, Exhibit 4 to Quarterly Report on Form 10-Q
1998 among MEDIQ/PRN Life Support filed by MEDIQ on August 14, 1998.
Services, Inc., National Patient Care
Systems, Inc. and other parties
named therein.
10.1 MEDIQ Executive Security Plan Exhibit 10.6 to Annual Report on
Form 10-K filed by MEDIQ on
January 12, 1996.
10.2 1998 MEDIQ Incorporated Stock Exhibit 10.5 to Annual Report on
Option Plan adopted October 1, 1998. Form 10-K filed by MEDIQ on
January 4, 1999.
10.3 Employment contract with Thomas E. Exhibit 10.9 to Annual Report on
Carroll dated as of April 27, 1995. Form 10-K filed by MEDIQ on
January 12, 1996.
10.3(a) Amendment No. 1 to Employment Exhibit 10.9(a) to Annual Report on
contract with Thomas E. Carroll Form 10-K filed by MEDIQ on December 23, 1997.
dated as of November 14, 1997.
</TABLE>
43
<PAGE>
(a)(3) Exhibits (continued)
<TABLE>
<CAPTION>
Exhibit Description Incorporation Reference
- ------- ----------- -----------------------
<S> <C> <C>
10.4 Employment contract with Jay M. Exhibit 10.10 to Annual Report on
Kaplan dated as of June 20, 1995. Form 10-K filed by MEDIQ on
January 12, 1996.
11 Statement re: computation of per share Not required.
earnings.
21 Subsidiaries of the Registrant. Not required.
27 Financial Data Schedule Filed herewith.
</TABLE>
(b) No reports on Form 8-K were filed during the quarter ended September 30,
1998.
44
<PAGE>
MEDIQ/PRN LIFE SUPPORT SERVICES, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
(in thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- -------------------------------------------------------------------------------------------------------------------------
Additions
<S> <C> <C> <C> <C> <C>
Description Balance at Charged to (1) Balance at
Beginning Costs and Charged to (2) End of
of Period Expenses Other Accounts Deductions Period
Year ended September 30, 1998:
Allowance for doubtful accounts $4,077 $7,912 $2,482 $3,039 $11,432
====== ====== ====== ====== =======
Year ended September 30, 1997:
Allowance for doubtful accounts $2,377 $3,240 $ 478 $2,018 $ 4,077
====== ====== ====== ====== =======
Year ended September 30, 1996:
Allowance for doubtful accounts $2,201 $1,237 $ -- $1,061 $ 2,377
====== ====== ====== ====== =======
</TABLE>
- ----------
(1) Primarily represents allowances for doubtful accounts related to
acquisitions.
(2) Represents accounts directly written off, net of recoveries.
45
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: January 4, 1999 MEDIQ Incorporated
/s/ Thomas E. Carroll
-------------------------------------
BY: Thomas E. Carroll
President and Chief Executive Officer
/s/ Jay M. Kaplan
-------------------------------------
BY: Jay M. Kaplan
Senior Vice President - Finance,
Treasurer and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated:
Signature Title Date
--------- ----- ----
/s/ Thomas E. Carroll Director, President and January 4, 1999
- ------------------------ Chief Executive Officer
Thomas E. Carroll
/s/ Jay M. Kaplan Director, Senior Vice President - January 4, 1999
- ------------------------ Finance, Treasurer and Chief
Jay M. Kaplan Financial Officer
/s/ Alan S. Einhorn Director and Vice President/ January 4, 1999
- ------------------------ General Counsel
Alan S. Einhorn
EXHIBIT 3.1
Certificate of Incorporation
<PAGE>
PAGE 1
State of Delaware
Office of the Secretary of State
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
INCORPORATION OF "MEDIQ/PLSS, INC.", FILED IN THIS OFFICE ON THE FIRST DAY OF
MAY, A.D. 1992, AT 10 O'CLOCK A.M.
[LOGO]
/s/ Edward J. Freel
-----------------------------------
Edward J. Freel, Secretary of State
AUTHENTICATION: 9077668
DATE: 05-13-98
2296368 8100
981182714
<PAGE>
CERTIFICATE OF INCORPORATION
OF
MEDIQ/PLSS, INC.
1. The name of the corporation is
MEDIQ/PLSS, INC.
2. The address of its registered office in the State of Delaware is
Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County
of New Castle. The name of its registered agent at such address is The
Corporation Trust Company.
3. The nature of the business or purposes to be conducted or promoted is:
To engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of Delaware.
4. The total number of shares of stock which the corporation shall have
authority to issue is Two Thousand (2,000) of which stock One Thousand (1,000)
shares of the par value of Ten Dollars ($10.00) each, amounting in the aggregate
to Ten Thousand Dollars ($10,000) shall be Common stock and of which One
Thousand (1,000) shares of the par value of Ten Dollars ($10.00) each, amounting
in the aggregate to Ten Thousand Dollars ($10,000) shall be Class A Common
stock.
5. The name and mailing address of each incorporator in as follows:
NAME MAILING ADDRESS
---- ---------------
M. A. Brzoska Corporation Trust Center
1209 Orange Street
Wilmington, Delaware 19801
<PAGE>
D. A. Hampton Corporation Trust Center
1209 Orange Street
Wilmington, Delaware 19801
L. J. Vitalo Corporation Trust Center
1209 Orange Street
Wilmington, Delaware 19801
6. The corporation is to have perpetual existence.
7. In furtherance and not in limitation of the powers conferred by statute,
the board of directors is expressly authorized:
To make, alter or repeal the by-laws of the corporation.
8. Elections of directors need not be by written ballot unless the by-laws
of the corporation shall so provide.
Meetings of stockholders may be held within or without the State of
Delaware, as the by-laws may provide. The books of the corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
board of directors or in the by-laws of the corporation.
9. The corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
10. A director of the corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty an a director except for liability (i) for any breach of the director's
duty of loyalty to the corporation
<PAGE>
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware General Corporation Law, or (iv) for any transaction
from which the director derived any improper personal benefit.
WE, THE UNDERSIGNED, being each of the incorporators hereinbefore named,
for the purpose of forming a corporation pursuant to the General Corporation Law
of the State of Delaware, do make this certificate, hereby declaring and
certifying that this is our act and deed and the facts stated are true, and
accordingly have hereunto set our hands this 1st day of May 1991.
/s/ M. A. Brzoska
-----------------------------------
M. A. Brzoska
D. A. Hampton
-----------------------------------
D. A. Hampton
L. J. Vitalo
-----------------------------------
L. J. Vitalo
<PAGE>
PAGE 1
State of Delaware
Office of the Secretary of State
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF MERGER,
WHICH MERGES:
"MEDIQ/PRN LIFE SUPPORT SERVICES, INC.", A CALIFORNIA CORPORATION,
WITH AND INTO "MEDIQ/PLSS, INC." UNDER THE NAME OF "MEDIQ/PRN LIFE SUPPORT
SERVICES, INC.", A CORPORATION ORGANIZED AND EXISTING UNDER THE LAWS OF THE
STATE OF DELAWARE, AS RECEIVED AND FILED IN THIS OFFICE THE FIRST DAY OF JUNE,
A.D. 1993, AT 12 O'CLOCK P.M.
[LOGO]
/s/ Edward J. Freel
------------------------------------
Edward J. Freel, Secretary of State
AUTHENTICATION: 9077669
DATE: 05-13-98
2296368 8100M
981182714
<PAGE>
CERTIFICATE OF MERGER
OF
MEDIQ/PRN Life Support Services, Inc.
INTO
MEDIQ/PLSS, Inc.
* * * * *
The undersigned corporation
DOES HEREBY CERTIFY:
FIRST: That the name and state of incorporation of each of the constituent
corporations of the merger is as follows:
NAME STATE OF INCORPORATION
MEDIQ/PRN Life Support California
Services, Inc.
MEDIQ/PLSS, Inc. Delaware
SECOND: That an Agreement of Merger between the parties to the merger has
been approved, adopted, certified, executed and acknowledged by each of the
constituent corporations in accordance with the requirements of Section 252 of
the General Corporation Law of Delaware.
THIRD: The name of the surviving corporation of the merger is MEDIQ/PLSS,
Inc., which shall herewith be changed to MEDIQ/PRN Life Support Services, Inc.,
a Delaware Corporation.
FOURTH: That the amendments or changes in the Certificate of Incorporation
of MEDIQ/PLSS, Inc., a Delaware corporation, which is the surviving corporation,
that are to be effected by the merger are as follows:
<PAGE>
FIRST: The name of the corporation is
MEDIQ/PRN Life Support Services, Inc.
FIFTH: That the executed Agreement of Merger is on file at the principal
place of business of the surviving corporation, the address of which is One
MEDIQ Plaza, Pennsauken, New Jersey 08110.
SIXTH: That a copy of the Agreement of Merger will be furnished on request
and without cost, to any stockholder of any constituent corporation.
SEVENTH: The authorized capital stock of each foreign corporation which is
a party to the merger is as follows:
Par Value
Corporation Class Number of Shares Per Share
- ----------- ----- ---------------- ---------
MEDIQ/PRN Life Common 20,000 $.01
Support Services, Inc.
MEDIQ/PRN Life Class A 20,000 $.01
Support Services, Inc. Common
EIGHTH: That this Certificate of Merger shall be effective on June 1, 1993.
Dated May 28th, 1993.
MEDIQ/PLSS, Inc.
By /s/ Michael F. Sandler
----------------------------------
Michael F. Sandler, Vice President
ATTEST:
By /s/ Alan S. Einhorn
------------------------------------
Alan S. Einhorn, Assistant Secretary
<PAGE>
PAGE 1
State of Delaware
Office of the Secretary of State
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT
OF "MEDIQ/PRN LIFE SUPPORT SERVICES, INC.", FILED IN THIS OFFICE ON THE
TWENTY-NINTH DAY OF JUNE, A.D. 1993, AT 10 O'CLOCK A.M.
[LOGO]
/s/ Edward J. Freel
-----------------------------------
Edward J. Freel, Secretary of State
AUTHENTICATION: 9077670
DATE: 05-13-98
2296368 8100
981182714
<PAGE>
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF MEDIQ/PRN LIFE SUPPORT SERVICES, INC.
The undersigned, being the Vice President - Treasurer of MEDIQ/PRN Life
Support Services, Inc. certifies that in accordance with Section 242 of the
Delaware General Corporation Law, the following amendment to the Certificate of
Incorporation was duly considered and approved by the holders of a majority of
the voting power of the outstanding shares qualified to vote thereon by
unanimous written consent of the sole shareholder dated June 2, 1993:
RESOLVED, that the first sentence of Article IV of the Certificate of
Incorporation of this Corporation shall read in its entirety as follows:
"The total number of shares of all classes of stock which the Company shall
have the authority to issue is 20,000 shares of Common Stock of a par value
of $.01 per share and 2,000 shares of Class A Common Stock of a par value
of $.01 per share.
IN WITNESS WHEREOF, MEDIQ/PRN Life Support Services, Inc. has caused its
corporate seal to be hereunto affixed and this Certificate to be signed by its
Vice President - Treasurer, Michael F. Sandler, and attested by its Assistant
Secretary, Alan S. Einhorn, this 21st day of June, 1993.
[Corporate Seal] MEDIQ/PRN LIFE SUPPORT
SERVICES, INC.
By: /s/ Michael F. Sandler
-----------------------------------
Michael F. Sandler
Vice President - Treasurer
ATTEST: /s/ Alan S. Einhorn
-------------------------------
Alan S. Einhorn
Assistant Secretary
<PAGE>
PAGE 1
State of Delaware
Office of the Secretary of State
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF OWNERSHIP,
WHICH MERGES:
"CRITICARE HOSPITAL SERVICES, INC.", A WASHINGTON CORPORATION,
WITH AND INTO "MEDIQ/PRN LIFE SUPPORT SERVICES, INC." UNDER THE NAME OF
"MEDIQ/PRN LIFE SUPPORT SERVICES, INC.", A CORPORATION ORGANIZED AND EXISTING
UNDER THE LAWS OF THE STATE OF DELAWARE, AS RECEIVED AND FILED IN THIS OFFICE
THE FOURTH DAY OF FEBRUARY, A.D. 1994, AT 10 O'CLOCK A.M.
[LOGO]
/s/ Edward J. Freel
------------------------------------
Edward J. Freel, Secretary of State
AUTHENTICATION: 9077671
DATE: 05-13-98
2296368 8100M
981182714
<PAGE>
CERTIFICATE OF OWNERSHIP AND MERGER
MERGING
Criticare Hospital Services, Inc.
INTO
MEDIQ/PRN Life Support Services, Inc.
MEDIQ/PRN Life Support Services, Inc., a corporation organized and existing
under the laws of Delaware,
DOES HEREBY CERTIFY:
FIRST: That this corporation was incorporated on the lst day of May, 1992,
pursuant to the General Corporation Law of the State of Delaware.
SECOND: That this corporation owns all of the outstanding shares of each
class of the stock of Criticare Hospital Services, Inc., a corporation
incorporated on the 3rd day of February, 1981, pursuant to the Business
Corporate Act of the State of Washington.
THIRD: That this corporation, by the following resolutions of its Board of
Directors, duly adopted by unanimous written consent of its members, filed with
the Board on the 18th day of January, 1994, determined to and did merge into
itself said Criticare Hospital Services, Inc.:
RESOLVED, that MEDIQ/PRN Life Support Services, Inc. merge, and it hereby
does merge into itself said Criticare Hospital Services, Inc., and assumes all
of its obligations; and
FURTHER RESOLVED, that the merger shall be effective upon the date of
filing with the Secretary of State of Delaware.
<PAGE>
FURTHER RESOLVED, that the proper officers of this corporation be and they
hereby are directed to make and execute a Certificate of Ownership and Merger
setting forth a copy of the resolutions to merge said Criticare Hospital
Services, Inc. and assume its liabilities and obligations, and the date of
adoption thereof, and to cause the same to be filed with the Secretary of State
and a certified copy recorded in the office of the Recorder of Deeds of New
Castle County and to do all acts and things whatsoever, whether within or
without the State of Delaware, which may be in anywise necessary or proper to
effect said merger.
FIFTH: Anything herein or elsewhere to the contrary notwithstanding, this
merger may be amended or terminated and abandoned by the Board of Directors of
MEDIQ/PRN Life Support Services, Inc. at any time prior to the date of filing
the merger with the Secretary of State.
IN WITNESS WHEREOF, said MEDIQ/PRN Life Support Services, Inc. has caused
this Certificate to be signed by Thomas E. Carroll, its Executive Vice
President and attested by Alan S. Einhorn, its Assistant Secretary, this 19th
day of January, 1994.
MEDIQ/PRN Life Support Services, Inc.
By: /s/ Thomas E. Carroll
---------------------------------
Thomas E. Carroll
Executive Vice President
ATTEST:
By: /s/ Alan S. Einhorn
--------------------------------
Alan S. Einhorn, Ass't Secretary
<PAGE>
PAGE 1
State of Delaware
Office of the Secretary of State
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF MERGER,
WHICH MERGES:
"MEDIQ/PRN LIFE SUPPORT SERVICES - I, INC.", A DELAWARE CORPORATION,
WITH AND INTO "MEDIQ/PRN LIFE SUPPORT SERVICES, INC." UNDER THE NAME OF
"MEDIQ/PRN LIFE SUPPORT SERVICES, INC.", A CORPORATION ORGANIZED AND EXISTING
UNDER THE LAWS OF THE STATE OF DELAWARE, AS RECEIVED AND FILED IN THIS OFFICE
THE FIRST DAY OF OCTOBER, A.D. 1996, AT 9 O'CLOCK A.M.
[LOGO]
/s/ Edward J. Freel
-----------------------------------
Edward J. Freel, Secretary of State
AUTHENTICATION: 9077672
DATE: 05-13-98
2296368 8100M
981182714
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 10/01/1996
960284529 - 2296368
CERTIFICATE OF MERGER
OF
MEDIQ/PRN LIFE SUPPORT SERVICES - I, INC.
WITH AND INTO
MEDIQ/PRN LIFE SUPPORT SERVICES, INC.
Under Section 251 of the General Corporation Law of the State of Delaware
- -------------------------------------------------------------------------------
MEDIQ/PRN Life Support Services, Inc. hereby certifies that:
1. The name and state of incorporation of each of the constituent corporations
to the merger are:
(a) MEDIQ/PRN Life Support Services, Inc., a Delaware corporation
("Surviving Entity"); and
(b) MEDIQ/PRN Life Support Services - I, Inc., a Delaware corporation
("PRN-I").
2. An Agreement and Plan of Merger (the "Merger Agreement") between Surviving
Entity, PRN-I and the sole stockholder of each of Surviving Entity and
PRN-I has been approved, adopted, certified, executed and acknowledged by
Surviving Entity and PRN-I in accordance with the provisions of Section 251
of the General Corporation Law of the State of Delaware.
3. The name of the corporation surviving the merger is MEDIQ/PRN Life Support
Services, Inc.
4. The Certificate of Incorporation of Surviving Entity as in effect
immediately prior to the effective time of the merger shall be the
Certificate of Incorporation of the surviving corporation until further
amended as provided therein and under Delaware law.
5. An executed copy of the Merger Agreement is on file at the principal place
of business of Surviving Entity at One MEDIQ Plaza, Pennsauken, New Jersey
08110-1460.
6. A copy of the Merger Agreement will be furnished by Surviving Entity, on
request and without cost, to any stockholder of PRN-I or Surviving Entity.
IN WITNESS WHEREOF, Surviving Entity has caused this Certificate of Merger
to be signed by a duly authorized officer thereof, as of the 1st day of October,
1996.
MEDIQ/PRN LIFE SUPPORT SERVICES, INC.
By: /s/ Jay M. Kaplan
---------------------------------
Name: Jay M. Kaplan
Title: Senior Vice-President
<PAGE>
PAGE 1
State of Delaware
Office of the Secretary of State
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF OWNERSHIP,
WHICH MERGES:
"PRN HOLDINGS, INC.", A DELAWARE CORPORATION,
WITH AND INTO "MEDIQ/PRN LIFE SUPPORT SERVICES, INC." UNDER THE NAME OF
"MEDIQ/PRN LIFE SUPPORT SERVICES, INC.", A CORPORATION ORGANIZED AND EXISTING
UNDER THE LAWS OF THE STATE OF DELAWARE, AS RECEIVED AND FILED IN THIS OFFICE
THE ELEVENTH DAY OF MAY, A.D. 1998, AT 1 O'CLOCK P.M.
[LOGO]
/s/ Edward J. Freel
-----------------------------------
Edward J. Freel, Secretary of State
AUTHENTICATION: 9077674
DATE: 05-13-98
2296368 8100M
981182714
<PAGE>
CERTIFICATE OF OWNERSHIP AND MERGER
MERGING
PRN HOLDINGS, INC.
INTO
MEDIQ/PRN LIFE SUPPORT SERVICES, INC.
PRN Holdings, Inc. a corporation organized and existing under the laws of
Delaware, DOES HEREBY CERTIFY:
FIRST: That this corporation was incorporated on the 24th day of May, 1994,
pursuant to the General Business Corporation Laws of the State of Delaware.
SECOND: That this corporation owns all of the outstanding shares of the
Conunon stock of MEDIQ/PRN Life Support Services, Inc., a corporation
incorporated on the 1st day of May, 1992, pursuant to the General Business
Corporation Laws of the State of Delaware.
THIRD: That the directors of PRN Holdings, Inc., by the following
resolutions of its board of Directors, duly adopted by the unanimous written
consent of its members, filed with the minutes of the Board on the 11th day of
May 1998, determined to merge itself into said MEDIQ/PRN Life Support Services,
Inc.
RESOLVED, that PRN Holdings, Inc. merge, and it hereby does merge itself
into said MEDIQ/PRN Life Support Services, Inc. which assumes all of the
obligations of PRN Holdings, Inc.
FURTHER RESOLVED, that the merger shall be effective upon filing with the
Secretary of State of Delaware.
FURTHER RESOLVED, that the proposed merger was submitted to the sole
stockholder of PRN Holdings, Inc. at a meeting of such stockholder duly called
and held after twenty days' notice of the purpose thereof mailed to the address
of such stockholder as it appears
<PAGE>
in the records of the corporation; and upon receiving the affirmative vote of
the holder of all of the outstanding stock entitled to vote thereon of PRN
Holdings, Inc., the merger was approved; and
FURTHER RESOLVED, that the proper officer of this corporation be and he is
hereby directed to make and execute a Certificate of Ownership and Merger
setting forth a copy of the resolutions to merge itself into said MEDIQ/PRN Life
Support Services, Inc., and the date of adoption thereof, and to cause the same
to be filed with the Secretary of State and to do all acts and things
whatsoever, whether within or without the State of Delaware, which may be in
anywise necessary or proper to effect said merger, and
FOURTH: Anything herein or elsewhere to the contrary notwithstanding, this
merger may be amended or terminated and abandoned by the Board of Directors of
PRN Holdings, Inc. at any time prior to the time that this merger filed with the
Secretary of State becomes effective.
IN WITNESS WHEREOF, said PRN Holdings, Inc. has caused this Certificate to
be signed by Jay M. Kaplan, its Senior Vice President, this 11th day of May,
1998.
PRN Holdings, Inc.
BY: /s/ Jay M. Kaplan
-------------------------------
Jay M. Kaplan, Sr. Vice President
EXHIBIT 3.2
By-Laws
<PAGE>
MEDIQ/PLSS, INC.
BY-LAWS
ARTICLE I - OFFICES
Section 1. The registered office of the corporation in the State of
Delaware shall be at Corporation Trust Center, 1209 Orange Street, Wilmington
(New Castle), Delaware.
The registered agent in charge thereof shall be The Corporation Trust
Company.
Section 2. The corporation may also have offices at such other places as
the Board of Directors may from time to time appoint or the business of the
corporation may require.
ARTICLE II - SEAL
Section 1. The corporate seal shall have inscribed thereon the name of the
corporation, the year of its organization and the words "Corporate Seal,
Delaware".
ARTICLE III - STOCKHOLDERS' MEETINGS
Section 1. Meetings of stockholders shall be held at the registered office
of the corporation in this state or at such place, either within or without this
state, as may be selected from time to time by the Board of Directors.
Section 2. ANNUAL MEETINGS: The annual meeting of the stockholders shall be
held on the 2nd day of January in each year if not a legal holiday, and if a
legal holiday, then on the next secular day following at 10:00 o'clock A.M.,
when they shall
<PAGE>
elect a Board of Directors and transact such other business as may properly be
brought before the meeting. If the annual meeting for election of directors is
not held on the date designated therefor, the directors shall cause the meeting
to be held as soon thereafter as convenient.
Section 3. ELECTION OF DIRECTORS: Elections of the directors of the
corporation shall be by written ballot.
Section 4. SPECIAL MEETINGS: Special meetings of the stockholders may be
called at any time by the President, or the Board of Directors, or stockholders
entitled to cast at least one-fifth of the votes which all stockholders are
entitled to cast at the particular meeting. At any time, upon written request of
any person or persons who have duly called a special meeting, it shall be the
duty of the Secretary to fix the date of the meeting, to be held not more than
sixty days after receipt of the request, and to give due notice thereof. If the
Secretary shall neglect or refuse to fix the date of the meeting and give notice
thereof, the person or persons calling the meeting may do so.
Business transacted at all special meetings shall be confined to the
objects stated in the call and matters germane thereto, unless all stockholders
entitled to vote are present and consent.
Written notice of a special meeting of stockholders stating the time and
place and object thereof, shall be given to each stockholder entitled to vote
thereat at least ten days before such meeting, unless a greater period of notice
is required by statute in a particular case.
Section 5. QUORUM: A majority of the outstanding shares of the
2
<PAGE>
corporation entitled to vote, represented in person or by proxy, shall
constitute a quorum at a meeting of stockholders. If less than a majority of the
outstanding shares entitled to vote is represented at a meeting, a majority of
the shares so represented may adjourn the meeting from time to time without
further notice. At such adjourned meeting at which a quorum shall be present or
represented, any business may be transacted which might have been transacted at
the meeting as originally noticed. The stockholders present at a duly organized
meeting may continue to transact business until adjournment, notwithstanding the
withdrawal of enough stockholders to leave less than a quorum.
Section 6. PROXIES: Each stockholder entitled to vote at a meeting of
stockholders or to express consent or dissent to corporate action in writing
without a meeting may authorize another person or persons to act for him by
proxy, but no such proxy shall be voted or acted upon after three years from its
date, unless the proxy provides for a longer period.
A duly executed proxy shall be irrevocable if it states that it is
irrevocable and if, and only as long as, it is coupled with an interest
sufficient in law to support an irrevocable power. A proxy may be made
irrevocable regardless of whether the interest with which it is coupled is an
interest in the stock itself or an interest in the corporation generally. All
proxies shall be filed with the Secretary of the meeting before being voted
upon.
Section 7. NOTICE OF MEETINGS: Whenever stockholders are required or
permitted to take any action at a meeting, a written notice of the meeting shall
be given which shall state the place,
3
<PAGE>
date and hour of the meeting, and, in the case of a special meeting, the purpose
or purposes for which the meeting is called.
Unless otherwise provided by law, written notice of any meeting shall be
given not less than ten nor more than sixty days before the date of the meeting
to each stockholder entitled to vote at such meeting.
Section 8. CONSENT IN LIEU OF MEETINGS: Any action required to be taken at
any annual or special meeting of stockholders of a corporation, or any action
which may be taken at any annual or special meeting of such stockholders, may be
taken without a meeting, without prior notice and without a vote, if a consent
in writing, setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. Prompt notice of the taking of
the corporate action without a meeting by less than unanimous written consent
shall be given to those stockholders who have not consented in writing.
Section 9. LIST OF STOCKHOLDERS: The officer who has charge of the stock
ledger of the corporation shall prepare and make, at least ten days before every
meeting of stockholders, a complete list of the stockholders entitled to vote at
the meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
No share of stock upon which any installment is due and unpaid shall be voted at
any meeting. The list shall be open to the examination of any stockholder, for
any purpose germane to the meeting, during ordinary business
4
<PAGE>
hours, for a period of at least ten days prior to the meeting, either at a place
within the city where the meeting is to be held, which place shall be specified
in the notice of the meeting, or, if not so specified, at the place where the
meeting is to be held. The list shall also be produced and kept at the time and
place of the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
ARTICLE IV - DIRECTORS
Section 1. The business and affairs of this corporation shall be managed by
its Board of Directors, four in number. The directors need not be residents of
this state or stockholders in the corporation. They shall be elected by the
stockholders at the annual meeting of stockholders of the corporation, and each
director shall. be elected for the term of one year, and until his successor
shall be elected and shall qualify or until his earlier resignation or removal.
Section 2. REGULAR MEETINGS: Regular meetings of the Board shall be held
without notice the 2nd day of January in each year at the registered office of
the corporation, or at such other time and place as shall be determined by the
Board.
Section 3. SPECIAL MEETINGS: Special Meetings of the Board may be called by
the President on one days notice to each director, either personally or by mail
or by telegram; special meetings shall be called by the President or Secretary
in like manner and on like notice on the written request of a majority of the
directors in office.
Section 4. QUORUM: A majority of the total number of directors shall
5
<PAGE>
constitute a quorum for the transaction of business.
Section 5. CONSENT IN LIEU OF MEETING: Any action required or permitted to
be taken at any meeting of the Board of Directors, or of any committee thereof,
may be taken without a meeting if all members of the Board or committee, as the
case may be, consent thereto in writing, and the writing or writings are filed
with the minutes of proceedings of the Board or committee. The Board of
Directors may hold its meetings, and have an office or offices, outside of this
state.
Section 6. CONFERENCE TELEPHONE: One or more directors may participate in a
meeting of the Board, of a committee of the Board or of the stockholders, by
means of conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other;
participation in this manner shall constitute presence in person at such
meeting.
Section 7. COMPENSATION: Directors as such, shall not receive any stated
salary for their services, but by resolution of the Board, a fixed sum and
expenses of attendance, if any, may be allowed for attendance at each regular or
special meeting of the Board PROVIDED, that nothing herein contained shall be
construed to preclude any director from serving the corporation in any other
capacity and receiving compensation therefor.
Section 8. REMOVAL: Any director or the entire Board of Directors may be
removed, with or without cause, by the holders of a majority of the shares then
entitled to vote at an election of directors, except that when cumulative voting
is permitted, if less than the entire Board is to be removed, no director may be
removed
6
<PAGE>
without cause if the votes cast against his removal would be sufficient to elect
him if then cumulatively voted at an election of the entire Board of Directors,
or, if there be classes of directors, at an election of the class of directors
of which he is a part.
ARTICLE V - OFFICERS
Section 1. The executive officers of the corporation shall be chosen by the
directors and shall be a President, Secretary and Treasurer. The Board of
Directors may also choose a Chairman, one or more Vice Presidents and such
other officers as it shall deem necessary. Any number of offices may be held by
the same person.
Section 2. SALARIES: Salaries of all officers and agents of the corporation
shall be fixed by the Board of Directors.
Section 3. TERM OF OFFICE: The officers of the corporation shall hold
office for one year and until their successors are chosen and have qualified.
Any officer or agent elected or appointed by the Board may be removed by the
Board of Directors whenever in its judgment the best interest of the corporation
will be served thereby.
Section 4. PRESIDENT: The President shall be the chief executive officer of
the corporation; he shall preside at all meetings of the stockholders and
directors; he shall have general and active management of the business of the
corporation, shall see that all orders and resolutions of the Board are carried
into effect, subject, however, to the right of the directors to delegate any
specific powers, except such as may be by statute exclusively conferred on the
President, to any other officer or officers of the corporation. He shall execute
bonds, mortgages and other contracts requiring a seal,
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under the seal of the corporation. He shall be EX-OFFICIO a member of all
committees, and shall have the general power and duties of supervision and
management usually vested in the office of President of a corporation.
Section 5. SECRETARY: The Secretary shall attend all sessions of the Board
and all meetings of the stockholders and act as clerk thereof, and record all
the votes of the corporation and the minutes of all its transactions in a book
to be kept for that purpose, and shall perform like duties for all committees of
the Board of Directors when required. He shall give, or cause to be given,
notice of all meetings of the stockholders and of the Board of Directors, and
shall perform such other duties as may be prescribed by the Board of Directors
or President, and under whose supervision he shall be. He shall keep in safe
custody the corporate seal of the corporation, and when authorized by the Board,
affix the same to any instrument requiring it.
Section 6. TREASURER: The Treasurer shall have custody of the corporate
funds and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation, and shall keep the moneys
of the corporation in a separate account to the credit of the corporation. He
shall disburse the funds of the corporation as may be ordered by the Board,
taking proper vouchers for such disbursements, and shall render to the President
and directors, at the regular meetings of the Board, or whenever they may
require it, an account of all his transactions as Treasurer and of the financial
condition of the corporation.
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ARTICLE VI - VACANCIES
Section 1. Any vacancy occurring in any office of the corporation by death,
resignation, removal or otherwise, shall be filled by the Board of Directors.
Vacancies and newly created directorships resulting from any increase in the
authorized number of directors may be filled by a majority of the directors then
in office, although less than a quorum, or by a sole remaining director. If at
any time, by reason of death or resignation or other cause, the corporation
should have no directors in office, then any officer or any stockholder or an
executor, administrator, trustee or guardian of a stockholder, or other
fiduciary entrusted with like responsibility for the person or estate of a
stockholder, may call a special meeting of stockholders in accordance with the
provisions of these By-Laws.
Section 2. RESIGNATIONS EFFECTIVE AT FUTURE DATE: When one or more
directors shall resign from the Board, effective at a future date, a majority of
the directors then in office, including those who have so resigned, shall have
power to fill such vacancy or vacancies, the vote thereon to take effect when
such resignation or resignations shall become effective.
ARTICLE VII - CORPORATE RECORDS
Section 1. Any stockholder of record, in person or by attorney or other
agent, shall, upon written demand under oath stating the purpose thereof, have
the right during the usual hours for business to inspect for any proper purpose
the corporation's stock ledger, a list of its stockholders, and its other books
and records, and to make copies or extracts therefrom. A proper purpose shall
mean a purpose
9
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reasonably related to such person's interest as a stockholder. In every instance
where an attorney or other agent shall be the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing which authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in this state or at its principal place of
business.
ARTICLE VIII - STOCK CERTIFICATES, DIVIDENDS, ETC.
Section 1. The stock certificates of the corporation shall be numbered and
registered in the share ledger and transfer books of the corporation as they are
issued. They shall bear the corporate seal and shall be signed by the President
or Vice President and Secretary or Assistant Secretary of the Corporation.
Section 2. TRANSFERS: Transfers of shares shall be made on the books of the
corporation upon surrender of the certificates therefor, endorsed by the person
named in the certificate or by attorney, lawfully constituted in writing. No
transfer shall be made which is inconsistent with law.
Section 3. LOST CERTIFICATE: The corporation may issue a new certificate of
stock in the place of any certificate theretofore signed by it, alleged to have
been lost, stolen or destroyed, and the corporation may require the owner of the
lost, stolen or destroyed certificate, or his legal representative to give the
corporation a bond sufficient to indemnify it against any claim that may be made
against it on account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate.
10
<PAGE>
Section 4. RECORD DATE: In order that the corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty nor less than ten days before the date of
such meeting, nor more than sixty days prior to any other action.
If no record date is fixed:
(a) The record date for determining stockholders entitled to notice of
or to vote at a meeting of stockholders shall be at the close of business
on the day next preceding the day on which notice is given, or, if notice
is waived, at the close of business on the day next preceding the day on
which the meeting is held.
(b) The record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting, when no prior
action by the Board of Directors is necessary, shall be the day on which
the first written consent is expressed.
(c) The record date for determining stockholders for any other purpose
shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
11
<PAGE>
(d) A determination of stockholders of record entitled to notice of or
to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new
record date for the adjourned meeting.
Section 5. DIVIDENDS: The Board of Directors may declare and pay dividends
upon the outstanding shares of the corporation, from time to time and to such
extent as they deem advisable, in the manner and upon the terms and conditions
provided by statute and the Certificate of Incorporation.
Section 6. RESERVES: Before payment of any dividend there may be set aside
out of the net profits of the corporation such sum or sums as the directors,
from time to time, in their absolute discretion, think proper as a reserve fund
to meet contingencies, or for equalizing dividends, or for repairing or
maintaining any property of the corporation, or for such other purpose as the
directors shall think conducive to the interests of the corporation, and the
directors may abolish any such reserve in the manner in which it was created.
ARTICLE IX - MISCELLANEOUS PROVISIONS
Section 1. CHECKS: All checks or demands for money and notes of the
corporation shall be signed by such officer or officers as the Board of
Directors may from time to time designate.
Section 2. FISCAL YEAR: The fiscal year shall begin on the first day of
October in each year.
Section 3. NOTICE: Whenever written notice is required to be given to any
person, it may be given to such person, either personally or by sending a copy
thereof through the mail, or by telegram,
12
<PAGE>
charges prepaid, to his address appearing on the books of the corporation, or
supplied by him to the corporation for the purpose of notice. If the notice is
sent by mail or by telegraph, it shall be deemed to have been given to the
person entitled thereto when deposited in the United States mail or with a
telegraph office for transmission to such person. Such notice shall specify the
place, day and hour of the meeting and, in the case of a special meeting of
stockholders, the general nature of the business to be transacted.
Section 4. WAIVER OF NOTICE: Whenever any written notice is required by
statute, or by the Certificate or the By-Laws of this corporation a waiver
thereof in writing, signed by the person or persons entitled to such notice,
whether before or after the time stated therein, shall be deemed equivalent to
the giving of such notice. Except in the case of a special meeting of
stockholders, neither the business to be transacted at nor the purpose of the
meeting need be specified in the waiver of notice of such meeting. Attendance of
a person either in person or by proxy, at any meeting shall constitute a waiver
of notice of such meeting, except where a person attends a meeting for the
express purpose of objecting to the transaction of any business because the
meeting was not lawfully called or convened.
Section 5. DISALLOWED COMPENSATION: Any payments made to an officer or
employee of the corporation such as a salary, commission, bonus, interest, rent,
travel or entertainment expense incurred by him, which shall be disallowed in
whole or in part as a deductible expense by the Internal Revenue Service, shall
be reimbursed by such officer or employee to the corporation to the full extent
of such
13
<PAGE>
disallowance. It shall be the duty of the directors, as a Board, to enforce
payment of each such amount disallowed. In lieu of payment by the officer or
employee, subject to the determination of the directors, proportionate amounts
may be withheld from his future compensation payments until the amount owed to
the corporation has been recovered.
Section 6. RESIGNATIONS: Any director or other officer may resign at any
time, such resignation to be in writing and to take effect from the time of its
receipt by the corporation, unless some time be fixed in the resignation and
then from that date. The acceptance of a resignation shall not be required to
make it effective.
ARTICLE X - ANNUAL STATEMENT
Section 1. The President and the Board of Directors shall present at each
annual meeting a full and complete statement of business and affairs of the
corporation for the preceding year. Such statement shall be prepared and
presented in whatever manner the Board of Directors shall deem advisable and
need not be verified by a Certified Public Accountant.
ARTICLE XI - INDEMNIFICATION AND INSURANCE
Section 1. (a) RIGHT TO INDEMNIFICATION. Each person who was or is made a
party or is threatened to be made a party or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she, or a person
of whom he or she is the legal
14
<PAGE>
representative, is or was a director or officer, of the Corporation or is or was
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans, whether
the basis of such proceeding is alleged action in an official capacity as a
director, officer, employee or agent or in any other capacity while serving as a
director, officer, employee or agent, shall be indemnified and held harmless by
the Corporation to the fullest extent authorized by the Delaware General
Corporation Law, as the same exists or may hereafter be amended (but, in the
case of any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than said law permitted
the Corporation to provide prior to such amendment), against all expense,
liability and loss (including attorneys' fees, judgments, fines, ERISA excise
taxes or penalties and amounts paid or to be paid in settlement) reasonably
incurred or suffered by such person in connection therewith and such
indemnification shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of his or her heirs,
executors and administrators; provided, however, that, except as provided in
paragraph (b) hereof, the Corporation shall indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
such person only if such proceeding (or part thereof) was authorized by the
Board of Directors of the Corporation. The right to indemnification conferred in
this Section shall be a contract right and shall include the right to be paid by
the Corporation the expenses incurred in defending any
15
<PAGE>
such proceeding in advance of its final disposition: provided, however, that, if
the Delaware General Corporation Law requires, the payment of such expenses
incurred by a director or officer in his or her capacity as a director or
officer (and not in any other capacity in which service was or is rendered by
such person while a director or officer, including, without limitation, service
to an employee benefit plan) in advance of the final disposition of a
proceeding, shall be made only upon delivery to the corporation of an
undertaking, by or on behalf of such director or officer, to repay all amounts
so advanced if it shall ultimately be determined that such director or officer
is not entitled to be indemnified under this Section or otherwise. The
Corporation may, by action of its Board of Directors, provide indemnification to
employees and agents of the Corporation with the same scope and effect as the
foregoing indemnification of directors and officers.
(b) RIGHT OF CLAIMANT TO BRING SUIT:
If a claim under paragraph (a) of this Section is not paid in full by the
Corporation within thirty days after a written claim has been received by the
Corporation, the claimant may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall be entitled to be paid also the expense of
prosecuting such claim. It shall be a defense to any such action (other than an
action brought to enforce a claim for expenses incurred in defending any
proceeding in advance of its final disposition where the required undertaking,
if any is required, has been tendered to the Corporation) that the claimant has
not met the standards of conduct which make it
16
<PAGE>
permissible under the Delaware General Corporation law for the Corporation to
indemnify the claimant for the amount claimed, but the burden of proving such
defense shall be on the Corporation. Neither the failure of the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in the
Delaware General Corporation Law, nor an actual determination by the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) that the claimant has not met such applicable standard or conduct,
shall be a defense to the action or create a presumption that the claimant has
not met the applicable standard or conduct.
(c) Notwithstanding any limitation to the contrary contained in
sub-paragraphs (a) and 8(b) of this section, the corporation shall, to the
fullest extent permitted by Section 145 of the General Corporation Law of the
State of Delaware, as the same may be amended and supplemented, indemnify any
and all persons whom it shall have power to indemnify under said section from
and against any and all of the expenses, liabilities or other matters referred
to in or covered by said section, and the indemnification provided for herein
shall not be deemed exclusive of any other rights to which those indemnified may
be entitled under any By-law, agreement, vote of stockholders or disinterested
Directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office, and shall continue as to a
person who has
17
<PAGE>
ceased to be director, officer, employee or agent and shall inure to the benefit
of the heirs, executors and administrators of such a person.
(d) INSURANCE:
The Corporation may maintain insurance, at its expense, to protect itself
and any director, officer, employee or agent of the Corporation or another
corporation, partnership, joint venture, trust or other enterprise against any
such expense, liability or loss, whether or not the Corporation would have the
power to indemnify such person against such expense, liability or loss under the
Delaware General Corporation Law.
ARTICLE XII - AMENDMENTS
Section 1. These By-Laws may be amended or repealed by the vote of
stockholders entitled to cast at least a majority of the votes which all
stockholders are entitled to cast thereon, at any regular or special meeting of
the stockholders, duly convened after notice to the stockholders of that
purpose.
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