-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O0lw5EdeHlR9r5t+/sdwXZ1/HEQxRi8JjyIg+PBtzolFJ53UQJHNLMy9eeRfavwx oQ1kXnR+Sm9lTobSFReoLw== 0000950115-96-000013.txt : 19960116 0000950115-96-000013.hdr.sgml : 19960116 ACCESSION NUMBER: 0000950115-96-000013 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 18 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19960112 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDIQ INC CENTRAL INDEX KEY: 0000350920 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISC HEALTH & ALLIED SERVICES, NEC [8090] IRS NUMBER: 510219413 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-08147 FILM NUMBER: 96503038 BUSINESS ADDRESS: STREET 1: ONE MEDIQ PLZ CITY: PENNSAUKEN STATE: NJ ZIP: 08110 BUSINESS PHONE: 6096656300 MAIL ADDRESS: STREET 1: ONE MEDIQ PLZ CITY: PENNSAUKEN STATE: NJ ZIP: 08110 10-K405 1 CURRENT REPORT - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------ 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, 1995 Commission File Number: 1-8147 MEDIQ INCORPORATED (Exact name of registrant as specified in its charter) DELAWARE 51-0219413 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) ONE MEDIQ PLAZA, PENNSAUKEN, NEW JERSEY 08110 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 665-9300 Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED - ---------------------------------------------------------------------------- --------------------------------- COMMON STOCK, PAR VALUE $1.00 AMERICAN STOCK EXCHANGE SERIES A PREFERRED STOCK, PAR VALUE $.50 AMERICAN STOCK EXCHANGE 7.25% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2006 AMERICAN STOCK EXCHANGE 7.50% EXCHANGEABLE SUBORDINATED DEBENTURES DUE 2003 AMERICAN STOCK EXCHANGE
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 ___ The approximate aggregate market value of the voting stock held by non-affiliates of the registrant as of December 22, 1995 (reference is made to the final paragraph of Part I herein for a statement of the assumptions upon which this calculation is based): Common Stock $46,000,000 Series A Preferred Stock $5,300,000
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_ The number of shares outstanding of each of the registrant's classes of stock as of December 22, 1995:
CLASS - ----- Common Stock 17,852,193 Shares Series A Preferred Stock 6,374,928 Shares
DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the registrant's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on March 5, 1996 (which is expected to be filed with the Commission not later than 120 days after the end of the registrant's last fiscal year) are incorporated by reference into Part III of this report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEM I. BUSINESS GENERAL MEDIQ Incorporated ('MEDIQ' or the 'Company'), through its wholly-owned subsidiary, MEDIQ/PRN Life Support Services, Inc. ('MEDIQ/PRN'), operates the largest movable critical care and life support medical equipment rental business in the United States. MEDIQ/PRN rents a wide variety of movable equipment for use by acute care hospitals, alternative care facilities, nursing homes, and home health care companies. On January 20, 1995, the Company announced the formation of a Special Committee of the Board of Directors for the purpose of exploring alternative ways of maximizing shareholder value, including a possible sale of the stock or assets of the Company or certain of its subsidiaries. After exploring a number of alternatives, the Board of Directors on October 23, 1995 accepted the recommendation of the Special Committee to reject two outstanding offers to acquire the Company and terminate any further efforts to sell the Company at the present time. The Board determined to continue the previously announced strategy of divesting substantially all operating assets other than MEDIQ/PRN and using the proceeds thereof to reduce indebtedness. Accordingly, MEDIQ/PRN constitutes the Company's principal business, accounting for 97% of consolidated revenues from continuing operations in 1995. MEDIQ/PRN LIFE SUPPORT SERVICES, INC. MEDIQ/PRN provides essential cost-effective services to its customers. In order to maximize operating efficiency, health care providers often choose to rent movable medical equipment rather than incur the capital costs required to finance equipment purchases and the on-going expenses required for maintenance and repair. In addition, renting patient-ready equipment provides a vital adjunct that permits a health care provider to meet periods of increased patient census without the need for investing capital in stand-by equipment. MEDIQ/PRN meets these needs by renting a wide variety of equipment to health care providers across the continuum of care. As of September 30, 1995, MEDIQ/PRN had available for rent 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 other movable critical care equipment for use in respiratory care, intensive care, labor and delivery, pediatric, neonatal intensive care and other departments of acute care general hospitals and for use in alternate care facilities, nursing homes, and by home health care providers. The 1994 acquisition of the movable medical equipment of KCI Therapeutic Services, Inc., a subsidiary of Kinetic Concepts, Inc. ('KCI'), substantially increased MEDIQ/PRN's rental equipment inventory and solidified its position as the leader in the critical care life support equipment rental business. MEDIQ/PRN also sells various disposable products which are used in conjunction with MEDIQ/PRN's rental products. MEDIQ/PRN's customers rent equipment, which is delivered in most cases within two hours of a request, 24 hours a day, 365 days a year through 74 branch offices in major cities nationwide and 11 independent distributors. MEDIQ/PRN 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 discounts which increase with the length of the rental term, and (iii) 'usage' rentals on a per use, per hour or per day basis. MEDIQ/PRN also offers its 'One Source' service which analyzes a customer's total rental activity from many sources for the previous year, and offers the same equipment to the customer on a long-term basis at a single fixed monthly cost that may result in substantial savings to the customer. MEDIQ/PRN also provides a Comprehensive Asset Management Program (CAMP(Trademark)), which enables a customer to contract with MEDIQ/PRN to supply any element of its medical equipment management needs, including equipment inventory, personnel, maintenance, documentation 1 and tracking. MEDIQ/PRN also has programs where it acquires all or part of the customer's equipment and rents the equipment back to the customer, eliminating the customer's burdens of ownership, underutilization and seasonal usage. MEDIQ/PRN's customers can also benefit from the use of CAMP(Trademark) through the reduction of biomedical and other hospital staff, lower equipment maintenance expenses and the elimination or reduction of capital expenditures for equipment. MEDIQ/PRN recently introduced its CAMP(Trademark) Plus logistics program that provides similar management services for multi-site health care networks to manage, service and transport movable patient care equipment. MEDIQ/PRN also participates in two joint ventures through a subsidiary and a limited liability company. MEDIQ PRN/SLT rents surgical laser equipment to health care providers. MEDIQ PRN/HNE, L.L.C. rents to health care providers mattress systems designed to treat, prevent or manage pressure ulcers. No single customer accounted for more than 10% of MEDIQ/PRN's rental revenues during fiscal 1995. The Company's other operating subsidiaries include MEDIQ Management Services, Inc., a provider of health care management and consulting services and MEDIQ Diagnostic Centers, Inc., a provider of management and other administrative support services to diagnostic imaging centers. The Company was incorporated in 1977. Its principal offices are located at One MEDIQ Plaza, Pennsauken, New Jersey. SEASONALITY MEDIQ/PRN's business is seasonal, with demand historically peaking in the winter months or the Company's second fiscal quarter. QUALITY ASSURANCE Quality control/quality assurance and risk management procedures are conducted for all of MEDIQ/PRN's medical equipment by trained biomedical technicians to ensure compliance with safety, testing and performance standards at all branch offices. All equipment is serviced and tested prior to delivery to a customer in accordance with MEDIQ/PRN's Pre-Delivery Inspection Program, which is primarily derived from the Emergency Care Research Institute's ('ECRI's') programs. Most types of medical equipment rented by MEDIQ/PRN require routine servicing at scheduled intervals based upon hours of usage, including complete testing and inspection of all components that may need to be replaced or refurbished. Routine servicing is conducted by MEDIQ/PRN's trained personnel at all of its branch locations. Major repairs are performed at MEDIQ/PRN's Pennsauken, New Jersey or Santa Fe Springs, California maintenance facilities by its biomedical equipment technicians. SUPPLIERS MEDIQ/PRN acquires substantially all of its new medical equipment for rental from approximately 100 suppliers. MEDIQ/PRN is not dependent upon any single supplier for its rental equipment or disposable products and believes that alternative purchasing sources of medical equipment are available to MEDIQ/PRN should they be needed. COMPETITION The medical equipment rental industry is competitive, and MEDIQ/PRN encounters competition in all regions in which it operates. MEDIQ/PRN's competitors include (i) medical equipment rental and leasing businesses 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 (iii) general leasing and financing companies and financial institutions, such as banks, which finance the acquisition of medical equipment by health care providers. MEDIQ/PRN believes 2 that key factors influencing the decision regarding the selection of a medical equipment rental vendor include availability and quality of medical equipment, service and price. EQUITY INVESTMENTS PCI Services, Inc. ('PCI') (NASDAQ:PCIS) is a leading provider of integrated pharmaceutical packaging services, including blister packaging, bottle filling, pouch filling, strip packaging, capsule filling, the design and production of folding cartons and thermoformed components, and the printing of inserts. At December 22, 1995, the Company owned 2,875,000 shares of PCI common stock, or approximately 47% of the outstanding shares. PCI's stock traded during fiscal 1995 in the range of $5.50 to $10.125 per share and on December 22, 1995 the closing per share price was $9.875. NutraMax Products, Inc. ('NutraMax') (NASDAQ:NMPC) is a leading private label health and personal care products company, marketing products in the feminine needs, cough/cold, baby care, ophthalmics, personal care and oral care categories. At December 22, 1995, the Company owned 4,037,258 shares of NutraMax common stock, or approximately 47% of the outstanding shares. NutraMax's stock traded during fiscal 1995 in the range of $5.75 to $10.375 per share and on December 22, 1995 the closing per share price was $9.25. The Company's ownership interest in NutraMax may decrease in the future if certain of the Company's outstanding subordinated debentures ($34.5 million aggregate principal outstanding as of December 22, 1995), which, by their terms, are exchangeable into shares of NutraMax common stock owned by the Company, are exchanged by the holders thereof for such shares. Assuming the Company does not exercise its rights upon such an exchange to redeem the debentures in cash, the effect of the exchange of all of such debentures would be to decrease the Company's ownership of NutraMax to approximately 21%. The Company has announced its support of the efforts of the Board of Directors of NutraMax to explore opportunities to maximize value for the NutraMax shareholders. The Company has also announced its intention to realize the value of its investment in PCI. DISCONTINUED OPERATIONS In the second quarter of fiscal 1995, the Company adopted a plan to sell the following four non-core businesses within twelve months: Medifac, Inc. ('Medifac'), a provider of health care facility planning, architectural and development services; Health Examinetics, Inc. ('Health Examinetics'), a provider of mobile health testing services; MEDIQ Mobile X-Ray Services, Inc. ('Mobile X-Ray'), a provider of portable X-ray and EKG services; and MEDIQ Imaging Services, Inc. ('MEDIQ Imaging'), a provider of diagnostic imaging services in mobile and fixed sites. In the fourth quarter of fiscal 1995, the Company revised the plan to include the operations of HealthQuest, Inc. ('HealthQuest'), a provider of case management and utilization review services, which is presently anticipated to be sold in fiscal 1996. As a result of these determinations, operating results and net assets of these five businesses have been reported as discontinued operations for fiscal 1995. Discontinued operations also include the Company's equity investment in InnoServ Technologies, Inc. (formerly MMI Medical, Inc.), which is anticipated to be distributed to the Company's shareholders during fiscal 1996. See footnote C to the Company's consolidated financial statements for certain financial information about discontinued operations. In June 1995, the Company sold Medifac and related assets to the management of Medifac for approximately $11 million in cash and notes, and the assumption of $26.9 million of non-recourse debt. In August 1995, the Company sold the assets of MEDIQ Imaging to NMC Diagnostic Services, Inc., a division of W.R. Grace and Co. for approximately $17 million in cash and the assumption of $9.7 million of debt. InnoServ Technologies, Inc. ('InnoServ') (NASDAQ:ISER) (formerly MMI Medical, Inc.), through its various subsidiaries, provides hospitals, clinics and private physicians' offices with maintenance services for diagnostic imaging equipment, shared mobile computed tomography and 3 cardiac catheterization services and other radiological parts and supplies. The Company owns 2,030,000 shares of InnoServ common stock, or approximately 40% of the outstanding shares. InnoServ's stock traded during fiscal 1995 in the range of $3.00 to $4.125 per share and on December 22, 1995 the closing per share price was $4.125. The present business operations of InnoServ include the business of the Company's former subsidiary, MEDIQ Equipment and Maintenance Services, Inc., which was merged with InnoServ in 1994. Pursuant to an agreement of merger and plan of reorganization, as amended, among MMI Medical, Inc., MMI Acquisition Subsidiary, Inc., MEDIQ, and MEDIQ Equipment and Maintenance Services, Inc. dated as of May 18, 1994, MEDIQ has agreed to distribute the shares of stock of InnoServ owned by MEDIQ to its stockholders as soon as practicable following registration of the shares by InnoServ, which the Company has been advised is expected to be accomplished in fiscal 1996. The Company presently anticipates that the disposal of Mobile X-Ray, Health Examinetics and HealthQuest will be completed in the second quarter of fiscal 1996. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS The Company operates primarily in one business segment, exclusive of discontinued operations. The Company, through MEDIQ/PRN, rents medical equipment on a short-term basis nationwide. This segment represents more than 90% of the consolidated revenues, operating profits and assets exclusive of corporate assets, which include net assets of discontinued operations of $27.1 million and equity investments of $43.1 million. GOVERNMENT REGULATION The Company's businesses are subject to Federal, state and local regulations relating to the operation of such businesses. The Company is unable to predict whether, or to what extent, new legislation or regulations affecting its businesses will be enacted and, if enacted, what impact they will have on the Company. The following is a summary of some of the significant regulations currently affecting the operations of MEDIQ/PRN and the Company's other operations. Compliance with FDA Regulations -- 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 with 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 MEDIQ/PRN or organizations which provide similar services as MEDIQ/PRN as device manufacturers. 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 MEDIQ/PRN, 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 Company is unable to predict the cost of compliance if any such regulations were to be adopted. MEDIQ/PRN is required to comply with certain other device tracking and reporting regulations administered by the FDA. Reimbursement of Health Care Costs -- Substantially all of the revenues generated by Mobile X-Ray are received from third party payors, including governmental programs such as Medicare and Medicaid, which subjects these businesses to rules and regulations governing participation in such programs. The Federal Medicare/Medicaid Anti-Fraud and Abuse Amendments to the Social Security Act (the 'Anti-Kickback Law') make it a criminal offense to offer, pay, solicit or receive renumeration in order to induce business for which reimbursement is provided under Medicare or Medicaid. In addition to criminal penalties, including fines of up to $250,000 and ten years imprisonment, violations of the Anti-Kickback Law can lead to civil monetary penalties and exclusion 4 from the Medicare and Medicaid programs. The scope of prohibited payments in the Anti-Kickback Law is broad and includes a large number of economic arrangements involving hospitals, physicians and other health care providers, including joint ventures, space and equipment rentals, purchases of physician practices and management and personal services contracts. The Department of Health and Human Services published regulations which describe certain arrangements that will not be deemed to constitute violations of the Anti-Kickback Law. The safe harbors described in the regulations are narrow and do not cover a wide range of economic relationships which many hospitals, physicians and other health care providers consider to be legitimate business arrangements not prohibited by the statute. Because the regulations describe safe harbors and do not purport to describe comprehensively all lawful or unlawful economic arrangements or other relationships between health care providers and referral sources, health care businesses having these arrangements or relationships may or may not be required to alter them in order to ensure compliance with the Anti-Kickback Law. The Company believes that it is presently in substantial compliance with the Anti-Kickback Law. Effective January 1, 1995, a portion of the Medicare Law known as the 'Stark Bill' became effective. The Stark Bill prohibits, with certain limited exceptions, the payment for business referred to an entity by physicians who have a 'financial relationship' with an entity providing 'designated health services.' 'Financial relationship' includes, among other relationships, an ownership or investment interest in the entity, or a compensation arrangement. Sanctions for prohibited referrals include the denial of Medicare payment for the services, civil money penalties, and possible exclusion from the Medicare program. The Company believes that none of its arrangements violate the Stark Bill. See also 'Legal Proceedings' herein for certain additional information. EMPLOYEES The Company and its wholly-owned subsidiaries have approximately 1,250 employees, of which approximately 500 are employees of discontinued operations. The Company believes relations with employees are satisfactory. ITEM 2. PROPERTIES The Company's principal facility is located in Pennsauken, New Jersey, where the Company's corporate headquarters and a portion of its operating activities are located, including MEDIQ/PRN's corporate headquarters. The Company and its wholly-owned subsidiaries also lease office and warehouse space in approximately 100 locations throughout the United States for local and regional operations. The properties owned and leased by the Company and its wholly-owned subsidiaries are believed to be adequate for the Company's operations. ITEM 3. LEGAL PROCEEDINGS On November 28, 1995, in the United States District Court for the Middle District of Pennsylvania, ATS Medical Services, Inc. ('ATS'), a subsidiary of the Company, and the president of ATS each pled guilty to one count of misprision of a felony in violation of Title 18, United States Code, Section 4. In addition, ATS agreed to repay the government $2.1 million for excess reimbursement received by ATS from the Medicare Program from 1988 through 1992. The payment is part of a settlement agreement entered into between ATS, the United States Government and a former ATS employee, who had filed a civil lawsuit on behalf of the government against ATS pursuant to the False Claims Act, Title 31, United States Code, Sections 3729, et seq., relating to ATS's alleged excess reimbursement. The government has agreed to recommend that no fine be imposed against ATS and has agreed that ATS will not be barred from submitting claims to the Medicare Program in the future. MEDIQ Imaging, the assets of which were sold by the Company in August 1995, is presently the subject of a criminal and 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 has focused on advice given by MEDIQ Imaging employees to physician customers of MEDIQ Imaging relating to the 5 reassignment of certain Medicare claims. The Company and MEDIQ Imaging voluntarily reported the issue to the government in January 1995 after learning that the advice given by MEDIQ Imaging employees was inconsistent with the reassignment regulations. The Company and MEDIQ Imaging have been cooperating in the investigation. The Company has agreed, subject to certain limitations, to be responsible for any fine or penalty assessed following the conclusion of the investigation. Management believes that there has been no violation of any statute or regulation by MEDIQ Imaging or any of its officers, directors or employees and intends to vigorously defend any claims that may be brought. In addition, the Company has pending several legal claims incurred in the normal course of business, which in the opinion of management, will not have material effect on the consolidated financial statements. See Note H to the Company's Consolidated Financial Statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the quarter ended September 30, 1995. For the purposes of calculating the aggregate market value of the shares of common stock of the Company held by nonaffiliates, as shown on the cover page of this report, it has been assumed that all the outstanding shares were held by nonaffiliates except for the shares held by directors and executive officers of the Company. However, this should not be deemed to constitute an admission that all directors and executive officers of the Company are, in fact, affiliates of the Company, or that there are not other persons who may be deemed to be affiliates of the Company. Further information concerning shareholdings of officers, directors and principal shareholders is included in the Company's definitive proxy statement filed or to be filed with the Securities and Exchange Commission. 6 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock and its Series A Preferred Stock, which is convertible into Common Stock, are listed on the American Stock Exchange. The following table sets forth the high and low closing prices for the Company's Common and Preferred Stocks on the American Stock Exchange for the past two fiscal years.
COMMON STOCK PREFERRED STOCK -------------------- -------------------- FISCAL YEAR ENDED SEPTEMBER 30, HIGH LOW HIGH LOW - ------------------------------------------------------------------- --------- --------- --------- --------- 1995 First Quarter................................................. $ 4.063 $ 3.563 $ 3.813 $ 3.625 Second Quarter................................................ 5.750 3.750 5.500 3.750 Third Quarter................................................. 6.188 5.125 5.750 5.063 Fourth Quarter................................................ 6.188 5.063 5.875 5.375 1994 First Quarter................................................. $ 4.688 $ 3.938 $ 4.500 $ 3.875 Second Quarter................................................ 4.500 3.625 4.313 3.875 Third Quarter................................................. 4.000 3.375 4.000 3.000 Fourth Quarter................................................ 4.250 3.500 4.125 3.500
As of December 1995, there were approximately 2,000 holders of record of the Company's Common Stock and approximately 350 holders of record of the Company's Preferred Stock. Since a portion of the Company's Common Stock and Preferred Stock is held in 'street' or nominee name, the Company is unable to determine the exact number of beneficial holders. Historically, the Company has paid cash dividends on a quarterly basis, dependent upon the earnings, capital requirements, operating and financial condition of the Company, compliance with debt agreements, and other factors deemed relevant by the Board of Directors. The Company did not pay any dividends in 1995. The Company paid cash dividends of $.03 per share on its Common Stock and $.018 per share on its Preferred Stock for the first, second and third quarters of 1994. The terms of one of the Company's indentures currently limits the payment of future dividends or the purchase of the Company's stock to approximately $5 million in the aggregate as of September 30, 1995. 7 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data presented below has been derived from the audited financial statements of the Company. This data is qualified in its entirety by reference to, and should be read in conjunction with, the Company's Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein.
YEAR ENDED SEPTEMBER 30, --------------------------------------------------------------- 1995(3) 1994 1993 1992(4) 1991 ----------- ----------- ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) SUMMARY INCOME STATEMENT DATA: Revenues (1).................................... $ 132,241 $ 81,498 $ 89,994 $ 102,195 $ 88,895 Operating income (loss) (1)..................... 23,938 1,095 8,378 4,336 (5,507) Interest expense................................ (28,977) (21,076) (20,807) (18,578) (19,588) Equity in earnings of unconsolidated affiliates.................................... 4,731 4,308 4,343 4,776 3,623 Other (2)....................................... 1,403 6,719 5,437 7,693 8,136 Income (loss) from continuing operations before income tax expense (benefit).................. 1,095 (8,954) (2,649) (1,773) (13,336) Income (loss) from continuing operations.................................... (209) (5,848) 1,222 2,388 (6,412) PER SHARE DATA: Income (loss) from continuing operations.................................... $ (.01) $ (.24) $ .05 $ .10 $ (.27) Cash dividends per common share................. $ -- $ .09 $ .12 $ .06 $ .03 Cash dividends per preferred share.............. $ -- $ .05 $ .07 $ .03 $ .02 Weighted average shares outstanding............. 24,604 24,405 24,366 24,007 23,808
SEPTEMBER 30, --------------------------------------------------------------- 1995(3) 1994(3) 1993 1992(4) 1991 ----------- ----------- ----------- ----------- ----------- (IN THOUSANDS) SUMMARY BALANCE SHEET DATA: Current assets.................................. $ 63,445 $ 35,041 $ 42,500 $ 48,431 $ 62,606 Investments in unconsolidated affiliates.................................... 43,092 38,338 34,693 26,830 11,359 Investments in discontinued operations.......... 27,070 61,573 63,402 89,768 115,372 Property, plant and equipment................... 132,823 149,051 117,748 112,621 64,349 Total assets.................................... 334,170 377,795 308,827 315,280 282,958 Current liabilities............................. 64,685 59,610 47,001 45,303 50,196 Senior debt, net of current portion............. 136,949 162,436 115,604 131,014 85,547 Subordinated debt, net of current portion....................................... 81,907 103,388 86,229 63,539 63,539 Stockholders' equity............................ 31,517 36,280 44,574 58,748 74,799
See Notes to Selected Consolidated Financial Data on next page 8 NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA (1) Revenues, EBITDA and operating income attributable to MEDIQ/PRN, the Company's core business, were as follows (in thousands):
YEAR ENDED SEPTEMBER 30, REVENUES EBITDA OPERATING INCOME - ----------------------------------------- ----------- --------- ---------------- 1995 $ 128,810 $ 60,528 $ 31,469 1994 74,944 25,619 5,283 1993 76,527 30,741 13,364 1992 56,898 22,023 11,082 1991 41,218 16,735 8,861
EBITDA -- Represents operating income before interest, income taxes, depreciation and amortization expenses. (2) Equity participation related to stock transactions by unconsolidated affiliates was ($.7) million, $3.5 million, $14.5 million and $3.6 million in 1994, 1993, 1992 and 1991, respectively. Net gains (losses) from the sale of assets were ($.4) million, $4.7 million, ($.3) million, $3.0 million and $3.1 million in 1995, 1994, 1993, 1992 and 1991, respectively. In 1992, the Company recorded a loss reserve of $10.6 million for an investment in a real estate limited partnership. (3) On September 30, 1994, MEDIQ/PRN acquired the critical care and life support rental equipment inventory of KCI. The purchase price, which was primarily financed with long-term debt, approximated $88 million, including transaction costs and the assumption of certain capital lease obligations. (4) In May 1992, MEDIQ/PRN acquired ATI Medical Services, Inc. for $23.9 million in cash and the assumption of debt. In July 1992, MEDIQ/PRN refinanced its outstanding debt by issuing $100 million of 11.125% Senior Secured Notes due 1999. 9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company's strategic plan adopted in fiscal 1991, in summary, called for narrowing the focus of MEDIQ, concentrating the Company's resources in the development of its core business, selling non-core assets and reducing corporate debt. On January 20, 1995, the Company announced the formation of a Special Committee of the Board of Directors for the purpose of exploring alternative ways of maximizing shareholder value, including a possible sale of the stock or assets of the Company or certain of its subsidiaries. After exploring a number of alternatives, the Board of Directors on October 23, 1995 accepted the recommendation of the Special Committee to reject two outstanding offers to acquire the Company and terminate any further efforts to sell the Company at the present time. The Board determined to continue the process of divesting the Company of substantially all operating assets other than MEDIQ/PRN and using the proceeds to reduce indebtedness. With the $88 million acquisition in 1994 of the movable medical equipment of KCI Therapeutic Services, Inc., a subsidiary of Kinetic Concepts, Inc. ('KCI'), MEDIQ/PRN, the Company's core business, strengthened its position as the leading company in the United States renting movable critical care and life support medical equipment to hospitals, home health care, sub-acute and nursing home providers on an 'as-needed basis.' With the successful integration of these assets into its 85 office distribution network, MEDIQ/PRN expanded its market presence, increased market share and improved its service standards. The Company's other operating subsidiaries reported as continuing operations include MEDIQ Management Services, Inc., a provider of healthcare management and consulting services and MEDIQ Diagnostic Centers, Inc., a provider of management and other administrative support services to diagnostic imaging centers. In 1993, the Company's other operating subsidiaries also included PCI of Virginia, Inc. and Harrisburg Healthcare, Inc. In addition to MEDIQ's core business, the Company has significant investments in unconsolidated affiliates, PCI Services, Inc. ('PCI') and NutraMax Products, Inc. ('NutraMax'). The Company owns 2,875,000 shares of the common stock of PCI, or approximately 47% of the outstanding shares. PCI is a leading provider of integrated packaging services to pharmaceutical manufacturers. The Company also owns 4,037,258 shares of the common stock of NutraMax, or approximately 47% of the outstanding shares. NutraMax is a leading private label health and personal care products company. The Company's ownership interest in NutraMax may decrease in the future in the event that certain of the Company's outstanding debentures are exchanged into shares of NutraMax common stock owned by the Company. Assuming the Company does not elect to pay cash, the effect of the exchange of all of such debentures would decrease the Company's ownership of NutraMax to approximately 21%. The Company's investments in PCI and NutraMax are accounted for under the equity method of accounting. The Company has announced its support of the efforts of the Board of Directors of NutraMax to explore opportunities to maximize value for the NutraMax shareholders. The Company has also announced its intention to realize the value of its investment in PCI. DISCONTINUED OPERATIONS In the second quarter of fiscal 1995, the Company adopted a plan to sell its non-core businesses: MEDIQ Mobile X-Ray Services, Inc. ('Mobile X-Ray'), a provider of portable X-ray and EKG services; MEDIQ Imaging Services, Inc. ('MEDIQ Imaging'), a provider of diagnostic imaging services in mobile and fixed sites; Medifac, Inc. ('Medifac'), a provider of healthcare facility planning, architectural and development services; and Health Examinetics, Inc. ('Health Examinetics'), a provider of mobile health testing services. In the fourth quarter of fiscal 1995, the Company expanded its plan to sell non-core businesses to include the operations of HealthQuest, Inc. ('HealthQuest'), a provider of case management and utilization review services. These operations, in addition to the Company's equity investment in InnoServ Technologies, Inc. (formerly MMI Medical, 10 Inc.), which is anticipated to be distributed to the Company's shareholders in fiscal 1996, are reported as discontinued operations. In addition, the Company reported the operations of Mental Health Management, Inc., ('MHM'), a provider of behavioral health services, as discontinued operations in fiscal 1993. In August 1993, the Company completed the tax-free distribution to its stockholders of 100% of the stock of MHM. In June 1995, the Company sold Medifac and related assets to the management of Medifac for approximately $11 million, consisting of $6 million in cash and $5 million in notes, and the assumption of $26.9 million of non-recourse debt. In August 1995, the Company sold the assets of MEDIQ Imaging to NMC Diagnostic Services, Inc., a division of W.R. Grace & Co., for approximately $17 million in cash and the assumption of $9.7 million of debt. The Company anticipates that the disposal of Mobile X-Ray, Health Examinetics and HealthQuest will be completed in the second quarter of fiscal 1996. RESULTS OF OPERATIONS Fiscal Year 1995 Compared with Fiscal Year 1994 Revenues from continuing operations were $132.2 million, as compared to $81.5 million in the prior year, an increase of $50.7 million, or 62%. MEDIQ/PRN's revenues increased 72%, to $128.8 million, as compared to revenues of $74.9 million in the prior year, primarily attributable to the KCI acquisition. MEDIQ/PRN incorporated the movable medical equipment obtained from the acquisition on September 30, 1994 into its national distribution network with the addition of six branch offices, which resulted in substantially higher revenues. Revenues from the Company's other operating activities (before intercompany eliminations) were $3.8 million, as compared to $6.3 million in the prior year. Operating income from continuing operations was $23.9 million, as compared to $1.1 million in 1994. The improvement in operating income was attributable to MEDIQ/PRN, which had operating income of $31.5 million, an increase of $26.2 million over 1994, principally related to additional revenues and improved operating margins resulting from the KCI acquisition. The Company's other operating activities had operating income of $.2 million in 1995, as compared to $1.9 million in the prior year. Non-operating activities, including corporate overhead, accounted for operating losses of $7.8 million in 1995, as compared to $6.1 million in 1994. Operating income from continuing operations in 1995 was adversely affected by corporate general and administrative expenses of approximately $1.7 million incurred in connection with the Company's corporate strategic activities during the year. These activities, which included the formation and activities of a Special Committee of the Board of Directors to explore alternative ways of maximizing shareholder value, were concluded in October 1995 when the Board accepted the recommendation of the Special Committee to reject two outstanding offers to acquire the Company and terminate any further efforts to sell the Company at the present time. The Company anticipates incurring additional expenses in the first quarter of fiscal 1996 for restructuring charges of approximately $2.0 million for employee severance costs incurred in connection with a plan approved by the Board of Directors to downsize corporate functions and consolidate certain activities with the operations of MEDIQ/PRN. The plan results in the termination of 29 employees in fiscal 1996. The Company anticipates reductions in corporate expenses of approximately $1.3 million in 1996 and $2 million annually thereafter as a result of the downsizing and consolidation of corporate activities. Interest expense increased 37%, to $29 million, from $21.1 million in 1994. Increased debt associated with financing MEDIQ/PRN's acquisition of KCI on September 30, 1994 resulted in higher interest expense, partially offset by lower interest at the corporate level. Net cash proceeds from the sale of discontinued operations in June and August 1995 aggregating approximately $24 million were used to reduce notes payable to banks and other long-term debt. 11 The Company's equity in the earnings of its unconsolidated affiliates, PCI and NutraMax, was $4.7 million, as compared to $4.3 million in the prior year. Operating results may be affected in the event of a sale of the Company's equity interest in PCI and/or NutraMax as the proceeds from any such sale would be utilized to reduce indebtedness and, accordingly, would result in reduced interest expense. Interest income was $1.5 million in 1995 and $1.4 million in 1994 and was primarily derived from the Company's note receivable from MHM. Other charges and credits for 1995 included a loss of $1.1 million from the sale of the Company's equity interest in New West Eyeworks, Inc. in April 1995 for $3.0 million, and income of $.6 million representing a portion of the contingent proceeds earned in 1995 from the prior year sale of the Company's interest in a kidney stone treatment center. Fiscal 1994 included a gain of $4.0 million related to the sale of the kidney stone treatment center and gains totalling $1.4 million from dividends and the sale of other assets, including a portion of the Company's equity interest in New West Eyeworks. Pretax income from continuing operations was $1.1 million for 1995, as compared to a pretax loss of $9.0 million in the prior year. The improvement in pretax income was attributable to MEDIQ/PRN and the success of its integration of the assets acquired in the KCI acquisition into its nationwide distribution network. The current year included non-recurring expenses of $1.7 million related to the strategic activities of the Board of Directors and a loss of $1.1 million on the sale of the Company's equity interest in New West Eyeworks. The pretax loss in 1994 included gains from the sale of the Company's interest in a kidney stone treatment center and other assets totalling $5.4 million, and a loss of $.7 million related to the Company's equity participation in common stock transactions of PCI and NutraMax. The income tax expense related to continuing operations was $1.3 million, as compared to a benefit of $3.1 million in the prior year. The Company's effective tax rates were disproportionate compared to the statutory rates as a result of goodwill amortization and the non-recognition for state income tax purposes of certain operating losses. Revenues from discontinued operations were $78.4 million in 1995, as compared to $86.6 million in 1994. The net loss from discontinued operations was $4.7 million in 1995, consisting principally of the net loss on disposal, as compared to a net loss of $1.5 million in the prior year. In November 1995, ATS Medical Services, Inc. ('ATS') a subsidiary of the Company, agreed to repay the government $2.1 million for excess reimbursements received by ATS from the Medicare Program from 1988 through 1992. Under the agreement, $75,000 is payable monthly without interest through October 1996 and, thereafter, $100,000 plus interest is payable monthly through October 1997. Upon the sale of ATS, the balance is payable in full. The Company recorded a reserve for such excess reimbursement in fiscal 1994 and has reflected such reserve in discontinued operations. Fiscal Year 1994 Compared with Fiscal Year 1993 Revenues from continuing operations were $81.5 million, as compared to $90 million in the prior year, a decrease of $8.5 million, or 9%. Revenues from MEDIQ/PRN, which decreased 2%, to $74.9 million, were adversely affected by lower average rental prices in response to competitive pressures. This situation was mitigated by MEDIQ/PRN's growth in the sub-acute, nursing home and home health care markets. Revenues from the Company's other operating subsidiaries were $6.3 million, as compared to $12 million in the prior year, which included revenues of $5.1 million related to operations that were divested in 1993. Operating income from continuing operations was $1.1 million, as compared to $8.4 million in 1993. MEDIQ/PRN's operating income decreased 60%, to $5.3 million, as compared to $13.4 million in 1993. This decrease resulted from reductions in average rental prices due to competition and higher administrative and operating expenses. MEDIQ/PRN's operating income was also adversely affected by higher depreciation and amortization expense related to increases in rental equipment inventory. The Company's other operating activities had operating income of $1.9 million, as compared to $1.1 12 million in 1993. Non-operating activities, including corporate overhead, accounted for operating losses of $6.1 million in 1994 and 1993. Interest expense was $21.1 million, which was comparable to the prior year. The Company's equity in the earnings of its unconsolidated affiliates was $4.3 million in 1994, which was comparable to the prior year. Equity participation related to common stock transactions by PCI and NutraMax resulted in a loss of $.7 million in 1994 and income of $3.5 million in 1993. Interest income was $1.4 million in 1994 and $1.1 million in 1993 and was primarily related to the MHM note receivable. Other income, including gains and losses on the sale of assets, was $6 million in 1994, as compared to $.9 million in 1993. In September 1994, the Company sold its rights under a management contract for a kidney stone treatment center to a regional hospital for $4 million in cash and $3 million contingent upon future earnings, resulting in a gain of $4 million. The Company also recognized $1.4 million of income from dividends and the sale of other assets in 1994. The income tax benefit from continuing operations was $3.1 million, as compared to $3.9 million in the prior year. The Company's effective tax rates were disproportionate compared to the statutory rates as a result of goodwill amortization, non-recognition for state income tax purposes of certain operating losses and permanent differences related to the disposition of assets. In 1993, the Company repaid approximately $15.9 million of corporate debt with proceeds from the disposition of operations and the Company's debenture offering in July 1993. As a result of such repayments, the Company incurred prepayment premiums of $1.5 million, or $1.0 million net of taxes. Revenues from discontinued operations were $86.6 million in 1994, as compared to $84.8 million in 1993. The net loss from discontinued operations was $1.5 million as compared to net income of $3.0 million in 1993, which included a net loss on disposal of $.5 million. Fiscal 1994 included a reserve of $1.5 million (net of taxes) related to excess reimbursement received by ATS under the Medicare program. LIQUIDITY AND CAPITAL RESOURCES In 1995, cash provided by operating activities increased to $23.3 million, as compared to $12.6 million in the prior year. This increase was principally the result of significantly higher operating income from MEDIQ/PRN. In addition to cash flow from operations, the Company raised $33 million in cash from the dispositions of Medifac, MEDIQ Imaging and other assets in 1995. The Company anticipates that additional dispositions will occur in 1996 and presently intends to use the net proceeds of any such disposition to further reduce long-term debt. Net cash provided by investing activities was $19.6 million for 1995, principally as a result of the sale of discontinued operations and other assets, partially offset by expenditures principally for rental medical equipment totalling $11.5 million. The Company anticipates capital expenditures of approximately $10 million during fiscal 1996, primarily for rental medical equipment. The Company intends to fund the rental medical equipment expenditures with cash from operations. Net cash used in financing activities was $41.5 million for 1995. Cash flow from operations and proceeds from the sale of discontinued operations and other assets were used to repay debt of $42.9 million, partially offset by borrowings of $1.2 million. In connection with the KCI acquisition, the Company obtained a $43 million term loan and issued $10 million of senior subordinated notes (including warrants) to finance a portion of the purchase price. In addition, KCI provided financing for the acquisition aggregating $17.1 million (net of related discounts). Borrowings under the Company's lines of credit and cash proceeds from the sale of assets in 1994 were utilized to fund the balance of the purchase price. The $43 million term loan is payable in equal monthly payments of approximately $600,000 through December 2000 plus interest at prime plus 2% or, at the Company's option, a rate equal to the adjusted Eurodollar rate plus 4.25%. The $10 million of senior subordinated notes include warrants 13 which allow the holders to purchase an aggregate of 10% of the common stock of MEDIQ/PRN for a nominal amount. Interest on the notes of 10% is payable semi-annually on April 1 and October 1 and annual principal payments of $1.0 million commence April 1, 2000, with the balance payable on October 1, 2004. Financing provided by KCI in the amount of $17.1 million was comprised of $8.6 million (net of related discounts) of subordinated notes and two term loans aggregating $8.5 million. The subordinated notes are due in September 1999 and bear interest at 10% commencing April 1, 1996. The term loans were paid in monthly installments through October 1, 1995. In September 1994, in connection with the KCI acquisition, MEDIQ/PRN amended the indenture relating to its outstanding $100 million of 11.125% senior secured notes, which resulted in an increase in the interest rate on the notes to 12.125% commencing September 30, 1995. The notes, which are not guaranteed by the Company, are redeemable after July 1997. MEDIQ/PRN is required to offer to repay a portion of the principal amount of the notes under certain circumstances (as defined in the indenture). At September 30, 1995, MEDIQ/PRN was not required to offer to repay any portion of the notes. Interest is payable on the notes semi-annually on January 1 and July 1. Although MEDIQ/PRN is highly leveraged, it anticipates that excess cash flow will be sufficient to repay the notes when due. If MEDIQ/PRN does not generate funds from operations sufficient to repay the notes upon maturity in 1999, MEDIQ/PRN would attempt to refinance such indebtedness. The Company's 7.25% convertible subordinated debentures due 2006 require the Company to offer to repurchase a portion of the debentures if stockholders' equity is $40 million or less at the end of two consecutive fiscal quarters. Since June 30, 1994, the Company's stockholders' equity has been less than $40 million. The requirements to repurchase debentures at December 31, 1994 and June 30, 1995 were satisfied through the Company's previous acquisition of $23.3 million principal amount of debentures. As of September 30, 1995, $22.5 million of the debentures was classified as current obligations pursuant to the terms of the indenture. In October and November 1995, the Company repurchased an aggregate of $11.25 million of its debentures at a discount in the open market and through a private transaction resulting in a pretax gain of approximately $1.5 million. This gain will be recorded in the first quarter of fiscal 1996 as an extraordinary item. The Company is required to either repurchase or redeem $11.25 million of debentures prior to June 30, 1996 and semi-annually thereafter until all of the debentures are repurchased or stockholders' equity is more than $40 million. As of September 30, 1995, the Company had lines of credit aggregating $16 million, bearing interest at rates ranging from prime (8.75% at September 30, 1995) to prime plus 1.5%. No amounts were outstanding under these facilities at September 30, 1995. The Company also has a $13.4 million long-term revolving credit facility. In December 1995, this credit facility which bears interest at prime plus 1% and, originally set to expire October 1995, was extended to December 1996. In connection with the extension to December 1996, the facility was increased to $15.0 million and the interest rate was reduced to prime plus .5%. In addition, as amended, the facility will be reduced by an amount equal to 50% of the net cash proceeds from the sale of discontinued operations and certain other assets. At September 30, 1995, the Company had $.6 million outstanding under this facility. During the first quarter of fiscal 1996, $6.9 million was borrowed under this facility to fund, in part, the repurchase of the Company's 7.25% convertible subordinated debentures. Certain of the Company's loan agreements require the maintenance of specified financial ratios and impose financial and dividend limitations. The terms of one of the Company's indentures currently limits the payment of future dividends or the purchase of the Company's stock to approximately $5 million in the aggregate as of September 30, 1995. The Company expects that its primary sources of liquidity for operating activities will be generated through cash flows from MEDIQ/PRN. Proceeds from the sale of discontinued operations and miscellaneous assets will be used to repay long-term debt. The Company believes that sufficient funds will be available from operating cash flows and the sale of assets to meet the Company's anticipated operating and capital requirements, including obligations to redeem or repurchase in the open market a portion of the 7.25% debentures. In addition, the Company is currently evaluating the possibility of refinancing all or a portion of its consolidated senior and subordinated debt, but there can be no assurances that such refinancing will occur. 14 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE ----------- Independent Auditors' Report............................................................................... 16 Consolidated Statements of Operations -- Three Years Ended September 30, 1995.............................. 17 Consolidated Balance Sheets -- September 30, 1995 and 1994................................................. 18 Consolidated Statements of Stockholders' Equity -- Three Years Ended September 30, 1995....................................................................................... 19 Consolidated Statements of Cash Flows -- Three Years Ended September 30, 1995.............................. 20 Notes to Consolidated Financial Statements................................................................. 21
15 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders MEDIQ Incorporated Pennsauken, New Jersey We have audited the accompanying consolidated balance sheets of MEDIQ Incorporated and subsidiaries as of September 30, 1995 and 1994, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended September 30, 1995. Our audits also include the financial statement schedules listed in the index at Item 14. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules 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 Incorporated and subsidiaries as of September 30, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1995 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Philadelphia, Pennsylvania December 28, 1995 16 MEDIQ INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, ------------------------------------- 1995 1994 1993 ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues................................................................... $ 132,241 $ 81,498 $ 89,994 Costs and Expenses: Operating................................................................ 53,164 38,654 41,903 Selling and administrative............................................... 24,714 20,364 20,526 Depreciation and amortization............................................ 30,425 21,385 19,187 ----------- ----------- ----------- 108,303 80,403 81,616 ----------- ----------- ----------- Operating Income........................................................... 23,938 1,095 8,378 Other (Charges) Credits: Interest expense......................................................... (28,977) (21,076) (20,807) Equity in earnings of unconsolidated affiliates.......................... 4,731 4,308 4,343 Equity participation..................................................... 22 (662) 3,519 Interest income.......................................................... 1,502 1,395 1,067 Gain (loss) on sale of assets............................................ (437) 4,672 (315) Other.................................................................... 316 1,314 1,166 ----------- ----------- ----------- Income (Loss) from Continuing Operations before Income Taxes and Extraordinary Charge..................................................... 1,095 (8,954) (2,649) Income Tax Expense (Benefit)............................................... 1,304 (3,106) (3,871) ----------- ----------- ----------- Income (Loss) from Continuing Operations before Discontinued Operations and Extraordinary Charge..................................................... (209) (5,848) 1,222 Discontinued Operations: Income (loss) from operations (net of income taxes of $1,777,000 in 1995; ($939,000) in 1994 and $3,008,000 in 1993)............................ (5) (1,470) 3,494 Gain (loss) on disposal (net of income taxes of $953,000 in 1995 and $0 in 1993).............................................................. (4,733) -- (467) ----------- ----------- ----------- (4,738) (1,470) 3,027 ----------- ----------- ----------- Income (Loss) before Extraordinary Charge.................................. (4,947) (7,318) 4,249 Extraordinary Charge, Early Retirement of Debt (net of income tax benefit of $509,000)............................................................. -- -- (953) ----------- ----------- ----------- Net Income (Loss).......................................................... $ (4,947) $ (7,318) $ 3,296 ----------- ----------- ----------- ----------- ----------- ----------- Earnings Per Share: Income (Loss) from: Continuing Operations................................................. $ (.01) $ (.24) $ .05 Discontinued Operations............................................... (.19) (.06) .13 ----------- ----------- ----------- Income (Loss) before Extraordinary Charge................................ (.20) (.30) .18 Extraordinary Charge..................................................... -- -- (.04) ----------- ----------- ----------- Net Income (Loss)........................................................ $ (.20) $ (.30) $ .14 ----------- ----------- ----------- ----------- ----------- ----------- Weighted Average Shares Outstanding........................................ 24,604 24,405 24,366 ----------- ----------- ----------- ----------- ----------- -----------
See Notes to Consolidated Financial Statements 17 MEDIQ INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, ------------------------- 1995 1994 ----------- ------------ (IN THOUSANDS) ASSETS Current Assets: Cash................................................................................. $ 2,966 $ 1,495 Accounts receivable (net of allowance of $2,207,000 in 1995 and $2,195,000 in 1994)............................................................................. 27,884 16,456 Investment in discontinued operations................................................ 19,009 -- Inventories.......................................................................... 4,181 5,939 Deferred income taxes................................................................ 4,310 3,298 Other current assets................................................................. 5,095 7,853 ----------- ------------ Total Current Assets........................................................ 63,445 35,041 Investments in unconsolidated affiliates............................................... 43,092 38,338 Investment in discontinued operations.................................................. 8,061 61,573 Note receivable from MHM............................................................... 10,733 11,500 Property, plant and equipment.......................................................... 132,823 149,051 Goodwill............................................................................... 61,744 64,781 Other assets........................................................................... 14,272 17,511 ----------- ------------ Total Assets........................................................................... $ 334,170 $ 377,795 ----------- ------------ ----------- ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Notes payable to financial institutions.............................................. $ -- $ 6,180 Accounts payable..................................................................... 6,694 5,861 Accrued expenses..................................................................... 20,230 23,163 Other current liabilities............................................................ 461 969 Current portion of long-term debt.................................................... 37,300 23,437 ----------- ------------ Total Current Liabilities................................................... 64,685 59,610 Senior debt............................................................................ 136,949 162,436 Subordinated debt...................................................................... 81,907 103,388 Deferred income taxes.................................................................. 13,414 10,041 Other liabilities...................................................................... 5,698 6,040 Commitments and contingencies.......................................................... -- -- Stockholders' Equity: Preferred stock ($.50 par value: Authorized 20,000,000 shares; issued Series A: 6,752,000 in 1995 and 6,816,000 in 1994).......................................... 3,376 3,408 Common stock ($1 par value: Authorized 40,000,000 shares; issued 19,127,000 in 1995 and 19,064,000 in 1994)........................................................... 19,127 19,064 Capital in excess of par value....................................................... 22,124 22,357 Accumulated deficit.................................................................. (6,067) (1,120) Treasury stock, at cost (preferred shares: 377,000 in 1995 and 377,000 in 1994; common shares: 1,275,000 in 1995 and 1,335,000 in 1994).......................................................................... (7,043) (7,429) ----------- ------------ Total Stockholders' Equity.................................................. 31,517 36,280 ----------- ------------ Total Liabilities and Stockholders' Equity............................................. $ 334,170 $ 377,795 ----------- ------------ ----------- ------------
See Notes to Consolidated Financial Statements 18 MEDIQ INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
PREFERRED STOCK COMMON STOCK CAPITAL RETAINED -------------------- -------------------- IN EARNINGS SHARES SHARES EXCESS OF (ACCUMULATED TREASURY ISSUED AMOUNT ISSUED AMOUNT PAR VALUE DEFICIT) STOCK --------- --------- --------- --------- --------- ------------ ---------- Balance October 1, 1992......... 7,274 $ 3,637 18,605 $ 18,605 $ 23,993 $ 23,136 $ (10,623) Net income...................... 3,296 Dividends....................... (2,541) Conversion of preferred stock to common stock.................. (436) (218) 437 437 (219) Stock options exercised......... (425) 1,106 Distribution of MHM............. (15,610) --------- --------- --------- --------- --------- ------------ ---------- Balance September 30, 1993.......................... 6,838 3,419 19,042 19,042 23,349 8,281 (9,517) Net loss........................ (7,318) Dividends....................... (2,083) Conversion of preferred stock to common stock.................. (22) (11) 22 22 (11) Issuance of stock............... (600) 1,309 Stock options exercised......... (381) 779 --------- --------- --------- --------- --------- ------------ ---------- Balance September 30, 1994.......................... 6,816 3,408 19,064 19,064 22,357 (1,120) (7,429) Net loss........................ (4,947) Conversion of preferred stock to common stock.................. (64) (32) 63 63 (31) Stock options exercised......... (202) 386 --------- --------- --------- --------- --------- ------------ ---------- Balance September 30, 1995.......................... 6,752 $ 3,376 19,127 $ 19,127 $ 22,124 $ (6,067) $ (7,043) --------- --------- --------- --------- --------- ------------ ---------- --------- --------- --------- --------- --------- ------------ ----------
See Notes to Consolidated Financial Statements 19 MEDIQ INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, ------------------------------------ 1995 1994 1993 ---------- ----------- ----------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss).......................................................... $ (4,947) $ (7,318) $ 3,296 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization......................................... 30,425 21,385 19,187 Provision for doubtful accounts....................................... 993 984 1,809 Provision for deferred income taxes (benefit)......................... 1,182 (3,146) (1,185) Undistributed earnings from unconsolidated affiliates................. (4,731) (4,308) (4,343) Equity participation.................................................. (22) 662 (3,519) Accretion of acquisition indebtedness................................. 1,402 -- -- Cash provided by discontinued operations.............................. 7,532 3,073 7,364 (Income) loss from discontinued operations............................ 4,738 1,470 (3,027) Other................................................................. 372 (4,616) 1,484 Increase (decrease), net of effects from acquisitions and dispositions: Accounts receivable............................................. (11,305) 1,527 4,048 Inventories..................................................... 1,758 175 446 Accounts payable................................................ (108) (1,615) (2,469) Accrued expenses................................................ (3,036) 2,303 (5,109) Other current assets and liabilities............................ (907) 1,987 (632) ---------- ----------- ----------- Net cash provided by operating activities.................................. 23,346 12,563 17,350 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of assets............................................... 10,957 8,251 9,084 Proceeds from sale of discontinued operations.............................. 23,858 -- -- Purchase of equipment...................................................... (11,548) (7,320) (15,830) Acquisitions............................................................... -- (70,528) -- Other...................................................................... (3,663) (2,794) (5,891) ---------- ----------- ----------- Net cash provided by (used in) investing activities........................ 19,604 (72,391) (12,637) CASH FLOWS FROM FINANCING ACTIVITIES Borrowings................................................................. 1,190 67,540 34,648 Debt repayments............................................................ (42,853) (19,299) (27,661) Dividends.................................................................. -- (2,722) (1,903) Proceeds from exercise of options.......................................... 184 398 642 ---------- ----------- ----------- Net cash provided by (used in) financing activities........................ (41,479) 45,917 5,726 ---------- ----------- ----------- Increase (decrease) in cash................................................ 1,471 (13,911) 10,439 Cash: Beginning balance........................................................ 1,495 15,406 4,967 ---------- ----------- ----------- Ending balance........................................................... $ 2,966 $ 1,495 $ 15,406 ---------- ----------- ----------- ---------- ----------- ----------- Supplemental disclosure of cash flow information: Interest paid............................................................ $ 26,200 $ 20,440 $ 21,213 ---------- ----------- ----------- ---------- ----------- ----------- Income taxes paid (refunded)............................................. $ 205 $ (2,886) $ (1,342) ---------- ----------- ----------- ---------- ----------- ----------- Supplemental disclosure of non-cash investing and financing activities: Equipment financed with long-term debt and capital leases................ $ 1,808 $ 5,937 $ 8,663 ---------- ----------- ----------- ---------- ----------- ----------- Portion of acquisitions financed by sellers.............................. $ -- $ 19,384 $ -- ---------- ----------- ----------- ---------- ----------- ----------- Liabilities assumed in connection with acquisitions...................... $ -- $ 2,804 $ -- ---------- ----------- ----------- ---------- ----------- -----------
See Notes to Consolidated Financial Statements 20 MEDIQ INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation -- The consolidated financial statements include the accounts of MEDIQ Incorporated and its subsidiaries (the 'Company'). Investments in companies owned 20% to 50% are accounted for under the equity method of accounting. All other investments are stated at the lower of cost or net realizable value. In consolidation, all significant intercompany transactions and balances have been eliminated. Inventories -- Inventories, which consist primarily of repair parts for rental equipment and finished goods held for sale, 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 -- 3 to 10 years and buildings and improvements -- 10 to 40 years). Goodwill -- The cost of acquired businesses in excess of net assets is amortized on a straight-line basis primarily over 20 years. Accumulated amortization was $12 million and $8.6 million as of September 30, 1995 and 1994, respectively. Carrying value of long-term assets -- The Company evaluates the carrying value of long-term assets, including rental equipment, goodwill and other intangible assets, based upon current and anticipated undiscounted cash flows, and recognizes an impairment when such estimated cash flows will be less than the carrying value of the asset. Measurement of the amount of impairment, if any, is based upon the difference between carrying value and fair value. Revenue recognition policy -- MEDIQ/PRN Life Support Services, Inc. ('MEDIQ/PRN') recognizes revenue in accordance with the terms of the related rental agreement and the usage of the related rental equipment. Revenues from other operating activities are recognized as services are rendered or as income is earned. Income taxes -- Effective October 1, 1993, the Company adopted on a prospective basis the provisions of Statement of Financial Accounting Standards ('SFAS') No. 109, 'Accounting for Income Taxes', which supersedes SFAS No. 96. The effect of the adoption of SFAS No. 109 was not significant. The Company files a consolidated federal tax return with its 80% or more owned subsidiaries and, accordingly, any dividends from included companies are not taxable to the Company. Subsidiary and unconsolidated affiliate stock transactions -- Gains (losses) resulting from the issuance or repurchase of stock by subsidiaries and unconsolidated affiliates are recognized by the Company as equity participation in the Consolidated Statements of Operations. Earnings (loss) per share -- Primary net earnings (loss) per share are computed by dividing net earnings (loss) by the weighted average number of shares of common stock and common stock equivalents outstanding during the period. Common stock equivalents include shares issuable upon conversion of the Company's convertible preferred stock and exercise of outstanding stock options. Reclassification of accounts -- Certain reclassifications have been made to conform prior years' balances to the current year presentation. NOTE B -- ACQUISITIONS On September 30, 1994, the Company acquired the critical care and life support rental equipment inventory of KCI Therapeutic Services, Inc., a subsidiary of Kinetic Concepts, Inc. ('KCI'). The purchase price was approximately $88 million, including transaction costs and the assumption of certain capitalized lease obligations. The purchase price was allocated to assets acquired and liabilities assumed based on fair values at the date of the acquisition. The excess of the purchase price over fair 21 MEDIQ INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE B -- ACQUISITIONS--(CONTINUED) values of the net assets acquired of $44.5 million was recorded as goodwill and is being amortized over twenty years. NOTE C -- DISPOSITIONS The Company's strategic plan adopted in fiscal 1991, in summary, called for narrowing the focus of MEDIQ, concentrating the Company's resources in the development of its core business, selling non-core assets and reducing corporate debt. On January 20, 1995, the Company announced the formation of a Special Committee of the Board of Directors for the purpose of exploring alternative ways of maximizing shareholder value, including a possible sale of the stock or assets of the Company or certain of its subsidiaries. After exploring a number of alternatives, the Board of Directors on October 23, 1995 accepted the recommendation of the Special Committee to reject two outstanding offers to acquire the Company and terminate any further efforts to sell the Company at the present time. The Board determined to continue the process of divesting the Company of substantially all operating assets other than MEDIQ/PRN and using the proceeds to reduce indebtedness. Sale of Assets In December 1993, the Company exercised warrants to purchase 229,518 shares of common stock of New West Eyeworks, Inc. ('New West') in connection with New West's initial public offering. The warrants were issued to the Company in 1988 together with $5.1 million of New West preferred stock as partial consideration for the sale of a business. In connection with the offering, the Company received $1.9 million, representing a partial redemption of the preferred shares, net proceeds from the sale of 82,500 shares of common stock and partial payment of accumulated preferred stock dividends and accrued interest. The Company received an additional 57,143 shares of New West common stock in payment of the balance of accumulated dividends and interest. The Company recorded income of $1.2 million in 1994 related to the sale of New West common stock and the payment of dividends and interest. In April 1995, the Company sold its remaining investments in New West common stock and preferred stock for aggregate consideration of $3 million resulting in a $1.1 million pretax loss. In September 1994, the Company sold its rights under a management contract related to a kidney stone treatment center for $4 million in cash and $3 million contingent upon future results of operations. The sale resulted in a pretax gain of $4 million in 1994 and $.6 million in 1995 representing a portion of the contingent proceeds. Discontinued Operations In the second quarter of fiscal 1995, the Company adopted a plan to sell four non-core businesses, Medifac, Inc., Health Examinetics, Inc., MEDIQ Mobile X-Ray Services, Inc. and MEDIQ Imaging Services, Inc., within twelve months. In the fourth quarter, the Company revised the plan to include the operations of HealthQuest, Inc., which is anticipated to be sold in fiscal 1996. As a result, operating results and net assets of these businesses have been reported as discontinued operations. Discontinued operations also include the Company's equity investment in InnoServ Technologies, Inc. ('InnoServ,' formerly MMI Medical, Inc.), which is anticipated to be distributed to the Company's shareholders during fiscal 1996. The Company's prior year consolidated financial statements have been restated to report the net assets and operating results of these businesses as discontinued operations. In addition, the Company reported the operations of Mental Health Management, Inc., ('MHM') as discontinued operations in fiscal 1993. In August 1995, the Company sold the assets of MEDIQ Imaging Services, Inc., the Company's mobile and fixed site ultrasound and nuclear imaging business, to NMC Diagnostic Services, Inc., a 22 MEDIQ INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE C -- DISPOSITIONS--(CONTINUED) division of W.R. Grace & Co., for approximately $17 million in cash, and the assumption of $9.7 million of debt. In June 1995, the Company sold Medifac, Inc., a healthcare facility planning, design and project management firm, and related assets to the management of Medifac for approximately $11 million, consisting of $6 million in cash and $5 million in notes, and the assumption of $26.9 million of non- recourse debt. In August 1994, the Company merged its MEDIQ Equipment and Maintenance Services, Inc. ('MEMS') subsidiary with InnoServ, and the Company received 2,030,000 shares of InnoServ common stock, or approximately 40% of the outstanding shares, and warrants to purchase at $6.25 per share an additional 325,000 shares of common stock. No gain or loss resulted from the merger. In August 1993, the Company completed the tax-free distribution to the Company's shareholders of the stock of MHM, a provider of behavioral healthcare services. The distribution was accounted for as a dividend with a resultant reduction in consolidated stockholders' equity of $15.6 million, representing the Company's equity investment in MHM. In connection with the distribution, the Company obtained a five-year note receivable from MHM for the balance of unpaid management fees and intercompany interest in the amount of $11.5 million. The note bears interest at a rate of prime (8.75% at September 30, 1995) plus 1.5%, with monthly interest payments for two years which commenced October 1, 1993 and monthly principal and interest payments for the following three years, based on a fifteen year amortization period, with the balance due on August 31, 1998. The Company anticipates that the disposal of Mobile X-Ray, Health Examinetics and HealthQuest will be completed in the second quarter of fiscal 1996. The estimated loss on the sale of discontinued operations, including operations to be sold in fiscal 1996, amounted to $4.7 million (net of income tax expense of $1 million). The investment in discontinued operations as of September 30, 1995 consisted of (in thousands): Current assets................................................................... $12,270 Current liabilities.............................................................. 8,841 --------- Net current assets............................................................... 3,429 Net fixed assets................................................................. 4,726 Investment in InnoServ........................................................... 8,061 Other noncurrent assets.......................................................... 10,854 --------- $27,070 --------- ---------
The investment in InnoServ, which will be distributed to the Company's shareholders in the form of a dividend, is reflected as a long-term asset. Revenues from discontinued operations were $78.4 million, $86.6 million and $84.8 million in 1995, 1994 and 1993, respectively. 23 MEDIQ INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE D -- PROPERTY, PLANT AND EQUIPMENT
SEPTEMBER 30, ------------------------ 1995 1994 ----------- ----------- (IN THOUSANDS) Rental equipment............................................................. $ 205,773 $ 211,373 Equipment and fixtures....................................................... 10,316 9,504 Building and improvements.................................................... 7,272 6,904 Land......................................................................... 149 149 ----------- ----------- 223,510 227,930 Less accumulated depreciation and amortization............................... (90,687) (78,879) ----------- ----------- $ 132,823 $ 149,051 ----------- ----------- ----------- -----------
Depreciation and amortization expense related to property, plant and equipment was $26.1 million, $19.7 million and $17.7 million in 1995, 1994 and 1993, respectively. NOTE E -- ACCRUED EXPENSES
SEPTEMBER 30, -------------------- 1995 1994 --------- --------- (IN THOUSANDS) Interest........................................................................ $ 5,301 $ 4,828 Payroll and related taxes....................................................... 3,093 2,008 Insurance....................................................................... 2,195 5,184 Other........................................................................... 9,641 11,143 --------- --------- $ 20,230 $ 23,163 --------- --------- --------- ---------
NOTE F -- NOTES PAYABLE TO FINANCIAL INSTITUTIONS The Company has $16 million of lines of credit which bear interest at rates ranging from prime (8.75% at September 30, 1995) to prime plus 1.5% and are secured primarily by certain accounts receivable, a pledge of the common stock of MEDIQ/PRN and a second mortgage on real estate. At September 30, 1995, no amounts were outstanding under these facilities. The amount of available credit fluctuates based upon the amount of eligible accounts receivable. The average amount outstanding under lines of credit in 1995 was $8.4 million and the weighted average interest rate computed on the monthly outstanding balance was 10.1%. 24 MEDIQ INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE G -- LONG-TERM DEBT Senior debt consisted of the following:
SEPTEMBER 30, ------------------------ 1995 1994 ----------- ----------- (IN THOUSANDS) Corporate debt: Revolving credit facility............................................................. $ 567 $ 11,147 Term loans payable in varying installments through 2005 at rates from prime (8.75% at September 30, 1995) to 12%......................................................... 1,815 1,862 Mortgage payable...................................................................... -- 3,917 Subsidiary debt: Senior secured notes due 1999......................................................... 100,000 100,000 Term loan payable monthly through 2000 at prime plus 2%............................... 37,493 43,000 Term loans payable in varying installments through 1999 at rates from prime plus 1% to 13%................................................................................ 2,828 13,114 Capital lease obligations payable in varying installments through 1999 at fixed rates from 8% to 21%..................................................................... 9,046 12,833 ----------- ----------- 151,749 185,873 Less current portion.................................................................... 14,800 23,437 ----------- ----------- $ 136,949 $ 162,436 ----------- ----------- ----------- -----------
Subordinated debt consisted of the following:
SEPTEMBER 30, ---------------------- 1995 1994 --------- ----------- (IN THOUSANDS) Corporate debt: 7.5% exchangeable subordinated debentures due 2003..................................... $ 34,500 $ 34,500 7.25% convertible subordinated debentures due 2006..................................... 51,729 51,729 Subsidiary debt: 10% subordinated notes due 2004........................................................ 8,664 8,547 10% subordinated notes due 1999........................................................ 9,514 8,612 --------- ----------- 104,407 103,388 Less current portion..................................................................... 22,500 -- --------- ----------- $ 81,907 $ 103,388 --------- ----------- --------- -----------
In September 1994, in connection with the acquisition of the rental equipment inventory of KCI, the Company obtained financing consisting of a $43.0 million term loan, $8.5 million of senior subordinated notes, $8.6 million of subordinated notes payable to KCI and two term loans aggregating $8.5 million payable to KCI. The $43.0 million term loan is payable in equal monthly payments through December 2000 of approximately $600,000 plus interest at the prime rate plus 2% or, at the Company's option, a rate equal to the adjusted Eurodollar rate plus 4.25% and is collateralized by all of the acquired equipment. The $8.5 million of senior subordinated notes, which have a face value of $10 million, include warrants which allow the holders to purchase, in the aggregate, up to 10% of the common stock of MEDIQ/PRN for a nominal amount. Interest on the notes of 10% is payable semi-annually on April 1 and October 1. Annual principal payments on the notes of $1.0 million commence April 1, 2000, with the remaining principal balance payable on October 1, 2004. The $8.6 million of subordinated notes payable to KCI, which have a face value of $10 million, mature on September 30, 1999 and bear interest at 10%, commencing April 1, 1996. The term loans, aggregating $8.5 million, 25 MEDIQ INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE G -- LONG-TERM DEBT--(CONTINUED) were payable to KCI in monthly installments through October 1995. The subordinated notes payable to KCI and certain of the term notes are carried net of related discounts. The MHM note receivable is pledged as collateral for the Company's obligations to KCI. In October 1993, the Company entered into an agreement with a commercial bank for a $7.5 million revolving credit facility, which was increased to $13.4 million in August 1994. In December 1995, this credit facility which bears interest at prime plus 1% and, originally scheduled to expire in October 1995, was extended to December 1996. In connection with the extension to December 1996, the facility was increased to $15 million and the interest rate was reduced to prime plus .5%. In addition, as amended, the facility will be reduced by an amount equal to 50% of the net cash proceeds from the sale of discontinued operations and certain other assets. At September 30, 1995, the Company had $.6 million outstanding and $2.2 million of letters of credit under this facility. This facility is secured by a portion of the shares of common stock of NutraMax and PCI owned by the Company. In September 1994, in connection with the acquisition of equipment from KCI, MEDIQ/PRN amended the indenture related to its outstanding $100 million of 11.125% senior secured notes to obtain approval for the transaction. The amendment also provided for an increase in the interest rate on the notes to 12.125% effective September 30, 1995. Interest on the notes is payable semi-annually on January 1 and July 1. The notes, which are collateralized by certain of MEDIQ/PRN's assets, are redeemable at the option of MEDIQ/PRN in whole or in part on or after July 1, 1997 at specified redemption prices, plus accrued interest. MEDIQ/PRN is obligated to offer to repay a portion of the principal amount of the senior secured notes under certain circumstances. At September 30, 1995, MEDIQ/PRN was not required to offer to repay any portion of the senior secured notes. The Company's ability to obtain cash from MEDIQ/PRN is limited by provisions in certain of MEDIQ/PRN's debt agreements. For 1995 and 1994, such provisions did not permit MEDIQ/PRN to pay any dividends to the Company. The 7.5% subordinated debentures are exchangeable for an aggregate of 2,255,000 shares of NutraMax common stock owned by the Company, or an equivalent of $15.30 per share, and are redeemable in whole or in part at the option of the Company after July 1996. Interest is payable semi-annually on January 15 and July 15. The 7.25% subordinated debentures are convertible at any time prior to maturity into shares of the common stock of the Company at $7.50 per share. Interest is payable semi-annually on June 1 and December 1. Annual sinking fund payments equal to 10% of the principal commence in June 1997. The Company is also required to offer to repurchase a portion of the debentures if stockholders' equity is $40 million or less at the end of two consecutive fiscal quarters. Since June 30, 1994, the Company's stockholders' equity has been less than $40 million. The requirements to repurchase debentures at December 31, 1994 and June 30, 1995 were satisfied through the Company's previous acquisition of $23.3 million principal amount of debentures. As of September 30, 1995, $22.5 million of the debentures was classified as current obligations pursuant to the terms of the indenture. In October and November 1995, the Company repurchased an aggregate of $11.25 million of its debentures at a discount in the open market and through a private transaction resulting in a pretax gain of approximately $1.5 million. This gain will be recorded in the first quarter of fiscal 1996 as an extraordinary item. The Company is required to either repurchase or redeem $11.25 million of debentures prior to June 30, 1996 and semi-annually thereafter until all of the debentures are repurchased or stockholders' equity is more than $40 million. The Company incurred prepayment premiums in connection with repayments of debt resulting in an extraordinary charge of $1.5 million, or $1.0 million net of taxes, in 1993. 26 MEDIQ INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE G -- LONG-TERM DEBT--(CONTINUED) Certain of the Company's loan agreements require the maintenance of specified financial ratios and impose financial and dividend limitations. The terms of one of the Company's indentures currently limits the payment of future dividends or the purchase of the Company's stock to approximately $5 million in the aggregate as of September 30, 1995. As of September 30, 1995, the Company and one of its subsidiaries did not comply with certain financial ratios, principally working capital and tangible net worth. Subsequent to September 30, 1995, the Company and its subsidiary obtained the necessary waivers/amendments from its lenders regarding these ratios. Restricted net assets of consolidated subsidiaries and unconsolidated affiliates aggregated approximately $38.4 million at September 30, 1995. Maturities of long-term debt are as follows:
YEAR ENDING SEPTEMBER 30, SENIOR SUBORDINATED TOTAL - ------------------------------------------------------------------------- ----------- ------------ ----------- (IN THOUSANDS) 1996..................................................................... $ 14,800 $ 22,500 $ 37,300 1997..................................................................... 10,243 22,500 32,743 1998..................................................................... 9,294 6,729 16,023 1999..................................................................... 108,667 -- 108,667 2000..................................................................... 6,931 9,514 16,445 Thereafter............................................................... 1,814 43,164 44,978 ----------- ------------ ----------- $ 151,749 $ 104,407 $ 256,156 ----------- ------------ ----------- ----------- ------------ -----------
NOTE H -- 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) 1996............................................................................. $ 3,640 $ 4,422 1997............................................................................. 3,211 3,336 1998............................................................................. 2,245 1,979 1999............................................................................. 1,520 810 2000 and thereafter.............................................................. 42 475 --------- --------- Total minimum lease payments..................................................... 10,658 $ 11,022 --------- --------- Amount representing interest..................................................... 1,612 --------- Present value of minimum lease payments.......................................... $ 9,046 --------- ---------
Total rent expense under operating leases was $5.4 million, $5.2 million and $5.4 million in 1995, 1994 and 1993, respectively. The leases, which are for terms of up to 10 years, contain options to renew for additional periods. At September 30, 1995, rental equipment and machinery and equipment included assets under capitalized lease obligations of $15.2 million, less accumulated amortization of $3.2 million. Purchase Commitments -- MEDIQ/PRN has agreed to purchase from one of its vendors certain rental equipment parts and supplies, and to obtain certain remanufacturing services from the vendor in the aggregate amount of approximately $3.0 million through 1997. 27 MEDIQ INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE H -- COMMITMENTS AND CONTINGENCIES--(CONTINUED) Legal Proceedings -- On November 28, 1995, in the United States District Court for the Middle District of Pennsylvania, ATS Medical Services, Inc. ('ATS'), a subsidiary of the Company, and the president of ATS each pled guilty to one count of misprision of a felony in violation of Title 18, United States Code, Section 4. In addition, ATS agreed to repay the government $2.1 million for excess reimbursement received by ATS from the Medicare Program from 1988 through 1992. The payment is part of a settlement agreement entered into between ATS, the United States Government and a former ATS employee, who had filed a civil lawsuit on behalf of the government against ATS pursuant to the False Claims Act, Title 31, United States Code, Sections 3729, et seq., relating to ATS's alleged excess reimbursement. The government has agreed to recommend that no fine be imposed against ATS and has agreed that ATS will not be barred from submitting claims to the Medicare Program in the future. Under the agreement, $75,000 is payable monthly without interest through October 1996 and, thereafter, $100,000 plus interest is payable monthly through October 1997. Upon the sale of ATS, the balance is payable in full. The Company recorded a reserve for such excess reimbursement in fiscal 1994 and has reflected such reserve in discontinued operations. MEDIQ Imaging, the assets of which were sold by the Company in August 1995, is presently the subject of a criminal and 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 has focused on advice given by 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 government in January 1995 after learning that the advice given by MEDIQ Imaging employees was inconsistent with the reassignment regulations. The Company and MEDIQ Imaging have been cooperating in the investigation. The Company has agreed, subject to certain limitations, to be responsible for any fine or penalty assessed following the conclusion of the investigation. Management believes that there has been no violation of any statute or regulation by MEDIQ Imaging or any of its officers, directors or employees and intends to vigorously defend any claims that may be brought. In addition, the Company has pending several legal claims incurred in the normal course of business. The Company has established reserves relating to its legal claims and believes that potential liabilities in excess of those recorded will not have a material adverse effect on the Company's Consolidated Financial Statements, however, there can be no assurances to this effect. NOTE I -- FAIR VALUE OF FINANCIAL INSTRUMENTS 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, 1995. Note receivable from MHM -- The carrying amount of the Company's note receivable from MHM of $11.5 million is a reasonable estimate of its fair value since the receivable earns interest at the prime rate plus 1.5%. 28 MEDIQ INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE I -- FAIR VALUE OF FINANCIAL INSTRUMENTS--(CONTINUED) Long-term debt (excluding capital lease obligations) -- The fair value of the Company's publicly traded debt is based on quoted market prices. 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 for debt issues for which quoted market prices are not available. The carrying amount and estimated fair value of long-term debt are $247.1 million and $234.1 million, respectively. The fair value estimates presented herein are based on information available to management as of September 30, 1995, 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. NOTE J -- COMMON AND PREFERRED STOCK Series A preferred stock is convertible on a one-for-one basis into shares of common stock, votes generally with the common stock as a single class, and in all such votes, has ten votes per share. The preferred stock participates in cash dividends at a rate equal to 60% of the amount paid on the common stock and has a $.50 per share preference in the event of dissolution or liquidation. Cash dividends of $.03 per share on the common stock and $.018 per share on the preferred stock were paid for the first, second and third quarters of 1994. NOTE K -- INCOME TAXES Income tax expense (benefit) consisted of the following:
YEAR ENDED SEPTEMBER 30, ------------------------------- 1995 1994 1993 --------- --------- --------- (IN THOUSANDS) Current: Federal............................................................... $ -- $ -- $ (2,836) State................................................................. 122 40 150 --------- --------- --------- 122 40 (2,686) --------- --------- --------- Deferred: Federal............................................................... 184 (3,971) (2,549) State................................................................. 998 825 1,364 --------- --------- --------- 1,182 (3,146) (1,185) --------- --------- --------- Total income tax expense (benefit).......................................... $ 1,304 $ (3,106) $ (3,871) --------- --------- --------- --------- --------- ---------
29 MEDIQ INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE K -- INCOME TAXES--(CONTINUED) The differences between the Company's income tax expense (benefit) and the income tax expense (benefit) computed using the U.S. federal income tax rate were as follows:
YEAR ENDED SEPTEMBER 30, ------------------------------- 1995 1994 1993 --------- --------- --------- (IN THOUSANDS) Statutory federal tax expense (benefit)..................................... $ 372 $ (3,044) $ (901) State income taxes, net of federal income taxes............................. 739 571 999 Goodwill amortization....................................................... 344 370 366 Effects of dispositions of subsidiaries..................................... -- (1,174) 6 Utilization of alternative minimum tax credits.............................. -- -- (2,858) Undistributed earnings of unconsolidated affiliates......................... -- -- (1,182) Other items -- net.......................................................... (151) 171 (301) --------- --------- --------- Income tax expense (benefit)................................................ $ 1,304 $ (3,106) $ (3,871) --------- --------- --------- --------- --------- ---------
Significant components of the Company's deferred tax assets and liabilities were as follows:
SEPTEMBER 30, -------------------- 1995 1994 --------- --------- (IN THOUSANDS) Liabilities: Depreciation.................................................................. $ 31,148 $ 28,424 Intangible assets............................................................. 11,481 9,800 Accrued expenses.............................................................. 381 202 Prepaid expenses.............................................................. 217 118 Other......................................................................... 5,902 4,140 --------- --------- Gross deferred tax liabilities............................................. 49,129 42,684 Assets: Net operating and capital loss carryforwards.................................. 27,662 22,604 Tax credit carryforwards...................................................... 5,747 5,747 Accrued expenses and reserves................................................. 8,696 5,173 Intangible assets............................................................. 429 3,907 Other......................................................................... 261 1,128 --------- --------- Gross deferred tax assets.................................................. 42,795 38,559 Valuation allowance........................................................... (2,770) (2,618) --------- --------- 40,025 35,941 --------- --------- Net deferred tax liability.................................................... $ 9,104 $ 6,743 --------- --------- --------- ---------
Under the provisions of SFAS No. 96, the deferred tax benefit for 1993 of $1.2 million resulted principally from depreciation and amortization of $2.7 million, allowance for doubtful accounts of $1.7 million, accrued expenses of $1.9 million, differences between book and tax gains and losses of $1.6 million and equity participation of $1.2 million, partially offset by net operating loss carryforwards of $8 million and the reduction of the alternative minimum tax accrual of $2.9 million. Deferred taxes of $1.6 million, $1.2 million and $.3 million were recorded in 1995, 1994 and 1993, respectively, for the undistributed earnings of unconsolidated affiliates. At September 30, 1995 for income tax purposes, the Company had alternative minimum tax credit carryforwards of approximately $5.1 million, net operating loss carryforwards of $41 million expiring 30 MEDIQ INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE K -- INCOME TAXES--(CONTINUED) through 2009, and capital loss carryforwards of $31.5 million expiring in 1998. State net operating loss carryforwards were $46 million, expiring through 2009. The Company also had a carryforward of Investment Tax Credit and Rehabilitation Tax Credit of $.6 million expiring through 2003. NOTE L -- RELATED PARTY TRANSACTIONS The Company recorded interest income related to the MHM note of $1.2 million, $.9 million and $.8 million in 1995, 1994 and 1993, respectively. In fiscal 1995 and 1994, the Company incurred legal fees of approximately $700,000 and $250,000, respectively, to a law firm of which the Company's Chairman of the Board of Directors is a partner. The Company derived revenues of $340,000, $327,000 and $225,000 in 1995, 1994 and 1993, respectively, pursuant to agreements to provide financial management, legal and risk management services to PCI, NutraMax and MHM. In January 1993, the Company sold PCI of Virginia, Inc. to PCI for aggregate consideration of $2.3 million which approximated the Company's investment. In addition, the Company assigned to PCI a purchase option to acquire the real estate leased by PCI of Virginia, in consideration for which PCI reimbursed the Company for a $1.0 million deposit. NOTE M -- STOCK OPTION PLANS Under the Company's stock option plans, options may be granted to officers and key employees of the Company and its subsidiaries. No option may be granted for a term in excess of ten years from the date of grant. As of September 30, 1995, all incentive and non-qualified stock options were exercisable under the plan. The exercise prices of outstanding options represented the fair market value at dates of grant. The Company's Board of Directors has reserved a sufficient number of shares for the exercise of outstanding stock options. In August 1993, the Company's Board of Directors reduced the exercise prices of certain outstanding stock options in connection with the distribution of MHM. A summary of the Company's stock option plan activity for common and preferred shares for the three years ended September 30, 1995 follows:
NUMBER OF OPTION PRICE SHARES PER SHARE ----------- ----------------- (IN THOUSANDS) Outstanding at October 1, 1992.......................................... 1,909 $2.45 to $5.16 Exercised............................................................. (172) $3.13 to $5.16 Terminated............................................................ (32) $2.45 to $4.09 ----------- Outstanding at September 30, 1993....................................... 1,705 $2.73 to $4.51 Exercised............................................................. (114) $ 3.06 Terminated............................................................ (149) $2.73 to $4.51 ----------- Outstanding at September 30, 1994....................................... 1,442 $2.73 to $4.51 Granted............................................................... 21 $4.02 to $4.13 Exercised............................................................. (60) $2.73 to $3.49 Terminated............................................................ (292) $2.73 to $4.49 ----------- Outstanding at September 30, 1995....................................... 1,111 $2.73 to $4.51 ----------- -----------
31 MEDIQ INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE N -- PENSION PLAN The Company maintains a noncontributory pension plan which provides retirement benefits to substantially all employees. Employees generally are eligible to participate in the plan after one year of service and become fully vested after five years of service. The plan provides defined benefits based on years of credited service and compensation. The Company makes contributions that are sufficient to fully fund its actuarially determined cost, generally equal to the minimum amounts required by ERISA. Assets of the plan consist primarily of stocks, bonds and annuities. Net periodic pension expense is comprised of the following:
YEAR ENDED SEPTEMBER 30, ------------------------------- 1995 1994 1993 --------- --------- --------- (IN THOUSANDS) Service cost -- benefits earned during the period.................... $ 785 $ 1,193 $ 1,220 Interest cost on projected benefit obligation........................ 929 894 836 Actual return on plan assets......................................... (1,642) (436) (713) Net amortization and deferrals....................................... 851 (331) 45 --------- --------- --------- Net periodic pension expense......................................... $ 923 $ 1,320 $ 1,388 --------- --------- --------- --------- --------- ---------
The following table presents the funded status of the Company's pension plan and the amounts reflected in the Consolidated Balance Sheets:
SEPTEMBER 30, ---------------------- 1995 1994 ---------- ---------- (IN THOUSANDS) Actuarial present value of benefit obligations: Vested benefits............................................................. $ (10,427) $ (9,532) ---------- ---------- ---------- ---------- Accumulated benefit obligation.............................................. $ (11,291) $ (10,502) ---------- ---------- ---------- ---------- Projected benefit obligation.................................................. $ (12,606) $ (12,261) Plan assets at fair value..................................................... 11,493 10,095 ---------- ---------- Projected benefit obligation in excess of plan assets......................... (1,113) (2,166) Unrecognized net gain......................................................... (2,345) (1,054) Balance of unrecorded transition obligation................................... 647 701 ---------- ---------- Accrued pension liability..................................................... $ (2,811) $ (2,519) ---------- ---------- ---------- ----------
The actuarial assumptions used in determining net periodic pension costs were:
YEAR ENDED SEPTEMBER 30, ------------------------------------- 1995 1994 1993 ----------- ----------- ----------- Discount rate............................................................ 8% 8% 7% Expected long-term return on plan assets................................. 8% 8% 8% Weighted average rate of increase in compensation levels................. 4.5% 4.5% 4.5%
NOTE O -- BUSINESS SEGMENT DATA The Company operates primarily in one business segment, exclusive of discontinued operations which include the Diagnostic Imaging Services Group, MEMS, MHM and other operating segments including Health Examinetics, Medifac and HealthQuest. Discontinued operations also includes the Company's equity investment in InnoServ. The Company, through its subsidiary MEDIQ/PRN, rents medical equipment on a short-term basis nationwide. This segment represents more than 90% of the consolidated revenues, operating profit and assets exclusive of corporate assets, which include net assets of discontinued operations of $27.1 million and equity investments of $43.1 million. 32 MEDIQ INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE P -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Selected quarterly financial data (in thousands except per share data) for 1995 and 1994 is as follows:
FIRST SECOND THIRD FOURTH 1995 QUARTER QUARTER QUARTER QUARTER - ---- --------- --------- --------- --------- Revenues........................................................... $ 31,842 $ 37,036 $ 33,098 $ 30,265(A) Operating income................................................... 4,676 10,244 6,481 2,537(A)(B) Income (loss) from continuing operations........................... (616) 1,564 290 (1,447)(A)(B) Income (loss) from discontinued operations......................... 405 223 (1,482) (3,884)(C) Net income (loss).................................................. (211) 1,787 (1,192) (5,331) Earnings per share: Income (loss) from continuing operations........................... (.03) .06 .01 (.06) Income (loss) from discontinued operations......................... .02 .01 (.06) (.16) Net income (loss).................................................. (.01) .07 (.05) (.22)
- ------------------ (A) Reflects seasonal nature of MEDIQ/PRN's business (B) Includes non-recurring expenses related to the activities of the Special Committee of the Board of Directors. (C) Reflects the expansion of the Company's plan to sell non-core businesses to include the operations of HealthQuest and the Company's investment in Innoserv. In addition, the Company revised its estimate of the loss on sale of discontinued operations.
FIRST SECOND THIRD FOURTH 1994 QUARTER QUARTER QUARTER QUARTER - ---- --------- --------- --------- --------- Revenues........................................................... $ 20,607 $ 22,550 $ 19,728 $ 18,613 Operating income (loss)............................................ 901 3,550 267 (3,623) Income (loss) from continuing operations........................... (925) (170) (2,855) (1,898) Income (loss) from discontinued operations......................... (337) 344 6 (1,483) Net income (loss).................................................. (1,262) 174 (2,849) (3,381) Earnings per share: Income (loss) from continuing operations........................... (.04) (.01) (.12) (.08) Income (loss) from discontinued operations......................... (.01) .02 -- (.06) Net income (loss).................................................. (.05) .01 (.12) (.14)
NOTE Q -- INVESTMENTS IN UNCONSOLIDATED AFFILIATES The Company's investments in unconsolidated affiliates consist of NutraMax Products, Inc. and PCI Services, Inc. The following summary presents the Company's approximate ownership interest, carrying value and market value as of September 30.
1995 1994 ------------------------------------- ------------------------------------- OWNERSHIP CARRYING MARKET OWNERSHIP CARRYING MARKET INTEREST VALUE VALUE INTEREST VALUE VALUE --------------- --------- --------- --------------- --------- --------- (IN THOUSANDS) PCI....................................... 47% $ 24,494 $ 26,234 47% $ 21,861 $ 18,688 NutraMax.................................. 47% 18,598 40,373 47% 16,477 41,887 --------- --------- --------- --------- $ 43,092 $ 66,607 $ 38,338 $ 60,575 --------- --------- --------- --------- --------- --------- --------- ---------
The Company's ownership interest in NutraMax may decrease in the future in the event that certain of the Company's outstanding debentures are exchanged into shares of NutraMax common 33 MEDIQ INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE Q -- INVESTMENTS IN UNCONSOLIDATED AFFILIATES--(CONTINUED) stock owned by the Company. Assuming the Company does not elect to pay cash, the effect of the exchange of all of such debentures would decrease the Company's ownership interest of NutraMax to approximately 21%. Gains (losses) on issuances of common stock by unconsolidated affiliates were $22,000 ($.7) million and $3.5 million in 1995, 1994 and 1993, respectively. Undistributed earnings were $17.1 million as of September 30, 1995. Summarized consolidated financial information for unconsolidated affiliates is as follows: NUTRAMAX PRODUCTS, INC. -- CONDENSED CONSOLIDATED BALANCE SHEETS
SEPT. 30, OCT. 1, 1995 1994 ------------- ----------- (IN THOUSANDS) ASSETS: Total current assets.................................................................. $ 23,552 $ 21,467 Property and equipment, net........................................................... 23,714 22,499 Goodwill, net......................................................................... 13,978 14,541 Other assets.......................................................................... 1,830 1,943 ------------- ----------- $ 63,074 $ 60,450 ------------- ----------- ------------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY: Total current liabilities............................................................. $ 9,400 $ 8,295 Long term debt, less current maturities............................................... 12,550 16,183 Deferred income taxes and other liabilities........................................... 1,891 1,215 Stockholders' equity.................................................................. 39,233 34,757 ------------- ----------- $ 63,074 $ 60,450 ------------- ----------- ------------- -----------
NUTRAMAX PRODUCTS, INC. -- CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED ------------------------------- SEPT. 30, OCT. 1, OCT. 2, 1995 1994 1993 --------- --------- --------- (IN THOUSANDS) Net sales...................................................................... $ 63,111 $ 55,958 $ 31,144 Cost of sales.................................................................. 45,916 38,752 19,598 --------- --------- --------- Gross profit................................................................... 17,195 17,206 11,546 Selling, general and administrative expenses................................... 8,694 9,281 5,928 --------- --------- --------- Operating income............................................................... 8,501 7,925 5,618 Other credits (charges)........................................................ (1,111) (833) 251 --------- --------- --------- Income before income tax expense............................................... 7,390 7,092 5,869 Income tax expense............................................................. 2,916 2,832 2,350 --------- --------- --------- Net income..................................................................... $ 4,474 $ 4,260 $ 3,519 --------- --------- --------- --------- --------- ---------
34 MEDIQ INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE Q -- INVESTMENTS IN UNCONSOLIDATED AFFILIATES--(CONTINUED) PCI SERVICES, INC. -- CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, ---------------------- 1995 1994 ----------- --------- (IN THOUSANDS) ASSETS: Total current assets..................................................................... $ 36,214 $ 28,301 Property, plant and equipment, net....................................................... 61,901 44,145 Goodwill, net............................................................................ 10,182 9,857 Other assets............................................................................. 670 1,124 ----------- --------- $ 108,967 $ 83,427 ----------- --------- ----------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY: Total current liabilities................................................................ $ 24,034 $ 17,244 Long-term debt, less current maturities.................................................. 27,208 14,760 Deferred income taxes and other liabilities.............................................. 4,189 4,079 Stockholders' equity..................................................................... 53,536 47,344 ----------- --------- $ 108,967 $ 83,427 ----------- --------- ----------- ---------
PCI SERVICES, INC. -- CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, ------------------------------------- 1995 1994 1993 ----------- ----------- ----------- (IN THOUSANDS) Net revenue................................................................ $ 129,785 $ 121,177 $ 111,272 Cost of goods sold......................................................... 101,586 96,092 86,932 ----------- ----------- ----------- Gross profit............................................................... 28,199 25,085 24,340 Operating expenses......................................................... 18,554 17,561 15,344 ----------- ----------- ----------- Income before income tax expense........................................... 9,645 7,524 8,996 Income tax expense......................................................... 4,073 2,168 2,841 ----------- ----------- ----------- Net income................................................................. $ 5,572 $ 5,356 $ 6,155 ----------- ----------- ----------- ----------- ----------- -----------
NOTE R -- RESTRUCTURING CHARGE In the first quarter of fiscal 1996, the Company recorded a restructuring charge of $2.0 million for employee severance costs incurred in connection with a plan approved by the Board of Directors to downsize corporate functions and consolidate certain activities with the operations of MEDIQ/PRN. The plan results in the termination of 29 employees in fiscal 1996. The Company anticipates reductions in corporate expenses of approximately $1.3 million in 1996 and $2.0 million annually thereafter as a result of the downsizing and consolidation of corporate activities. 35 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable PART III INCORPORATED BY REFERENCE The information called for by Item 10 'Directors and Executive Officers of the Registrant', Item 11 'Executive Compensation', Item 12 'Security Ownership of Certain Beneficial Owners and Management' and Item 13 'Certain Relationships and Related Transactions' is incorporated herein by reference to the Company's definitive proxy statement for its Annual Meeting of Shareholders scheduled to be held March 5, 1996, which definitive proxy statement is expected to be filed with the Commission not later than 120 days after the end of the fiscal year to which this report relates. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) Financial Statements and Supplementary Data
Report of Independent Auditors 16 Consolidated Statements of Operations 17 Consolidated Balance Sheets 18 Consolidated Statements of Stockholders' Equity 19 Consolidated Statements of Cash Flows 20 Notes to Consolidated Financial Statements 21-35
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 I -- Condensed Financial Information of Registrant Schedule II -- Valuation and Qualifying Accounts and Reserves Other Schedules are omitted because of the absence of conditions under which they are required. (a)(3) Exhibits The exhibits are listed in the Index to Exhibits appearing below. (b) No reports on Form 8-K were filed in the quarter ended September 30, 1995. (c) Exhibits
EXHIBIT # DESCRIPTION INCORPORATION REFERENCE OR PAGE NUMBER HEREIN - ------------- ------------------------------------------------ ------------------------------------------------ 2.1(a) Agreement of Merger and Plan of Reorganization Exhibit 2 to Current Report on Form 8-K filed among MMI Medical, Inc., MMI Acquisition June 9, 1994. Subsidiary, Inc., MEDIQ and MEDIQ Equipment and Maintenance Services, Inc., dated May 18, 1994.
36
EXHIBIT # DESCRIPTION INCORPORATION REFERENCE OR PAGE NUMBER HEREIN - ------------- ------------------------------------------------ ------------------------------------------------ 2.1(b) Amendment No. 1 to Agreement of Merger and Plan Filed herewith. of Reorganization dated October 24, 1995 by and among MMI Medical, Inc., MMI Acquisition Subsidiary, Inc., MEDIQ and MEDIQ Equipment and Maintenance Services, Inc. 2.2(a) Asset Purchase Agreement dated August 23, 1994 Exhibit 2.1 to Current Report on Form 8-K filed by and among Kinetic Concepts, Inc., KCI October 14, 1994. Therapeutic Services, Inc., MEDIQ, PRN Holdings, Inc. and MEDIQ/PRN Life Support Services-I, Inc. 2.2(b) Amendment No. 1 to Asset Purchase Agreement Exhibit 2.2 to Current Report on Form 8-K filed dated September 30, 1994 by and among Kinetic October 14, 1994. Concepts, Inc., KCI Therapeutic Services, Inc., MEDIQ, PRN Holdings, Inc., and MEDIQ/PRN Life Support Services-I, Inc. 2.3 Agreement and Plan of Merger dated April 7, 1995 Filed herewith. by and among MEDIQ, MEDIFAC, Inc., MEDIFAC Acquisition, Inc., and MEDIFAC Holdings, Inc. 2.4 Asset Purchase Agreement dated August 11, 1995, Filed herewith. by and among MEDIQ Imaging Services, Inc., American Cardiovascular Imaging Labs, Inc., Southern Diagnostic, Inc., and NMC Diagnostic Services, Inc. 3.1 Certificate of Incorporation. Filed herewith. 3.2 By-Laws. Filed herewith. 4.1 Indenture dated as of June 1, 1986 between MEDIQ Exhibit 4.1 to S-2 Registration Statement No. and Mellon Bank, N.A. for 7.25% Convertible 33-5089 originally filed on May 2, 1986, as Subordinated Debentures due 2006. amended. 4.2 7.25% Convertible Subordinated Debenture due Exhibit 4.2 to S-2 Registration Statement No. 2006. 33-5089 originally filed on May 2, 1986, as amended. 4.3 Indenture dated as of July 1, 1993 between MEDIQ Exhibit 4.1 to S-2 Registration Statement No. and First Fidelity Bank, N.A. for 7.5% 33-61724 originally filed on April 28, 1993, as Exchangeable Subordinated Debentures due 2003. amended. 4.4 7.5% Exchangeable Subordinated Debentures due Exhibit 4.2 to S-2 Registration Statement No. 2003. 33-61724 originally filed on April 28, 1993, as amended.
37
EXHIBIT # DESCRIPTION INCORPORATION REFERENCE OR PAGE NUMBER HEREIN - ------------- ------------------------------------------------ ------------------------------------------------ 4.5(a) Warrant Agreement, dated as of May 29, 1992 Exhibit 4.5 to Form S-1 Registration Statement among MEDIQ, MEDIQ/PRN Life Support Services, of MEDIQ/PRN Life Support Services, Inc. (File Inc. and Internationale Nederlanden Bank, N.V., No. 33-47787), originally Filed on May 8, 1992, New York Branch. as amended. 4.5(b) Warrant issued to Internationale Nederlanden Exhibit 4.6 to the Form S-1 Registration (US) Finance Corporation Statement of MEDIQ/PRN Life Support Services, Inc. (File No. 33-47787), originally Filed on May 8, 1992, as amended. 4.6(a) Promissory Note dated September 30, 1994 in the Exhibit 4.4 to Current Report on Form 8-K filed principal amount of $2,956,957 payable by on October 14, 1994. MEDIQ/PRN Life Support Services-I, Inc. to the order of KCI Therapeutic Services, Inc. 4.6(b) Promissory Note dated September 30, 1994 in the Exhibit 4.5 to Current Report on Form 8-K filed principal amount of $5,835,707 payable by on October 14, 1994. MEDIQ/PRN Life Support Services, Inc. to the order of KCI Therapeutic Services, Inc. 4.6(c) Negative Covenants Agreement dated September 30, Exhibit 4.6 to Current Report on Form 8-K filed 1994 by and among Kinetic Concepts, Inc., KCI on October 14, 1994. Therapeutic Services, Inc., MEDIQ/PRN Holdings, Inc. and MEDIC/PRN Life Support Services-I, Inc. 4.6(d) Guaranty Agreement dated September 30, 1994 made Exhibit 4.7 to Current Report on Form 8-K filed by PRN Holdings, Inc. in favor of KCI on October 14, 1994. Therapeutic Services, Inc. 4.6(e) Guaranty Agreement dated September 30, 1994 made Exhibit 4.8 to Current Report on Form 8-K filed by MEDIQ Incorporated in favor of KCI on October 14, 1994. Therapeutic Services, Inc. 4.7(a) Loan and Security Agreement by and between Exhibit 4.9 to Current Report on Form 8-K filed Congress Financial Corporation and MEDIQ/PRN on October 14, 1994. Life Support Services-I, Inc. dated September 30, 1994. 4.7(b) Amendment No. 1 to Loan and Security Agreement Filed herewith. by and between Congress Financial Corporation and MEDIQ/PRN Life Support Services-I, Inc. dated December 31, 1995. 4.8(a) PRN Holdings, Inc. Note Agreement, dated as of Exhibit 4.10 to Current Report on Form 8-K filed September 30, 1994 RE: $10,000,000 Senior on October 14, 1994. Subordinated Notes due October 1, 2004 and Warrants to Purchase Common Stock.
38
EXHIBIT # DESCRIPTION INCORPORATION REFERENCE OR PAGE NUMBER HEREIN - ------------- ------------------------------------------------ ------------------------------------------------ 4.8(b) Form of Warrant to Purchase Shares of Common Exhibit 4.11 to Current Report on Form 8-K filed Stock of PRN Holdings, Inc. on October 14, 1994. *Miscellaneous long-term debt instruments and credit facility agreements of the Company, under which the underlying authorized debt is equal to less than 10% of the total assets of the Company and its subsidiaries on a consolidated basis, may not be filed as exhibits to this report. The Company agrees to furnish to the Commission, upon request, copies of any such unfiled instruments. 10.6 MEDIQ Executive Security Plan. Filed herewith. 10.7 1987 Stock Option Plan. Filed herewith. 10.8 Employment contract with Michael F. Sandler Filed herewith. dated as of June 26, 1995. 10.9 Employment contract with Thomas E. Carroll dated Filed herewith. as of April 27, 1995. 10.10 Employment contract with Jay M. Kaplan dated as Filed herewith. of June 20, 1995. 11 Statement re computation of per share earnings. Filed herewith. 21 Subsidiaries of the Registrant. Filed herewith. 23 Consent of Deloitte & Touche LLP Filed herewith. 27 Financial Data Schedule Filed herewith. 99.1 Financial Statements of PCI Services, Inc. Items 8 and 14 of the Annual Report on Form 10-K (approximately 47% owned by MEDIQ as of of PCI Services, Inc. for the fiscal year ended September 30, 1995). September 30, 1995. (File No. 0-197595). 99.2 Financial Statements of NutraMax Products, Inc. Items 8 and 14 of the Annual Report on Form 10-K (approximately 47% owned by MEDIQ as of of NutraMax Products, Inc. for the fiscal year September 30, 1995). ended September 30, 1995. (File No. 0-18671).
(d) Financial Statements of Unconsolidated Affiliates: The financial statements of NutraMax Products, Inc. and PCI Services, Inc., unconsolidated affiliates of the Company, which are required to be filed pursuant to Item 14(d) of Form 10-K are filed herein through incorporation by reference under Rule 12b-23, promulgated under the Securities Exchange Act of 1934, as amended (the 'Act'), to the Annual Report on Form 10-K of each of such companies filed under the Act, which are included as exhibits to this Annual Report on Form 10-K pursuant to Rule 12b-23(c), and such exhibits are incorporated by reference into this Annual Report on Form 10-K under Rule 12b-32, promulgated under the Act.
39 MEDIQ INCORPORATED AND SUBSIDIARIES SCHEDULE I CONDENSED STATEMENTS OF OPERATIONS (REGISTRANT - ONLY) YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
YEAR ENDED SEPTEMBER 30, ------------------------------- 1995 1994 1993 --------- --------- --------- (IN THOUSANDS) Revenues: Management fees.............................................................. $ 3,930 $ 6,770 $ 9,454 Other........................................................................ 953 1,111 2,874 --------- --------- --------- 4,883 7,881 12,328 Other (income) and expenses: General and administrative................................................... 7,738 6,880 8,118 Depreciation and amortization................................................ 374 438 934 Interest expense............................................................. 7,801 7,518 7,635 Interest income.............................................................. (5,002) (4,621) (4,134) (Earnings) losses from unconsolidated subsidiaries and affiliates, net of taxes..................................................................... (9,635) 1,364 (3,114) Other -- net................................................................. 73 (1,478) (3,268) --------- --------- --------- 1,349 10,101 6,171 --------- --------- --------- Income (Loss) from Continuing Operations before Income Taxes and Extraordinary Charge....................................................................... 3,534 (2,220) 6,157 Income Tax Benefit............................................................. (670) (96) (573) --------- --------- --------- Income (Loss) from Continuing Operations before Extraordinary Charge........... 4,204 (2,124) 6,730 Discontinued Operations (1).................................................... (9,151) (5,194) (2,481) --------- --------- --------- Income (Loss) before Extraordinary Charge...................................... (4,947) (7,318) 4,249 Extraordinary Charge, Early Retirement of Debt ................................ -- -- (953) --------- --------- --------- Net Income (Loss).............................................................. $ (4,947) $ (7,318) $ 3,296 --------- --------- --------- --------- --------- --------- Earnings Per Share: Income (Loss) from: Continuing Operations..................................................... $ .17 $ (.09) $ .28 Discontinued Operations (1)............................................... (.37) (.21) (.10) --------- --------- --------- Income (Loss) before Extraordinary Charge.................................... (.20) (.30) .18 Extraordinary Charge......................................................... -- -- (.04) --------- --------- --------- Net Income (Loss)............................................................ $ (.20) $ (.30) $ .14 --------- --------- --------- --------- --------- ---------
- ------------------ (1) Loss from discontinued operations does not agree to the consolidated statements of operations because the respective management fees and intercompany interest of discontinued operations have not been eliminated. See Notes to Schedule I 40 MEDIQ INCORPORATED AND SUBSIDIARIES SCHEDULE I CONDENSED BALANCE SHEETS (REGISTRANT - ONLY) YEARS ENDED SEPTEMBER 30, 1995 AND 1994
SEPTEMBER 30, ------------------------ 1995 1994 ----------- ----------- (IN THOUSANDS) ASSETS Current Assets: Cash.................................................................................. $ 926 $ 166 Accounts receivable................................................................... 976 303 Deferred income taxes................................................................. 2,287 867 Investment in discontinued operations................................................. 19,009 -- Other current assets.................................................................. 1,000 2,496 ----------- ----------- Total Current Assets......................................................... 24,198 3,832 Investments in unconsolidated subsidiaries and affiliates............................... 89,931 76,012 Investment in discontinued operations................................................... 8,061 61,573 Note receivable -- MHM.................................................................. 10,733 11,500 Deferred income taxes................................................................... 17,106 13,720 Goodwill................................................................................ 638 656 Other assets............................................................................ 9,517 10,272 ----------- ----------- Total Assets............................................................................ $ 160,184 $ 177,565 ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Notes payable to financial institutions............................................... $ -- $ 1,000 Accounts payable...................................................................... 467 513 Accrued expenses...................................................................... 10,650 12,608 Other current liabilities............................................................. -- 723 Current portion of long-term debt..................................................... 23,067 1,277 ----------- ----------- Total Current Liabilities.................................................... 34,184 16,121 Senior debt............................................................................. 1,815 15,649 Subordinated debt....................................................................... 63,729 86,229 Advances from unconsolidated subsidiaries............................................... 25,052 19,498 Other liabilities....................................................................... 3,887 3,788 Stockholders' Equity: Preferred stock....................................................................... 3,376 3,408 Common stock.......................................................................... 19,127 19,064 Additional paid-in capital............................................................ 22,124 22,357 Accumulated deficit................................................................... (6,067) (1,120) Treasury stock........................................................................ (7,043) (7,429) ----------- ----------- Total Stockholders' Equity................................................... 31,517 36,280 ----------- ----------- Total Liabilities and Stockholders' Equity.............................................. $ 160,184 $ 177,565 ----------- ----------- ----------- -----------
See Notes to Schedule I 41 MEDIQ INCORPORATED AND SUBSIDIARIES SCHEDULE I CONDENSED STATEMENTS OF CASH FLOWS (REGISTRANT - ONLY) YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
YEAR ENDED SEPTEMBER 30, ------------------------------- 1995 1994 1993 --------- --------- --------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss).............................................................. $ (4,947) $ (7,318) $ 3,296 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities......................................................... 5,702 10,681 (19,419) --------- --------- --------- Net cash provided by (used in) operating activities.......................... 755 3,363 (16,123) CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of discontinued operations, subsidiaries and assets...................................................... 27,498 1,672 8,667 Net cash provided by (used in) discontinued operations, equity investments and unconsolidated subsidiaries.................................................. (13,028) (11,557) 9,529 Purchase of property, plant and equipment...................................... (5) (135) (2,421) Other.......................................................................... 900 (138) (3,099) --------- --------- --------- Net cash provided by (used in) investing activities.......................... 15,365 (10,158) 12,676 CASH FLOWS FROM FINANCING ACTIVITIES Borrowings..................................................................... 230 10,634 34,646 Debt repayments................................................................ (15,774) (13,642) (19,623) Dividends...................................................................... -- (2,722) (1,903) Proceeds from exercise of stock options........................................ 184 398 642 --------- --------- --------- Net cash provided by (used in) financing activities.......................... (15,360) (5,332) 13,762 Increase (decrease) in cash.................................................... 760 (12,127) 10,315 Cash Beginning balance............................................................ 166 12,293 1,978 --------- --------- --------- Ending balance............................................................... $ 926 $ 166 $ 12,293 --------- --------- --------- --------- --------- --------- Supplemental disclosure of cash flow information: Interest paid................................................................ $ 7,836 $ 7,841 $ 8,218 --------- --------- --------- --------- --------- --------- Income taxes paid (refunded)................................................. $ 5 $ (2,801) $ (1,727) --------- --------- --------- --------- --------- ---------
See Notes to Schedule I 42 MEDIQ INCORPORATED AND SUBSIDIARIES SCHEDULE I NOTES TO CONDENSED FINANCIAL STATEMENTS (REGISTRANT - ONLY) NOTE A -- DEBT
YEAR ENDED SEPTEMBER 30, ------------------------ 1995 1994 ----------- ----------- (IN THOUSANDS) Senior recourse debt: Revolving credit facility.................................................. $ 567 $ 11,147 Term loan payable at rates ranging from prime (8.75% at September 30, 1995) to 12%.................................................................. 1,815 1,862 Mortgage payable........................................................... -- 3,917 Subordinated debt: 7.5% exchangeable subordinated debentures due 2003......................... 34,500 34,500 7.25% convertible subordinated debentures due in 2006...................... 51,729 51,729 ----------- ----------- 88,611 103,155 Current portion.............................................................. (23,067) (1,277) ----------- ----------- $ 65,544 $ 101,878 ----------- ----------- ----------- -----------
Maturities of long term debt at September 30, 1995 are as follows: 1996.......................................................... $23,067 1997.......................................................... 22,500 1998.......................................................... 6,729 1999.......................................................... -- 2000.......................................................... -- Thereafter.................................................... 36,315 ----------- $88,611 ----------- -----------
Certain of the Registrant's loan agreements require the maintenance of specified financial ratios and impose financial and dividend limitations. The terms of one of the Registrant's indentures currently limits the payment of future dividends or the purchase of the Registrant's stock to approximately $5 million in the aggregate as of September 30, 1995. At September 30, 1995, the Registrant complied with these ratios and limitations, as amended. NOTE B -- DIVIDENDS FROM UNCONSOLIDATED SUBSIDIARIES AND AFFILIATES There were no cash dividends received by the Registrant from unconsolidated subsidiaries and affiliates for the fiscal years ended September 30, 1995 and 1994. 43 MEDIQ INCORPORATED AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993 (IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------ COL. A COL. B COL. C COL. D COL. E - ------------------------------------------------------------------------------------------------------------------ ADDITIONS BALANCE AT CHARGED TO (1) BALANCE AT BEGINNING COSTS AND CHARGED TO (2) END OF DESCRIPTION OF PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS PERIOD - ------------------------------------------------------------------------------------------------------------------ Year ended September 30, 1995: Allowance for doubtful accounts.......... $ 2,195 $ 993 $ -- $ 981 $ 2,207 ----------- ----------- ----------------- ----------- ----------- ----------- ----------- ----------------- ----------- ----------- Year ended September 30, 1994: Allowance for doubtful accounts.......... $ 1,968 $ 984 $ 246 $ 1,003 $ 2,195 ----------- ----------- ----------------- ----------- ----------- ----------- ----------- ----------------- ----------- ----------- Year ended September 30, 1993: Allowance for doubtful accounts.......... $ 3,975 $ 1,809 $ 723 $ 4,539 $ 1,968 ----------- ----------- ----------------- ----------- ----------- ----------- ----------- ----------------- ----------- -----------
- ------------------ (1) Primarily represents allowances for doubtful accounts related to acquisitions. (2) Represents accounts directly written-off net of recoveries. 44 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 11, 1996 MEDIQ Incorporated By: /s/ THOMAS E. CARROLL ---------------------------------- Thomas E. Carroll President and Chief Executive Officer By: /s/ MICHAEL F. SANDLER --------------------------------- Michael F. Sandler 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 dates indicated:
SIGNATURE TITLE DATE - -------------------------------------------- -------------------------------------------- --------------------- /s/ THOMAS E. CARROLL Director, Chief Executive Officer and January 11, 1996 - ------------------------------------------ President Thomas E. Carroll /s/ MICHAEL F. SANDLER Director and Chief Financial Officer January 11, 1996 - ------------------------------------------ Michael F. Sandler /s/ SHELDON M. BONOVITZ Director January 11, 1996 - ------------------------------------------ Sheldon M. Bonovitz /s/ LIONEL H. FELZER Director January 11, 1996 - ------------------------------------------ Lionel H. Felzer /s/ MARK S. LEVITAN Director January 11, 1996 - ------------------------------------------ Mark S. Levitan - ------------------------------------------ Director January __, 1996 H. Scott Miller /s/ MICHAEL J. ROTKO Chairman of the Board and Director January 11, 1996 - ------------------------------------------ Michael J. Rotko /s/ JACOB SHIPON Vice Chairman of the Board and Director January 11, 1996 - ------------------------------------------ Jacob Shipon - ------------------------------------------ Director January __, 1996 Bernard J. Korman
45 EXHIBIT INDEX
EXHIBIT # DESCRIPTION INCORPORATION REFERENCE OR PAGE NUMBER HEREIN - ------------- ------------------------------------------------ ------------------------------------------------ 2.1(a) Agreement of Merger and Plan of Reorganization Exhibit 2 to Current Report on Form 8-K filed among MMI Medical, Inc., MMI Acquisition June 9, 1994. Subsidiary, Inc., MEDIQ and MEDIQ Equipment and Maintenance Services, Inc., dated May 18, 1994. 2.1(b) Amendment No. 1 to Agreement of Merger and Plan Filed herewith. of Reorganization dated October 24, 1995 by and among MMI Medical, Inc., MMI Acquisition Subsidiary, Inc., MEDIQ and MEDIQ Equipment and Maintenance Services, Inc. 2.2(a) Asset Purchase Agreement dated August 23, 1994 Exhibit 2.1 to Current Report on Form 8-K filed by and among Kinetic Concepts, Inc., KCI October 14, 1994. Therapeutic Services, Inc., MEDIQ, PRN Holdings, Inc. and MEDIQ/PRN Life Support Services-I, Inc. 2.2(b) Amendment No. 1 to Asset Purchase Agreement Exhibit 2.2 to Current Report on Form 8-K filed dated September 30, 1994 by and among Kinetic October 14, 1994. Concepts, Inc., KCI Therapeutic Services, Inc., MEDIQ, PRN Holdings, Inc., and MEDIQ/PRN Life Support Services-I, Inc. 2.3 Agreement and Plan of Merger dated April 7, 1995 Filed herewith. by and among MEDIQ, MEDIFAC, Inc., MEDIFAC Acquisition, Inc., and MEDIFAC Holdings, Inc. 2.4 Asset Purchase Agreement dated August 11, 1995, Filed herewith. by and among MEDIQ Imaging Services, Inc., American Cardiovascular Imaging Labs, Inc., Southern Diagnostic, Inc., and NMC Diagnostic Services, Inc. 3.1 Certificate of Incorporation. Filed herewith. 3.2 By-Laws. Filed herewith. 4.1 Indenture dated as of June 1, 1986 between MEDIQ Exhibit 4.1 to S-2 Registration Statement No. and Mellon Bank, N.A. for 7.25% Convertible 33-5089 originally filed on May 2, 1986, as Subordinated Debentures due 2006. amended. 4.2 7.25% Convertible Subordinated Debenture due Exhibit 4.2 to S-2 Registration Statement No. 2006. 33-5089 originally filed on May 2, 1986, as amended. 4.3 Indenture dated as of July 1, 1993 between MEDIQ Exhibit 4.1 to S-2 Registration Statement No. and First Fidelity Bank, N.A. for 7.5% 33-61724 originally filed on April 28, 1993, as Exchangeable Subordinated Debentures due 2003. amended. 4.4 7.5% Exchangeable Subordinated Debentures due Exhibit 4.2 to S-2 Registration Statement No. 2003. 33-61724 originally filed on April 28, 1993, as amended.
EXHIBIT # DESCRIPTION INCORPORATION REFERENCE OR PAGE NUMBER HEREIN - ------------- ------------------------------------------------ ------------------------------------------------ 4.5(a) Warrant Agreement, dated as of May 29, 1992 Exhibit 4.5 to Form S-1 Registration Statement among MEDIQ, MEDIQ/PRN Life Support Services, of MEDIQ/PRN Life Support Services, Inc. (File Inc. and Internationale Nederlanden Bank, N.V., No. 33-47787), originally Filed on May 8, 1992, New York Branch. as amended. 4.5(b) Warrant issued to Internationale Nederlanden Exhibit 4.6 to the Form S-1 Registration (US) Finance Corporation Statement of MEDIQ/PRN Life Support Services, Inc. (File No. 33-47787), originally Filed on May 8, 1992, as amended. 4.6(a) Promissory Note dated September 30, 1994 in the Exhibit 4.4 to Current Report on Form 8-K filed principal amount of $2,956,957 payable by on October 14, 1994. MEDIQ/PRN Life Support Services-I, Inc. to the order of KCI Therapeutic Services, Inc. 4.6(b) Promissory Note dated September 30, 1994 in the Exhibit 4.5 to Current Report on Form 8-K filed principal amount of $5,835,707 payable by on October 14, 1994. MEDIQ/PRN Life Support Services, Inc. to the order of KCI Therapeutic Services, Inc. 4.6(c) Negative Covenants Agreement dated September 30, Exhibit 4.6 to Current Report on Form 8-K filed 1994 by and among Kinetic Concepts, Inc., KCI on October 14, 1994. Therapeutic Services, Inc., MEDIQ/PRN Holdings, Inc. and MEDIC/PRN Life Support Services-I, Inc. 4.6(d) Guaranty Agreement dated September 30, 1994 made Exhibit 4.7 to Current Report on Form 8-K filed by PRN Holdings, Inc. in favor of KCI on October 14, 1994. Therapeutic Services, Inc. 4.6(e) Guaranty Agreement dated September 30, 1994 made Exhibit 4.8 to Current Report on Form 8-K filed by MEDIQ Incorporated in favor of KCI on October 14, 1994. Therapeutic Services, Inc. 4.7(a) Loan and Security Agreement by and between Exhibit 4.9 to Current Report on Form 8-K filed Congress Financial Corporation and MEDIQ/PRN on October 14, 1994. Life Support Services-I, Inc. dated September 30, 1994. 4.7(b) Amendment No. 1 to Loan and Security Agreement Filed herewith. by and between Congress Financial Corporation and MEDIQ/PRN Life Support Services-I, Inc. dated December 31, 1995. 4.8(a) PRN Holdings, Inc. Note Agreement, dated as of Exhibit 4.10 to Current Report on Form 8-K filed September 30, 1994 RE: $10,000,000 Senior on October 14, 1994. Subordinated Notes due October 1, 2004 and Warrants to Purchase Common Stock.
EXHIBIT # DESCRIPTION INCORPORATION REFERENCE OR PAGE NUMBER HEREIN - ------------- ------------------------------------------------ ------------------------------------------------ 4.8(b) Form of Warrant to Purchase Shares of Common Exhibit 4.11 to Current Report on Form 8-K filed Stock of PRN Holdings, Inc. on October 14, 1994. *Miscellaneous long-term debt instruments and credit facility agreements of the Company, under which the underlying authorized debt is equal to less than 10% of the total assets of the Company and its subsidiaries on a consolidated basis, may not be filed as exhibits to this report. The Company agrees to furnish to the Commission, upon request, copies of any such unfiled instruments. 10.6 MEDIQ Executive Security Plan. Filed herewith. 10.7 1987 Stock Option Plan. Filed herewith. 10.8 Employment contract with Michael F. Sandler Filed herewith. dated as of June 26, 1995. 10.9 Employment contract with Thomas E. Carroll dated Filed herewith. as of April 27, 1995. 10.10 Employment contract with Jay M. Kaplan dated as Filed herewith. of June 20, 1995. 11 Statement re computation of per share earnings. Filed herewith. 21 Subsidiaries of the Registrant. Filed herewith. 23 Consent of Deloitte & Touche LLP Filed herewith. 27 Financial Data Schedule Filed herewith. 99.1 Financial Statements of PCI Services, Inc. Items 8 and 14 of the Annual Report on Form 10-K (approximately 47% owned by MEDIQ as of of PCI Services, Inc. for the fiscal year ended September 30, 1995). September 30, 1995. (File No. 0-197595). 99.2 Financial Statements of NutraMax Products, Inc. Items 8 and 14 of the Annual Report on Form 10-K (approximately 47% owned by MEDIQ as of of NutraMax Products, Inc. for the fiscal year September 30, 1995). ended September 30, 1995. (File No. 0-18671).
EX-2.1(B) 2 AGREEMENT AND PLAN OF REORGANIZATION AMENDMENT NO. 1 TO AGREEMENT AND PLAN OF REORGANIZATION This Amendment No. 1 to Agreement and Plan of Reorganization is entered into as of this 24th day of October, 1995 by and between MMI Medical, Inc., a California corporation ("MMI") and MEDIQ, Incorporated, a Delaware corporation ("MEDIQ"). WHEREAS, MMI, MEDIQ and certain other parties entered into that certain Agreement of Merger and Plan of Reorganization (the "Agreement") dated as of May 18, 1994 pursuant to which MEDIQ Equipment and Maintenance Services, Inc., a subsidiary of MEDIQ was merged with a subsidiary of MMI; WHEREAS, pursuant to the Agreement, MMI agreed to use reasonable efforts to cause all Registrable Securities (as defined in the Agreement) to be registered under the 1933 Act as soon as reasonably practical after the filing of its annual report of Form 10-K for the fiscal year ending April 28, 1995; WHEREAS, MMI and MEDIQ have agreed to modify the timing of MMI's agreement to effect such registration. NOW, THEREFORE, in consideration of the foregoing and the representations, warranties and agreements contained herein, the parties hereto hereby agree as follows: 1. Section 11.2(a) of the Agreement is hereby amended to read in full as follows: 11.2 Registration (a) MMI shall employ its reasonable efforts to cause all Registrable Securities to be registered under the 1933 Act as soon as reasonably practicable during the first quarter of calendar 1996; provided, however, that if MMI shall furnish to MEDIQ a certificate signed by its President stating that, in the good faith judgment of the board of directors of MMI, it would be detrimental to MMI or its shareholders for a registration statement to be filed in the near future, the MMI shall have the right to defer the filing of a registration statement with respect to such Registrable Securities until such time as the board of directors of MMI deems advisable, but in no event later than April 30, 1996, and thereafter shall employ its reasonable efforts to cause all Registrable Securities to be registered under the 1933 Act as soon as practicable. MMI shall be obligated to effect only one registration pursuant to this Article XI. 2. All defined terms used herein which are not otherwise defined shall have the meanings set forth in the Agreement. 3. Except where inconsistent with the express terms of this Amendment No. 1, all provisions of the Agreement as originally entered into prior to the date hereof shall remain in full force ad effect. 4. This Amendment shall be governed by and construed in accordance with the laws of the State of California as applied to contracts between California residents made and to be performed entirely within the State of California. 5. This amendment may be executed in any number of counterparts by the different parties hereto in separate counterparts, each of which when executed and delivered shall be deemed to be an original and all of which taken together shall constitute one in the same agreement. IN WITNESS WHEREOF, each of the parties has caused this Amendment No. 1 to be executed on its behalf by its officers thereunto duly authorized on the day and year first above written. MMI MEDICAL, INC. By: /s/ Samuel Salen ---------------------------------- Samuel Salen Its: President MEDIQ INCORPORATED By: /s/ Michael Sandler ----------------------------------- Michael Sandler Its: Senior Vice President EX-2.3 3 AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER Parties: MEDIQ INCORPORATED a Delaware corporation ("Owner") One Mediq Plaza Pennsauken, NJ 08110 MEDIFAC, INC. a Delaware corporation (the "Company") The Granary 411 North 20th Street Philadelphia, PA 19130 MEDIFAC ACQUISITION, INC. a Delaware corporation ("Newco") The Granary 411 North 20th Street Philadelphia, PA 19130 MEDIFAC HOLDINGS, INC. a Delaware corporation ("Parentco") The Granary 411 North 20th Street Philadelphia, PA 19130 Date: April 7, 1995 Background: The Company is in the business of providing project management, architectural planning and design, interior design and development services. Owner owns all of the issued and outstanding capital stock of the Company (the "Company's Stock"). Parentco owns all of the issued and outstanding capital stock of Newco. The parties desire that Newco be merged with and into the Company (the "Merger") on the terms and conditions set forth in this Agreement and Plan of Merger ("Agreement"). The respective boards of directors of Owner and the Company have determined that the Merger and the other transactions contemplated by this Agreement are in the best interests of Owner and the Company and their respective shareholders. The board of directors of Newco has determined that the Merger and the other transactions contemplated by this Agreement are in the best interests of Newco and its shareholder. Intending to be legally bound, and in consideration of the mutual agreements contained herein, the parties agree as follows: -1- 1. DEFINED TERMS Certain defined terms used in this Agreement and not specifically defined in context are defined in this Section 1, as follows: 1.1. "Accounts Receivable" means (a) any right to payment for goods sold, leased or licensed or for services rendered, whether or not it has been earned by performance, whether billed or unbilled, and whether or not it is evidenced by any Contract, (b) any note receivable, or (c) any other receivable or right to payment of any nature. 1.2. "Ancillary Agreements" means the Real Estate Agreement and the Management Agreement. 1.3. "Asset" means any real, personal, mixed, tangible or intangible property of any nature, including, but not limited to, (a) Cash Assets, (b) Accounts Receivable, (c) other current assets of any nature including, but not limited to, prepayments, deposits and escrows, (d) Tangible Property, (e) Real Property, (f) Intangibles, (g) Contract Rights, (h) claims, causes of action and other legal rights and remedies of any nature, and (i) goodwill and miscellaneous assets of any nature including, but not limited to, rights with respect to telephone numbers, rights with respect to telephone and other directory listings, marketing materials and advertisements, books and records, correspondence files, data bases, customer lists, prospect lists, supplier lists, and other files and records of any nature, whether stored in written form or on any type of computer, electronic or other media. 1.4. "Cash Asset" means any cash on hand, cash in bank or other accounts, readily marketable securities, and other cash-equivalent liquid assets of any nature. 1.5. "Consent" means any consent, approval, order or authorization of, or any declaration, filing or registration with, or any application or report to, or any waiver by, or any other action (whether similar or dissimilar to any of the foregoing) of, by or with, any Person, which is legally necessary in order to take a specified action or actions in a specified manner and/or to achieve a specified result. 1.6. "Contract" means any written or oral contract, agreement, instrument, order, arrangement, commitment or understanding of a legally binding nature, including, but not limited to, sales orders, purchase orders, leases, subleases, data processing agreements, maintenance agreements, license agreements, sublicense agreements, loan agreements, promissory notes, security agreements, pledge agreements, deeds, mortgages, guaranties, indemnities, warranties, employment agreements, consulting agreements, sales representative agreements, joint venture agreements, buy-sell agreements, subscriptions, options or warrants. 1.7. "Contract Right" means any right, power or remedy of any nature under any Contract including, but not limited to, rights to receive property or services or otherwise derive benefits from the payment, satisfaction or performance of another party's Obligations, rights to demand that another party accept property or services or take any other actions, and rights to pursue or exercise remedies or options. -2- 1.8. "Employee Benefit Plan" means any employee benefit plan as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or any other plan, program, policy or arrangement for or regarding bonuses, commissions, incentive compensation, severance, vacation, deferred compensation, pensions, profit sharing, retirement, payroll savings, stock options, stock purchases, stock awards, stock ownership, phantom stock, stock appreciation rights, medical/dental expense payment or reimbursement, disability income or protection, sick pay, group insurance, self insurance, death benefits, employee welfare or fringe benefits of any nature; but not including employment Contracts with individual employees or Contracts with independent contractors. 1.9. "Encumbrance" means any lien, security interest, pledge, mortgage, easement, covenant, restriction, reservation, conditional sale, prior assignment, or other encumbrance, claim, burden or charge of any nature. 1.10. "GAAP" means generally accepted accounting principles under United States accounting rules and regulations, as in effect from time to time, consistently applied throughout the applicable periods. 1.11. "Insurance Policy" means any public liability, product liability, general liability, comprehensive, property damage, vehicle, life, hospital, medical, dental, disability, workers' compensation, key man, fidelity bond, theft, forgery, errors and omissions, directors' and officers' liability, or other insurance policy of any nature. 1.12. "Intangible" means any name, corporate name, fictitious name, trademark, trademark application, service mark, service mark application, trade name, brand name, product name, slogan, trade secret, know-how, patent, patent application, copyright, copyright application, design, logo, formula, invention, product right, computer program, operating system, applications system, firmware, software, or other intangible asset of any nature, whether in use, under development or design, or inactive, but not including any software. 1.13. "Judgment" means any order, writ, injunction, citation, award, decree or other judgment of any nature of any foreign, federal, state or local court, governmental body, administrative agency, regulatory authority or arbitration tribunal. 1.14. "Law" means any provision of any foreign, federal, state or local law, statute, ordinance, charter, constitution, treaty, rule or regulation. 1.15. "Material Adverse Effect" means, with respect to any Person, any adverse effect on the financial condition, financial performance, financial prospects, business prospects or operations of such Person and its Subsidiaries, which is or will be material, under either GAAP or applicable legal principles, to such Person and its Subsidiaries. 1.16. "Obligation" means any debt, liability or obligation of any nature, whether secured, unsecured, recourse, nonrecourse, liquidated, unliquidated, accrued, absolute, fixed, contingent, ascertained, unascertained, known, unknown or otherwise. -3- 1.17. "Permit" means any license, permit, approval, waiver, order, authorization, right or privilege of any nature, granted, issued, approved or allowed by any foreign, federal, state or local governmental body, administrative agency or regulatory authority. 1.18. "Person" means any individual, sole proprietorship, joint venture, partnership, corporation, association, cooperative, trust, estate, governmental body, administrative agency, regulatory authority or other entity of any nature. 1.19. "Proceeding" means any demand, claim, suit, action, litigation, governmental investigation, arbitration, administrative hearing or other legal proceeding of any nature. 1.20. "Real Property" means any real estate, land, building, condominium, town house, structure or other real property of any nature, all shares of stock or other ownership interests in cooperative or condominium associations or other forms of ownership interest through which interests in real estate may be held, and all appurtenant and ancillary rights thereto, including, but not limited to, easements, covenants, water rights, sewer rights and utility rights. 1.21. "Subsidiary" means, with respect to any Person, any other Person as to which such Person directly or indirectly owns or has the power to vote, or to exercise a controlling influence with respect to, 50% or more of the securities or interests of any class of such other Person which are entitled to vote for the election of directors or others performing similar functions. OMD, Inc. ("OMD") shall be deemed a Subsidiary of the Company within the meaning of Section 4.2 below. 1.22. "Tangible Property" means any furniture, fixtures, leasehold improvements, vehicles, office equipment, computer equipment, other equipment, machinery, tools, forms, supplies or other tangible personal property of any nature, whether constituting fixed assets, inventory or otherwise. 1.23. "Tax" means (a) any foreign, federal, state or local income, earnings, profits, gross receipts, franchise, capital stock, net worth, sales, use, occupancy, severance, general property, real property, personal property, intangible property, license, stamp, transfer, fuel, excise, payroll, employment withholding, unemployment compensation, social security or other tax of any nature, (b) any foreign, federal, state or local organization fee, qualification fee, annual report fee, filing fee, occupation fee, assessment, sewer rent or other fee or charge of any nature, or (c) any deficiency, interest or penalty or addition thereto, whether disputed or not, imposed with respect to any of the foregoing. 2. MERGER 2.1. Merger. On the Effective Date (as defined in Section 10.1), Newco shall be merged with and into the Company in accordance with this Agreement and in compliance with the Delaware General Corporation Law ("DGCL"), and the Merger shall have the effect provided for in the DGCL. The Company (sometimes referred to below as the "Surviving Corporation") shall be the surviving corporation of the Merger and shall continue to exist and to be governed by the Laws of the State of Delaware. The corporate existence and identity of the Company shall continue unaffected and unimpaired by the Merger. On the Effective Date, the Company shall succeed to and be fully vested with the corporate existence and identity of Newco, and the separate corporate existence and identity of Newco shall cease. -4- 2.2. Name of Surviving Corporation. The name of the Surviving Corporation shall be "Medifac, Inc." 2.3. Certificate of Incorporation. The Certificate of Incorporation of the Company immediately before the Merger shall be the Certificate of Incorporation of the Surviving Corporation immediately after the Merger, unless and until otherwise subsequently amended or modified. 2.4. Bylaws. The Bylaws of the Company immediately before the Merger shall be the Bylaws of the Surviving Corporation immediately after the Merger, unless and until otherwise subsequently amended or modified. 2.5. Directors. Immediately after Merger, the directors of the Surviving Corporation shall consist of the persons listed below, who shall serve in accordance with the Bylaws of the Surviving Corporation and until their successors are elected and have qualified: James W. Eastwood 2.6. Officers. On the Effective Date, the officers of the Surviving Corporation shall consist of the persons listed below who shall hold the office(s) in the Surviving Corporation set forth opposite their name and shall serve in accordance with the Bylaws of the Surviving Corporation: Name Office James W. Eastwood Chairman and President Michael Goldenberg Secretary Salvatore Scelsi Treasurer 2.7. Conversion of Newco Stock. On the Effective Date, each share of the total of 100 shares of common stock, par value $10.00 per share, of Newco issued and outstanding immediately before the Effective Date shall, by virtue of the Merger and without any action on the part of the holder thereof, be automatically converted into and become one share of common stock, $10.00 par value per share, of the Surviving Corporation. It is the intention of the parties that, immediately after the Merger, Parentco shall own all of the issued and outstanding capital stock of the Surviving Corporation. 2.8. Conversion of the Company's Stock. On the Effective Date, each share of the total of 100 shares of common stock, $10.00 par value per share, of the Company issued and outstanding immediately before the Effective Date shall, by virtue of the Merger and without any action on the part of the holder thereof, be automatically converted into the right to receive (i) $15,000.00 in cash, and (ii) a subordinated note of the Surviving Corporation in the principal amount of $15,000.00 (the "Subordinated Note"). The Subordinated Note shall have a term of six years, and shall be repayable as follows: (a) interest only on the outstanding principal amount shall be payable monthly during the first two years of the term, at an annual rate of .5% above the National Commercial Rate of Meridian Bank, as the same may vary from time to time; (b) for the remaining four years of the term, interest on the outstanding principal amount shall be payable monthly at an annual rate of 9.5%, and principal shall be payable at such periodic intervals and upon such an -5- amortization schedule as set forth in the Subordinated Note; and (c) all unpaid principal and interest shall be payable at the expiration of the six year term. The Subordinated Note, together with the fees due pursuant to the Management Agreement described in Section 10.2.10, shall be secured by (i) a guaranty of Granary Partners, L.P., which shall be secured by subordinated mortgage on the Granary, and (ii) a life insurance policy on the life of James W. Eastwood, which policy shall be purchased by the Surviving Corporation, shall have Owner as the beneficiary and shall be in such amount as mutually agreed upon by Owner and Parentco. The terms and conditions of the Subordinated Note, the guaranty and mortgage from Granary Partners, L.P. and the other documents relating thereto shall be mutually agreed upon by Owner and Parentco. The Subordinated Note shall be subject and subordinate in every respect to the Financing, as hereinafter defined, upon such terms and conditions as are reasonably acceptable to Owner and Parentco. 2.9. Treasury Stock. On the Effective Date, each share of the Company's Stock which is held by the Company (as a treasury share), immediately before the Effective Date shall, by virtue of the Merger and without any action on the part of the Company, be automatically canceled. 2.10. Exchange Procedures. At Closing (as defined in Section 6.1), Owner shall surrender certificates evidencing all of the Company's Stock in exchange for the following consideration (the "Merger Consideration"): 2.10.1 Cash Payment. An aggregate of $1,500,000, payable by wire transfer of federal funds to the account of Owner designated by Owner, or by bank cashier's or certified check; and 2.10.2 Subordinated Note. A Subordinated Note in the aggregate principal amount of $1,500,000. 2.11. No Dissenter's Rights. Owner, as the only stockholder of the Company, has approved and voted for the Merger and, therefore, shall not be entitled to exercise any dissenter's rights. 2.12. Cash at Closing. As of the Effective Date, the Company shall have cash (the "Closing Cash Amount") in an amount equal to the sum of (i) $389,500, (ii) the accrued bonuses as of the Effective Date for 1995 for all employees of the Company, and (iii) the amount of accounts payable of the Company as of the Effective Date (the "Closing Payables"). 2.13. Closing Balance Sheet. Within 45 days of the Closing, the Company shall prepare a balance sheet of the Company as of the Effective Date (the "Closing Balance Sheet"). The Closing Balance Sheet shall be prepared in accordance with generally accepted accounting principles, consistently applied. The Company and Owner shall fully cooperate in connection with the preparation of the Closing Balance Sheet. Owner shall have ten (10) business days after receipt of the Closing Balance Sheet to notify the Company in writing of any objections to the Closing Balance Sheet. If Owner notifies the Company of any objections within such period, then the Closing Balance Sheet shall be reviewed as soon as possible, at the joint shared expense of Owner and the Surviving Corporation, by the Company's independent certified public accounting firm (the "Company's Accountants"). The parties shall instruct the Company's Accountants to resolve any disagreements and deliver a final report to the parties as soon as possible. -6- 2.14. Adjustment. If the amount of cash reflected on the Closing Balance Sheet is less than the Closing Cash Amount, Owner shall pay to the Surviving Corporation, within five business days after the Closing Balance Sheet is finalized, the amount of such deficiency. If the amount of cash reflected on the Closing Balance Sheet is more than the Closing Cash Amount, the Surviving Corporation shall pay to Owner, within five business days after the Closing Balance Sheet is finalized, the amount of such excess. 3. [INTENTIONALLY OMITTED] 4. REPRESENTATIONS OF OWNER Knowing that Parentco and Newco rely thereon, Owner represents and warrants to Parentco and Newco as follows: 4.1. Organization. The Company is a corporation that is duly organized, validly existing and in good standing under the Law of the State of Delaware, its jurisdiction of incorporation. The Company is duly qualified or registered to do business as a foreign corporation in the States of Pennsylvania, New Jersey and New York. Accurate and complete copies of the charter and bylaws of the Company, including all amendments to date, are attached to Schedule 4.1. The Company has the full corporate power and authority to own its Assets, conduct its business as and where such business is presently conducted, and enter into and perform this Agreement. 4.2. Subsidiaries. Schedule 4.2 sets forth a list of each direct or indirect Subsidiary of the Company (such Subsidiaries and the Company being hereinafter referred to as the "Companies"), setting forth as to each such Subsidiary its name, jurisdiction of incorporation, and the percentage of voting securities or other interest owned by the Company or any of its Subsidiaries. Except as set forth on Schedule 4.2, each of the Company's Subsidiaries (a) is a corporation duly organized, validly existing, and in good standing under the laws of its respective jurisdiction of incorporation, (b) is duly qualified or registered to do business as a foreign corporation or entity in each jurisdiction set forth on Schedule 4.2, and (c) has the full corporate power and authority to own its respective Assets and conduct its respective business as and where such business is presently conducted. All of the issued and outstanding capital stock of each of the Company's Subsidiaries is duly authorized, validly issued, fully paid and non-assessable, with no liability attaching to the ownership thereof. Except for (i) Medifac Architect, P.C., the shares of which are owned by Michael R. Arnold, (ii) Medifac Architects, Inc., the shares of which are owned by Norman H. Martin and Michael R. Arnold, and (iii) Medifac Architects, P.A., the shares of which are owned by Michael R. Arnold, the shares of each of the Company's Subsidiaries are owned by the Company, free and clear of all Encumbrances. Except as set forth on Schedule 4.2, there are no outstanding stock appreciation rights, phantom stock or other contracts or Contract rights relating to the issuance, sale, redemption, disposition or voting of any shares of capital stock or other securities of any of the Company's Subsidiaries. Except for the Company's interest in its Subsidiaries, to the knowledge of Owner, the Company does not own directly or indirectly any interest in any other Person. -7- 4.3. Effect of Agreement. The execution, delivery and performance of this Agreement and the Ancillary Agreements, and the consummation of the transactions contemplated by this Agreement and the Ancillary Agreements, by Owner and the Company have been (or as of the Closing Date shall have been) duly authorized by all necessary corporate actions by their respective boards of directors and stockholders and do not constitute a violation of or default under their respective charters, bylaws and/or other organizational documents. The execution, delivery and performance of this Agreement and the Ancillary Agreements, and the consummation of the transactions contemplated by this Agreement and the Ancillary Agreements, by Owner and the Company (a) do not constitute a default or breach (immediately or after the giving of notice, passage of time or both) under any Contract to which Owner is a party or by which it is bound, (b) do not constitute a violation of any Law or Judgment that is applicable to Owner (c) do not result in the creation of any Encumbrance upon, or give to any third party any interest in, any of the business or Assets of the Companies, or any of the capital stock of the Companies except as contemplated by this Agreement and the Ancillary Agreements, and (d) except as stated on Schedule 4.3 (the "Required Consents") and except for the filing of the Certificate of Merger with the proper officials of the State of Delaware, do not require the Consent of any Person. This Agreement constitutes and the Ancillary Agreements, when executed and delivered, will constitute the valid and legally binding agreements of Owner and the Company, enforceable against them in accordance with their respective terms. 4.4. Corporate Records. Accurate and complete copies of the contents of the minute books and stock books of the Companies have been delivered to Parentco. Such minute books and stock books include (a) minutes of all meetings of the stockholders, boards of directors and any committees of the boards of directors at which any material action was taken, which minutes accurately record all actions taken at such meetings, (b) accurate and complete written statements of all actions taken by the stockholders, boards of directors and any committees of the boards of directors without a meeting at which any material action was taken, and (c) accurate and complete records of the issuance, transfer and cancellation of all shares of capital stock and other securities since the date of incorporation. Neither the stockholders, boards of directors or any committee of the boards has taken any material action other than those actions reflected in the records referenced in clauses (a) and (b) of the preceding sentence. 4.5. Capital Stock and Ownership. The authorized capital stock of the Company consists of 100 shares of Common Stock, $10.00 par value, all of which are issued, outstanding and owned by Owners, and no shares are held in treasury. Except for Owner, there are no other record or beneficial owners of any shares of capital stock of the Company. Except for the 100 shares of the Company's Stock owned by Owner, there are no other issued or outstanding shares of capital stock of the Company. All of the issued and outstanding shares of capital stock of the Company have been duly authorized and validly issued, and are fully paid and nonassessable, with no liability attaching to the ownership thereof. All offerings, sales and issuances by the Company of any shares of capital stock were conducted in compliance with all applicable federal and state securities Laws and all applicable state corporation Laws. Except for this Agreement, there are no outstanding stock appreciation rights, phantom stock, or other Contracts or Contract Rights relating to the offering, sale, issuance, redemption, disposition or voting of any shares of capital stock, or other securities of the Company. 4.6. Assets. Except as set forth on Schedule 4.6, Owner has taken no action that would result in any Encumbrance on any Assets of any of the Companies. -8- 4.7. Obligations. Except as set forth on Schedule 4.7, Owner has incurred no Obligations on behalf of any of the Companies. 4.8. Employee Benefit Plans. Except as listed on Schedule 4.8, none of the Companies sponsors, maintains or contributes to, nor do the Companies have any ongoing Obligation with respect to, any Employee Benefit Plan. Except as described on Schedule 4.8, none of the Companies has agreed or committed, or has any understanding whether legally binding or not, to create any additional Employee Benefit Plan or to continue, modify, change or terminate any Employee Benefit Plan. Any Employee Benefit Plan that is a "Pension Plan" (as defined in Section 3(2) of ERISA) that the Companies have established, maintained, sponsored or contributed to, and with respect to which the Companies have any ongoing Obligation, is intended to qualify under Sections 401 and 501 of the Code. Except as otherwise described on Schedule 4.8, with respect to each Employee Benefit Plan listed on Schedule 4.8, (a) the Companies have made all payments required to be made and have accrued in accordance with GAAP all payments due but not yet payable; (b) the Companies have operated and currently operate such plans in compliance with the plan documents and in all material respects with all applicable Laws including, but not limited to, ERISA, the Internal Revenue Code of 1986, as amended (the "Code"), (including, but not limited to, Section 4980B thereof) and the regulations thereunder; (c) there has not been any violation of the reporting and disclosure provisions of the Code and ERISA; (d) there has not been any Prohibited Transaction (as defined in ERISA or the Code); and (e) there has not been any violation of Sections 404, 406 or 407 of ERISA. None of the Companies has any direct or indirect Obligation under any Employee Benefit Plan other than the Employee Benefit Plans listed on Schedule 4.8. Except as described on Schedule 4.8, there are no circumstances arising out of the sponsorship of or contribution to any Employee Benefit Plan by the Companies that will result in the Companies having any direct or indirect liability other than liability for contributions, benefit payments, administrative costs and liabilities incurred in the ordinary course of business. There would be no direct or indirect liability of any of the Companies under Title IV of ERISA if any Employee Benefit Plan listed on Schedule 4.8 were terminated as of the Closing Date. No event has occurred and no circumstances currently exist that do or will result in any civil penalty being assessed pursuant to Section 502 of ERISA, any tax being imposed under Section 4975 of the Code, any liability for a breach of fiduciary or other responsibility under ERISA or the Code in connection with any Employee Benefit Plan or any other Obligation under applicable Law (including, but not limited to, those relating to Section 4980B of the Code or Sections 601 through 609 of ERISA) with respect to any Employee Benefit Plan that has been established, maintained or contributed to by any of the Companies or any other entity or entities that, together with any of the Companies, constitute elements of either a controlled group of corporations (within the meaning of Section 414(b) of the Code), a group of trades or businesses under common control (within the meaning of Section 414(c) of the Code or Section 4001 of ERISA), an affiliated service group (within the meaning of Section 414(m) of the Code), or another arrangement covered by Section 414(o) of the Code. 4.9. Taxes. 4.9.1 General. Schedule 4.9.1 is an accurate and complete list of all federal, state, local and other Tax returns and reports (including, but not limited to, information returns) (collectively "Returns") filed by the Companies with respect to their last five fiscal years. Accurate and complete copies of all Returns filed by the Companies with respect to their last five fiscal years have been delivered or made available to Newco. Except as explained on Schedule 4.9.1, (a) each of the Companies has properly and timely filed all Tax Returns required to be filed by it, all of -9- which were accurately prepared and completed; (b) each of the Companies has properly withheld from payments to its employees, agents, representatives, contractors and suppliers all amounts required by Law to be withheld for Taxes; (c) each of the Companies has paid all amounts for Taxes required to be paid by it except for current Taxes which are not yet due or Taxes which are being contested in good faith as disclosed on Schedule 4.9.1 by appropriate proceedings diligently prosecuted, provided that, in either case, adequate reserves therefor have been established in accordance with GAAP; (d) no audit of any of the Companies by any governmental taxing authority has ever been conducted, is currently pending or, to Owner's knowledge, threatened; (e) no notice of any proposed Tax audit, or of any Tax deficiency or adjustment, has been received by any of the Companies, and there is no reasonable basis for any Tax deficiency or adjustment to be assessed against any of the Companies; and (f) there are no agreements or waivers currently in effect that provide for an extension of time for the assessment of any tax against any of the Companies. 4.9.2 Affiliated Group. None of the Companies has been a member of an affiliated group filing a consolidated federal income Tax Return other than a group the common parent of which is the Owner (the "Affiliated Group"). The Affiliated Group has filed all income Tax Returns that it was required to file for each taxable period during which any of the Companies was a member of the group. No director or officer (or employee responsible for Tax matters) of any of the Companies expects any authority to assess any additional Taxes against the Affiliated Group for any taxable period during which any of the Companies was a member of the group. There is no dispute or claim concerning any Tax liability of the Affiliated Group for any taxable period during which any of the Companies was a member of the group either (A) claimed or raised by any authority in writing or (B) as to which any of the directors and officers (and employees responsible for Tax matters) of any of the Companies has knowledge based upon personal contact with any agent of such authority. Except as disclosed on Schedule 4.9.2, the Affiliated Group has not waived any statute of limitations in respect of any Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency for any taxable period during which any of the Companies was a member of the group. None of the Companies has any liability for the Taxes of any person other than the Companies (A) under Treasury Reg. Section 1.1.1502-6 (or any similar provision of state, local or foreign law), (B) as a transferee or successor, (C) by contract, or (D) otherwise. 4.10. Proceedings and Judgments. Except as described on Schedule 4.10, to Owner's knowledge, (a) no Proceeding is currently pending or threatened against or relating to any of the Companies, any of the Companies' Businesses or any of the Companies' Assets, or the transactions contemplated by this Agreement; and (b) no Judgment is currently outstanding against or relating to the Company or the Companies' Businesses or any of the Companies' Assets. 4.11. Insurance. Schedule 4.11 is an accurate and complete list and description of (a) each Insurance Policy currently owned or maintained by or for the benefit of any of the Companies (excluding Insurance Policies for Employee Benefit Plans that are listed on Schedule 4.11), and (b) each Insurance Policy owned or maintained by or for the benefit of any of the Companies at any time since January 1, 1990. Each such Insurance Policy is or was in full force and effect during the period of coverage set forth on Schedule 4.11. Neither Owner nor, to Owner's knowledge, any of the Companies has received any notice of cancellation with respect to any such current Insurance Policy. Except as explained on Schedule 4.11, no claim is pending under any Insurance Policy listed on Schedule 4.11, nor has any claim occurred thereunder since January 1, 1990. -10- 4.12. Related Party Transactions. Except as explained on Schedule 4.12 and for intercompany transactions between Owner and the Companies consistent with past practices, there are no Contracts, arrangements, transactions or understandings of any nature between any of the Companies and Owner or any director or officer of Owner or between any of the Companies and any Person that is an affiliate (as such term is defined for purposes of the Exchange Act) or immediate family member of any director or officer of Owner. 4.13. Brokerage Fees. No Person acting on behalf of any of the Companies or Owner is entitled to any brokerage, finder's or investment banking fee in connection with the transactions contemplated by this Agreement. 4.14. Full Disclosure. No representation or warranty made by Owner in this Agreement or the Ancillary Agreements or pursuant hereto or thereto contains or will contain any untrue statement of any material fact, or omits or will omit any material fact necessary to make the statements made, in the context in which made, not false or misleading. The copies of documents comprising or attached to the Schedules to this Agreement and the Ancillary Agreements, or otherwise delivered or provided to Parentco and Newco in connection with the transactions contemplated by this Agreement, are accurate and complete and are not missing any amendments, modifications, correspondence or other related papers that would be pertinent to Parentco's and Newco's understanding thereof. 5. REPRESENTATIONS OF PARENTCO AND NEWCO Knowing that the Owner relies thereon, Parentco and Newco jointly and severally, represent and warrant to Owner as follows: 5.1. Organization. Parentco and Newco each is a corporation that is duly organized, validly existing and in good standing under the Law of the State of Delaware. Parentco and Newco each has the full corporate power and authority to own its Assets, and enter into and perform this Agreement and the Ancillary Agreements. 5.2. Agreement. Parentco's and Newco's execution, delivery and performance of this Agreement and the Ancillary Agreements, and the consummation of the transactions contemplated by this Agreement and the Ancillary Agreements, (a) have been duly authorized by all necessary corporate actions by Parentco's and Newco's board of directors and stockholders; (b) do not constitute a violation of or default under Parentco's and Newco's charter or bylaws; (c) do not constitute a default or breach (immediately or after the giving of notice, passage of time or both) under any Contract to which Parentco or Newco is a party or by which Parentco or Newco is bound; (d) do not constitute a violation of any Law or Judgment that is applicable to Parentco or Newco, to the business or Assets of Parentco or Newco, or to the transactions contemplated by this Agreement; and (e) except as stated on Schedule 5.2 and except for the filing of the Certificate of Merger with the proper officials of the State of Delaware, do not require the Consent of any Person. This Agreement constitutes and the Ancillary Agreements, when executed and delivered, will constitute the valid and legally binding agreements of Parentco and Newco, enforceable against them in accordance with their respective terms. -11- 5.3. Proceedings. There is no Proceeding currently pending or, to the knowledge of Parentco or Newco, threatened against Parentco or Newco which has, or so far as Newco can now reasonably foresee will have, a Material Adverse Effect on Newco, or on Parentco's or Newco's ability to perform this Agreement. 5.4. Brokerage Fees. No Person acting on behalf of Parentco or Newco is entitled to any brokerage, finder's or investment banking fee in connection with the transactions contemplated by this Agreement. 5.5. Full Disclosure. None of the representations and warranties made by Parentco or Newco in this Agreement or the Ancillary Agreements or pursuant hereto or thereto contains any untrue statement of any material fact, or omits any material fact necessary to make the statements made, in the context in which made, not false or misleading. 6. CERTAIN OBLIGATIONS OF THE COMPANY AND OWNER PENDING CLOSING 6.1. Investigation. During the period from the date of this Agreement to the Closing Date, Owner shall provide, and shall cause the Companies to provide, to Parentco and Newco and their authorized representatives all information concerning the Companies and their businesses, Assets and that financial conditions that is reasonably requested by Parentco and Newco. 6.2. Conduct Pending Closing. During the period from the date of this Agreement to the Closing Date, except with the express prior written consent of Parentco. 6.2.1 Outside the Ordinary Course. Owner shall not take any action that would cause the Companies to do anything outside the ordinary course of business consistent with past practices. 6.2.2 Corporate Action. Owner shall cause each of the Companies not to (i) declare, pay or set aside for payment any dividend or other distribution, or make any direct or indirect redemption, retirement or acquisition of any shares of its capital stock, (ii) make any change in its accounting policies or practices, (iii) issue, or authorize the issuance, of any shares of capital stock or other securities or grant any rights with respect to its shares of capital stock or other securities, (iv) amend its certificate of incorporation or bylaws (or other organizational documents), or merge with or into, consolidate with, completely or partially liquidate or dissolve, or be involved in any other business combination with any other Person, (v) change, or authorize a change in, the rights of its outstanding capital stock or the character of its business, (vi) adopt or amend any Employee Benefit Plan. 6.2.3 Compliance. Owner shall (i) maintain all Insurance Policies relating to the Companies and their businesses and Assets in full force and effect, (ii) duly and timely file all Tax Returns required to be filed by the Companies, (iii) fully pay due all Taxes payable by the Companies or assessed against them or any of their respective Assets, (iv) continue to maintain the Employee Benefit Plans of the Companies in accordance with their respective terms. 6.2.4 Other Matters. Owner shall not, and shall cause the Companies not to, sell, transfer, give or otherwise dispose of, or create any Encumbrance upon, any of the Company's Stock. -12- 6.3. Acquisition Proposals. During the period from the date of this Agreement until June 30, 1995, Owner shall not, and shall cause the Companies and the respective directors, officers, employees, affiliates, associates, advisors, representatives and agents of Owner and the Companies not to, directly or indirectly, solicit, initiate or encourage any inquiries or proposals from, discuss or negotiate with, provide any non-public information to, or consider the merits of any unsolicited inquiries, or proposals from, any Person (other than Parentco and Newco and their respective officers, employees, representatives and agents) relating to any transaction involving the sale of the business or Assets of any of the Companies, or any of the capital stock of any of the Companies or any merger, consolidation, business combination, or similar transaction involving any of the Companies. 6.4. Consents. Between the date of this Agreement and the Closing Date, Owner shall, and shall cause the Companies to, in good faith, use all reasonable efforts to obtain as promptly as practicable, and shall cooperate with Parentco and Newco in obtaining, the Required Consents. 6.5. Advice of Changes. Between the date of this Agreement and the Closing Date, Owner shall promptly advise Parentco in writing of any fact of which it obtains knowledge from a source other than an officer or employee of the Company and which, if existing or known as of the date of this Agreement, would have been required to be set forth or disclosed in or pursuant to this Agreement (it being understood that any such advice shall not be deemed to modify the representations, warranties or covenants of Owner contained in this Agreement). 6.6. Accounting Adjustment and Contribution of OMD. On the Closing Date immediately prior to the Effective Date, Owner shall take all actions necessary or appropriate to (i) properly contribute to the capital of the Company the Mediq Advance account and the current Federal Taxes Payable (Receivable) account; and (ii) contribute all of the issued and outstanding shares of OMD to the Company. 6.7. Reasonable Efforts. Owner shall, and shall cause the Company to, use all reasonable efforts to consummate the transactions contemplated by this Agreement as promptly as practicable, and neither Owner nor the Company shall take, or cause to be taken, or to the best of its ability permit to be taken, any action that would impair the prospect of completing the transactions contemplated by this Agreement. 7. CERTAIN OBLIGATIONS OF PARENTCO AND NEWCO PENDING CLOSING 7.1. Consents. Between the date of this Agreement and the Closing Date, Parentco and Newco shall, in good faith, use all reasonable efforts to obtain as promptly as practicable, and shall cooperate with Owner and the Company in obtaining, the Required Consents. 7.2. Advice of Changes. Between the date of this Agreement and the Closing Date, Parentco shall promptly advise Owner in writing of any fact of which it obtains knowledge and which, if existing or known as of the date of this Agreement, would have been required to be set forth or disclosed in or pursuant to this Agreement (it being understood that any such advice shall not be deemed to modify the representations, warranties and covenants of Parentco or Newco contained in this Agreement). -13- 7.3. Financing. Parentco and Newco shall use all reasonable efforts to obtain financing, subject to reasonable and customary conditions, from reputable lenders in an aggregate amount which will be adequate to pay the $1,500,000 cash payment portion of the Merger Consideration, and provide a line of credit, in the amount of $1,000,000, to be used as working capital (said loan and line of credit being jointly referred to herein as the "Financing"). 7.4. Reasonable Efforts. Parentco and Newco shall use all reasonable efforts to consummate the transactions contemplated by this Agreement as promptly as practicable, and neither Parentco nor Newco shall take, cause to be taken, or to the best of its ability permit to be taken, any action that would impair the prospect of completing the transactions contemplated by this Agreement. 8. CONDITIONS PRECEDENT TO CLOSING BY OWNER Each obligation of Owner to be performed on the Closing Date shall be subject to the satisfaction of each of the following conditions, except to the extent that such satisfaction is waived by Owner in writing: 8.1. Representations of Parentco and Newco. All representations, warranties and certifications of Parentco and Newco contained in this Agreement and the Ancillary Agreements and in any written statement or document delivered to Owner by Parentco or Newco under or in connection with this Agreement or the Ancillary Agreements, taken individually and together, shall be true on and as of the Closing Date, with the same force and effect as though made on and as of the Closing Date, except that any such representation, warranty or certification made as of a specified date shall be true on and as of such date. 8.2. Performance by Parentco and Newco. All of the covenants, terms and conditions of this Agreement to be satisfied or performed by Parentco or Newco on or before the Closing Date shall have been substantially satisfied or performed. 8.3. Absence of Proceedings. No Proceeding shall have been instituted or threatened on or before the Closing Date by any Person (other than Owner or any of the Companies), no Judgment shall have been issued, and no new Law shall have been enacted, that seeks to or does prohibit or restrain, or that seeks damages as a result of, the consummation of the transactions contemplated by this Agreement. 8.4. Consents. All Required Consents shall have been obtained. 8.5. Owner's Board Approval. This Agreement and the transactions contemplated hereby shall have been approved by Owner's board of directors. 9. CONDITIONS PRECEDENT TO CLOSING BY PARENTCO, NEWCO AND THE SHAREHOLDER Each obligation of Parentco and Newco to be performed on the Closing Date shall be subject to the satisfaction of each of the following conditions, except to the extent that such satisfaction is waived by Parentco in writing: -14- 9.1. Representations of Owner. All of the representations, warranties and certifications of Owner contained in this Agreement and the Ancillary Agreements and in any written statement or document delivered by Owner under or in connection with this Agreement, taken individually and together, ("Owner's Representations and Warranties") shall be true on and as of the Closing Date, with the same force and effect as though made on and as of the Closing Date, except that any such representation, warranty or certification made as of a specified date shall be true on and as of such date. 9.2. Performance by Owner. All of the covenants, terms and conditions of this Agreement to be satisfied or performed by Owner on or before the Closing Date shall have been satisfied or performed. 9.3. Absence of Adverse Changes. There shall not have been any change or casualty loss between the date of this Agreement and the Closing Date that has or would have a Material Adverse Effect on the Company. 9.4. Absence of Proceedings. No Proceeding shall have been instituted or threatened on or before the Closing Date by any Person (other than Parentco or Newco) no Judgment shall have been issued, and no new Law shall have been enacted, that seeks to or does prohibit or restrain, or that seeks damages as a result of, the consummation of the transactions contemplated by this Agreement. 9.5. Consents. All Required Consents shall have been obtained. 9.6. Financing. Newco shall have received the proceeds of the Financing. 9.7. OMD. Prior to the Closing Date, Owner shall have contributed all of the issued and outstanding shares of OMD to the Company. 9.8. Owner's Board Approval. This Agreement and the transactions contemplated hereby shall have been approved by Owner's board of directors. 10. CLOSING 10.1. Closing. Unless this Agreement is terminated in accordance with Section 13, the closing of the Merger and the other transactions contemplated by this Agreement ("Closing") shall be held at 10:00 A.M. local time on the fifth business day after the conditions to closing set forth in Sections 8.4, 8.5, 9.5 and 9.6 are satisfied, or such other time and date as is agreed upon by Owner and Parentco, at the offices of Blank, Rome, Comisky & McCauley, Four Penn Center Plaza, Philadelphia, Pennsylvania 19103, or such other location as is agreed upon by Owner and Parentco. The parties shall cause Certificate of Merger to be filed with the Secretary of State of the State of Delaware on the Closing Date or as soon as thereafter as is possible, and the Merger shall be effective on the date and time specified in the Certificate of Merger (the "Effective Date"). The parties shall take such further actions as may be required by the DGCL in connection with such filing and the consummation of the Merger. 10.2. Obligations of Owner at Closing. At the Closing, Owner shall deliver the following to Parentco and Newco: -15- 10.2.1 The Company Stock. Stock certificates representing all of the Company's Stock, together with assignments separate from certificate in blank, dated the Effective Date and duly executed by Owner, and stamps or other proper evidence of the payment of any stock transfer or similar Taxes due as a result of the transfer of the Company's Stock. 10.2.2 Instruments of Transfer. All instruments or documents necessary to change the names of the individuals who have access to or are authorized to make withdrawals from or dispositions of all bank accounts, other accounts, certificates of deposits, marketable securities, other investments, safe deposit boxes, lock boxes and safes of the Companies and all keys and combinations to all safe deposit boxes, lock boxes and safes of the Companies. 10.2.3 Certificate of Merger. A Certificate of Merger, in form and substance, acceptable to the parties ("Certificate of Merger"), dated the Closing Date and duly executed by the Company and Owner. 10.2.4 Consents. The original signed copies of all Consents listed on Schedule 4.3. 10.2.5 Corporate Records and Resignations. All of the original minute books and stock books of the Companies and duly executed resignations, dated the Effective Date, of all directors and officers of the Companies other than as specified by Parentco. 10.2.6 Good Standing. Good standing certificates for the Companies, dated no earlier than ten (10) days before the Closing Date, from their respective jurisdictions of incorporation and from each other jurisdiction in which they are qualified or registered to do business as a foreign corporation. 10.2.7 Certified Resolutions. Copies of the resolutions duly adopted by the respective boards of directors of the Company and Owner, authorizing the Company and Owner to execute, deliver and perform this Agreement and to consummate the transactions contemplated by this Agreement, certified by an officer of the Company and Owner, as the case may be, as in full force and effect, without modification or rescission, on and as of the Closing Date. 10.2.8 Closing Certificate. A certificate dated the Closing Date and duly executed by proper officers of Owner in which Owner represents and warrants to Parentco and Newco that the conditions set forth in Sections 9.1, 9.2, 9.3, 9.4 and 9.7 have been satisfied. 10.2.9 General Release. A General Release of the Companies, in form acceptable to Owner and Parentco dated the Closing Date and duly executed by Owner. 10.2.10 Management Agreement. A Management Agreement, in form and substance acceptable to Owner and Parentco (the "Management Agreement"), dated the Closing Date, and duly executed by Owner, providing for the payment by the Surviving Corporation to Owner of a fee (the "Annual Service Fee"), in an amount per year for seven years calculated as set forth below, in exchange for the provision by Owner to Newco of certain management services over such seven year period. The Annual Service Fee shall equal the result of: (i) the quotient of (A) the amount of the Company's net accounts receivable as reflected on the Closing Balance Sheet, less -16- all billings made by the Company in excess of costs and income recognized on uncompleted projects as reflected on the Closing Balance Sheet, divided by (B) seven, less (ii) $375,000. 10.2.11 Lease Agreement. A lease agreement (the "Granary Lease"), in form and substance acceptable to Owner and Parentco, dated the Closing Date, and duly executed by Owner, providing that the Surviving Corporation shall lease the property located at 411 North Twentieth Street, Philadelphia, Pennsylvania (the "Granary") from Owner at the same rent the Company currently pays Owner for the use of such property. 10.2.12 Other Documents. All other agreements, certificates, instruments, opinions and documents reasonably requested by Parentco in order to fully consummate the transactions contemplated by this Agreement. 10.3. Obligations of Parentco and Newco at Closing. At the Closing, Parentco and Newco shall deliver the following to Owner: 10.3.1 Payment. The Merger Consideration shall be paid in accordance with Section 2.10. 10.3.2 Certificate of Merger. The Certificate of Merger, dated the Closing Date and duly executed by Newco and Parentco. 10.3.3 Good Standing. Good standing certificates for Parentco, Newco, dated no earlier than ten (10) days before the Closing Date, from the State of Delaware. 10.3.4 Certified Resolutions. Copies of the resolutions duly adopted by the board of directors of Parentco, Newco, authorizing Parentco and Newco to execute, deliver and perform this Agreement and to consummate the transactions contemplated by this Agreement, certified by an officer of Parentco and Newco as in full force and effect, without modification or rescission, on and as of the Closing Date. 10.3.5 Closing Certificate. A certificate dated the Closing Date and duly executed by proper officers of Parentco and Newco, in which Parentco and Newco jointly and severally, represent and warrant to Owner that the conditions set forth in Sections 8.1, 8.2 and 8.3 have been satisfied. 10.3.6 Management Agreement. The Management Agreement, dated the Closing Date and duly executed by the Surviving Corporation. 10.3.7 Lease Agreement. The Granary Lease, dated the Closing Date and duly executed by the Surviving Corporation. 10.3.8 Guaranty and Life Insurance Policy. The Guaranty of Granary Partners, L.P. referred to in Section 2.8, dated the Closing Date and duly executed by Granary Partners, L.P., and the life insurance policy on the life of James W. Eastwood referred to in Section 2.8. -17- 10.3.9 Other Documents. All other agreements, certificates, instruments, opinions and documents reasonably requested by Owner in order to fully consummate the transactions contemplated by this Agreement. 11. CERTAIN POST-CLOSING OBLIGATIONS 11.1. Transition and Cooperation. From and after the Closing Date, (a) Owner shall fully cooperate to transfer to Parentco the control and enjoyment of the Company in accordance with this Agreement; and (b) Owner shall promptly deliver to the Company all correspondence, papers, documents and other items and materials received by Owner or found to be in the possession of Owner which pertain to the Company. At any time and from time to time after the Closing Date, at the Company's request and without further consideration, Owner shall promptly execute and deliver all such further agreements, certificates, instruments and documents and perform such further actions as the Company may reasonably request, in order to fully consummate the transactions contemplated hereby and carry out the purposes and intent of this Agreement. 11.2. Tax Matters. 11.2.1 Tax Sharing Agreements. Any Tax sharing agreement between Owner and any of the Companies shall be terminated as of the Closing Date and shall have no further effect for any taxable year (whether the current year, a future year, or a past year). 11.2.2 Returns for Periods Through the Closing Date. Owner shall include the income of the Companies (including any deferred income triggered into income by Treasury Reg. Section 1.1502-13 and Treasury Reg. Section 1.1502-14 and any excess loss accounts taken into income under Treasury Reg. Section 1.1502-19) on Owner's consolidated federal income Tax Returns for all periods through the Closing Date and pay all federal income Taxes attributable to such income. The Companies will furnish Tax information to Owner for inclusion in Owner's federal consolidated income Tax Return and separate company state Tax Returns for the period which includes the Closing Date in accordance with Companies' past custom and practice. Owner shall take no position on such Tax Returns relating to the Companies that is inconsistent with past practices. The income of the Companies shall be apportioned to the period up to and including the Closing Date and the period after the Closing Date by closing the books of the Companies as of the end of the Closing Date. 11.2.3 Audits. Owner shall permit the Companies and their counsel to participate in any audits of Owner's consolidated federal income Tax Returns to the extent that such returns relate to the Companies. Owner shall not settle any such audit in a manner which would adversely affect the Companies after the Closing Date without the prior written consent of Parentco, which consent shall not unreasonably be withheld. 11.2.4 Election Out of Consolidated Group. The Companies shall not elect to be excluded from Owner's consolidated group under Treasury Reg. Section 1.1502-76(b)(5)(ii) for the Owner group taxable year that includes the Closing Date. 11.2.5 No Carrybacks. Surviving Corporation shall not carryback any post-acquisition Tax attribute of any of the Companies into the Owner's consolidated Tax Return. -18- 11.2.6 Section 338(h)(10) Election. Owner shall join with Parentco and Newco in making an election under Sections 338(g) and 338(h)(10) of the Code (and any corresponding elections under state, local, or foreign tax law)(collectively a "Section 338(h)(10) Election") with respect to the Merger. Owner shall pay any Tax attributable to the making of the Section 338(h)(10) Election and will indemnify Parentco, Newco and the Companies, against any adverse consequences arising out of any failure to pay such Tax. Owner shall also pay any state, local, or foreign Tax and indemnify Parentco, Newco and the Companies against any adverse consequences arising out of any failure to pay such Tax attributable to an election under state, local, or foreign law similar to the election available under Section 338(g) of the Code (or which results from the making of an election under Section 338(g) of the Code) with respect to the Merger where the state, local, or foreign Tax jurisdiction (i) does not provide or recognize a Section 338(h)(10) election or (ii) does not apply its provisions corresponding to Section 338(h)(10) of the Code to the purchase and sale of the stock of the Companies (for example, because the Companies file a separate company Tax return in such jurisdiction). 11.2.7 Certain Limitations. Parentco and Newco covenant and agree that they will take no action, including, but not limited to, any merger or liquidation that would adversely affect the categorization of the Merger as a qualified stock purchase for the purpose of Section 338 of the Code. 11.3. The Company's Employee Benefit Plans. As soon as practicable, following the Effective Date, Surviving Corporation shall establish a retirement plan which shall include a cash or deferred arrangement described in Section 401(k) of the Code. It is intended that such plan will satisfy the applicable requirements of the Code and ERISA. After establishing such 401(k) retirement plan, those same assets attributable to the entire accounts, whether or not vested, of the participants in the Mediq Incorporated Employees' Savings Plan who become employees of Surviving Corporation on the Effective Date shall be transferred to Surviving Corporation's 401(k) retirement plan as soon as practicable. Such accounts shall be adjusted for all investment experience through the date of the actual transfer. Such accounts shall include the actual assets allocated to each participant's account, including stock of Owner, and all employer matching contributions with respect to deferrals made by participants for all periods through the Effective Date. The vesting provisions of Mediq Incorporated Pension Plan ("Pension Plan") shall be amended to provide that employees of the Companies on the Effective Date who are participants in the Pension Plan shall continue to receive vesting credit for employment with the Surviving Corporation. The Surviving Corporation shall periodically notify Owner upon the termination of employment of an employee of the Surviving Corporation who was a participant in the Pension Plan. 11.4. Nondisclosure. At all times after the Closing Date, except with the Company's prior written consent or as legally required in the reasonable written opinion of counsel to Owner, Owner shall not, directly or indirectly, in any capacity communicate, publish or otherwise disclose to any Person, or use for the benefit of any Person, any confidential or proprietary property, knowledge or information of any of the Companies or concerning any of their businesses, assets or financial conditions, no matter when or how such knowledge or information was obtained. 11.5. Noncompetition. During the period beginning on the Closing Date and ending on the third anniversary of the Closing Date, except with the Company's prior written consent, Owner shall not, directly or indirectly, in any capacity, at any location where the Companies have conducted or are conducting business as of the Closing: -19- 11.5.1 Non-Solicitation. Communicate with or solicit any Person who is, or during such period becomes, a customer, prospect, supplier, employee, salesman, agent or representative of, or a consultant to, any of the Companies, in any manner which interferes or might interfere with such Person's relationship with any of the Companies, or in an effort to obtain any such Person as a customer, employee, salesman, agent or representative of, or a consultant to, any other Person that conducts a business competitive with or similar to the project management, interior design or architectural planning and design businesses (the "Business") of any of the Companies. 11.5.2 Competing Business. Establish, own, manage, operate, finance or control, or participate in the establishment, ownership, management, operation, financing or control of, or be a director, officer, employee, salesman, agent or representative of, or be a consultant to, any Person that conducts a business competitive with or similar to the Business of any of the Companies. 11.6. Enforcement of Covenants. Owner expressly acknowledges that it would be extremely difficult to measure the damages that might result from any breach of the Covenants, and that any breach of the Covenants will result in irreparable injury to the Company for which money damages could not adequately compensate. If a breach of the Covenants occurs, then the Company shall be entitled, in addition to all other rights and remedies that it may have at law or in equity, to have an injunction issued by any competent court enjoining and restraining the Owner and all other Persons involved therein from continuing such breach. The existence of any claim or cause of action that the Owner or any such other Person may have against any of the Companies shall not constitute a defense or bar to the enforcement of any of the Covenants. If the Company must resort to litigation to enforce any of the Covenants that has a fixed term, then such term shall be extended for a period of time equal to the period during which a breach of such Covenant was occurring, beginning on the date of a final court order (without further right of appeal) holding that such a breach occurred or, if later, the last day of the original fixed term of such Covenant. 11.7. Scope of Covenants. If any Covenant, or any part thereof, or the application thereof, is construed to be invalid, illegal or unenforceable, then the other Covenants, or the other portions of such Covenant, or the application thereof, shall not be affected thereby and shall be enforceable without regard thereto. If any of the Covenants is determined to be unenforceable because of its scope, duration, geographical area or other factor, then the court making such determination shall have the power to reduce or limit such scope, duration, area or other factor, and such Covenant shall then be enforceable in its reduced or limited form. 12. INDEMNIFICATION 12.1. Indemnification Obligations of Owner. From and after the Closing Date, Owner shall indemnify and hold harmless Parentco, Newco, the Companies and all existing and future, direct or indirect, subsidiaries of the Companies (collectively, the "Company Group"), and their respective successors and assigns, and their respective shareholders, directors, officers, employees, agents and representatives ("Indemnified Persons"), from and against any and all actions, suits, claims, demands, debts, liabilities, obligations, losses, damages, costs and expenses, including, but not limited to, reasonable attorney's fees and court costs, arising out of or caused by, directly or indirectly, any of all of the following: -20- 12.1.1 Misrepresentation. Any misrepresentation, breach or failure of any warranty or representation made by the Owner in or pursuant to this Agreement. 12.1.2 Nonperformance. Any failure or refusal by Owner to satisfy or perform any covenant, term or condition of this Agreement required to be satisfied or performed by it. 12.1.3 Employee Benefit Plans. Any Proceeding arising out of, directly or indirectly, the Savings Plan or the Pension Plan and any act or omission of Owner, or any act or omission of any of the Companies prior to the Effective Date, relating to the Savings Plan or the Pension Plan. 12.1.4 Taxes. Any deficiency or adjustment for Taxes and related interest, penalties and expenses, assessed against or imposed upon any of the Companies (or their successors) with respect to any period ending on or before the Closing Date, including any liability of any of the Companies for Taxes of Owner or any of its Subsidiaries or affiliates other than any of the Companies (i) under Treasury Reg. Section 1.1502-6 (or any similar provision of state, local or foreign law), (ii) as a transferee or successor, (iii) by contract, or (iv) otherwise. 12.2. Indemnification Obligations of Parentco and the Surviving Corporation. From and after the Closing Date, Parentco and the Surviving Corporation, jointly and severally, shall indemnify and hold harmless Owner and its Indemnified Persons from and against any and all actions, suits, claims, demands, debts, liabilities, obligations, losses, damages, costs and expenses, including, but not limited to, reasonable attorney's fees and court costs, arising out of or caused by, directly or indirectly, any of all of the following: 12.2.1 Misrepresentation. Any misrepresentation, breach or failure of any warranty or representation made by Parentco or Newco in or pursuant to this Agreement. 12.2.2 Nonperformance. Any failure or refusal by Parentco or Newco to satisfy or perform any covenant, term or condition of this Agreement required to be satisfied or performed by it. 12.2.3 Proceedings Against Owner. Any Proceeding against Owner by any Person (other than Parentco or the Surviving Corporation) solely as a result of Owner having been a shareholder of the Company and not as a result of any act or omission of Owner. 12.3. Indemnification Procedures. With respect to each event, occurrence or matter ("Indemnification Matter") as to which the members of the Company Group or Owner (in either case, referred to as the "Indemnitee") are entitled to indemnification from another party (referred to as the "Indemnitor") under this Section 12: 12.3.1 Notice. Within ten (10) days after the Indemnitee receives written documents underlying the Indemnification Matter or, if the Indemnification Matter does not involve a third party action, suit, claim or demand, promptly after the Indemnitee first has actual knowledge of the Indemnification Matter, the Indemnitee shall give notice to the Indemnitor of the nature of the Indemnification Matter and the amount demanded or claimed in connection therewith ("Indemnification Notice"), together with copies of any such written documents. -21- 12.3.2 Defense. If a third party action, suit, claim or demand is involved, then, upon receipt of the Indemnification Notice, the Indemnitor shall, at its expense and through counsel of its choice, promptly assume and have sole control over the litigation, defense or settlement (the "Defense") of the Indemnification Matter, except that (a) the Indemnitee may, at its option and expense and through counsel of its choice, participate in (but not control) the Defense; (b) if the Indemnitee reasonably believes that the handling of the Defense by the Indemnitor may have a material adverse effect on the Indemnitee, its business or financial condition, or its relationship with any customer, prospect, supplier, employee, salesman, consultant, agent or representative, then the Indemnitee may, at its option and expense and through counsel of its choice, assume control of the Defense, provided that the Indemnitor shall be entitled to participate in the Defense at its expense and through counsel of its choice, and provided further that the Indemnitee shall not consent to any judgment or agree to any settlement without the Indemnitor's prior written consent, which consent shall not be unreasonably withheld or delayed; (c) the Indemnitor shall not consent to any Judgment, or agree to any settlement, without the Indemnitee's prior written consent provided that, if the Indemnitee withholds its consent to any monetary Judgment or monetary settlement which is acceptable to the Indemnitor and which does not exceed the limitation set forth in Section 12.4.2, then the Indemnitor's liability with respect to such Indemnification Matter shall be limited to such monetary amount; (d) if the Indemnitor does not promptly assume control over the Defense or, after doing so, does not continue to prosecute the Defense in good faith, the Indemnitee may, at its option and through counsel of its choice, but at the Indemnitor's expense, assume control over the Defense provided that the Indemnitor shall continue to be obligated to indemnify the Indemnitee with respect thereto. In any event, the Indemnitor and the Indemnitee shall fully cooperate with each other in connection with the Defense, including, but not limited to, by furnishing all available documentary or other evidence as is reasonably requested by the other. 12.3.3 Payments. All amounts owed by the Indemnitor to the Indemnitee (if any) shall be paid in cash in full within five (5) business days after a final Judgment (without further right of appeal) determining the amount owed is rendered, or after a final settlement or agreement as to the amount owed is executed. 12.4. Limits on Indemnification. The Indemnitor's liability under this Section 12 shall be limited as follows: 12.4.1 Threshold. No amount shall be payable by the Indemnitor under this Section 12 unless and until the aggregate amount otherwise payable by the Indemnitor under this Section 12 exceeds Ten Thousand Dollars ($10,000), in which event the Indemnitor shall pay such aggregate amount and all future amounts payable by the Indemnitor under this Section 12. 12.4.2 Ceiling. The Indemnitor's total liability under this Section 12 shall not exceed the sum of Three Million Dollars ($3,000,000). 12.4.3 Time Periods. With respect to any Indemnification Matter that does not involve a third party or governmental claim, demand or Proceeding, the Indemnitor shall have no liability unless the Indemnitee gives an Indemnification Notice with respect thereto within three (3) years after the Closing Date. With respect to an Indemnification Matter that involves a third party or governmental claim, demand or proceeding, the liability of Indemnitor shall not be affected if the Indemnitee gives an Indemnification Notice with respect thereto after the expiration of the three year period after the Closing Date. -22- 12.4.4 Exceptions. None of the foregoing limitations shall apply in the case of any Indemnification Matter involving recklessness, intentional misrepresentation, fraud or criminal liability or Taxes. 12.5. Setoff and Holdback. In addition to all other rights and remedies that the Indemnitee may have, the Indemnitee shall have the right to setoff, against any amounts due to the Indemnitor, whether due under this Agreement, any of the other Contracts contemplated by this Agreement or otherwise, any sums for which the Indemnitee is entitled to indemnification under this Section 12; provided that the Indemnitee's rights to indemnification under this Section 12 shall not be in any manner limited by or to this right of setoff. If any Indemnification Matters are pending at a time when the Indemnitee is required to pay any amount due to the Indemnitor, then the Indemnitee shall have the right, upon notice to the Indemnitor, to withhold from such payment, until final determination of such pending Indemnification Matters, the total amount for which the Indemnitor may become liable as a result thereof, as determined by the Indemnitee reasonably and in good faith. 13. TERMINATION 13.1. Termination. This Agreement may be terminated and the transactions contemplated hereby abandoned at any time before Closing, whether before or after approval by Acquiror's shareholders in accordance with any of the following methods: 13.1.1 Mutual Consent. By the mutual written consent of Parentco and Owner. 13.1.2 Termination Date. By written notice from Parentco to Owner or from to Owner to Parentco, if the Closing does not occur on or before June 30, 1995 for any reason other than a breach of this Agreement by the party giving such notice. 13.1.3 Failure of Parentco's and Newco's Conditions. By written notice from Parentco to Owner, if it becomes certain, for all practical purposes, that any of the conditions to the closing obligations of Parentco and Newco set forth in Section 9 cannot be satisfied for a reason other than Parentco's or Newco's breach of this Agreement, and Parentco is not willing to waive the satisfaction of such condition. 13.1.4 Failure of Owner's Conditions. By written notice from Owner to Parentco, if it becomes certain, for all practical purposes, that any of the conditions to the closing obligations of Owner set forth in Section 8 cannot be satisfied for a reason other than Owner's breach of this Agreement, and Owner is not willing to waive the satisfaction of such condition. 13.2. Effect of Termination. Upon termination of this Agreement pursuant to Section 13.1, this Agreement shall be of no further force and effect, and there shall be no liability on the part of any party hereto, except for the obligations of the parties under Sections 14.1, 14.2 and 14.3 and except that no such termination shall relieve any party from liability for any breach of this Agreement prior to such termination. Each party's rights under this Section 13 is in addition to all other rights it may have under this Agreement or otherwise, and the exercise of its rights under this Section 13 shall not be deemed an election of remedies. 14. OTHER PROVISIONS -23- 14.1. Confidentiality. During the period from the date of this Agreement to the Closing Date, each of the parties shall maintain the confidentiality of all confidential information which is disclosed to them in connection with this Agreement. If this Agreement is terminated in accordance with Section 13, then each party shall promptly return all confidential information and materials of the other parties, and the provisions of the foregoing sentence shall survive such termination indefinitely. The parties acknowledge that any breach of this Section 14.1 may cause irreparable injury to the others for which money damages could not adequately compensate. If there is such a breach, the aggrieved parties shall be entitled, in addition to all other rights and remedies they may have at law or in equity, to have an injunction issued by any competent court enjoining and restraining the breaching parties from continuing such breach. The existence of any claim or cause of action which any of the breaching parties may have against any of the aggrieved parties shall not constitute a defense or bar to the enforcement of this Section 14.1. 14.2. Fees and Expenses. Parentco and Newco shall pay all of the fees and expenses incurred by them, and Owner shall pay all fees and expenses incurred by the Company and it, in negotiating and preparing this Agreement (and all other Contracts executed in connection herewith or therewith) and in consummating the transactions contemplated by this Agreement; provided, that Newco and Owner shall each be responsible for and shall each pay one-half of the counsel fees of any lender which are payable by Parentco and/or Newco in connection with a Financing. The parties acknowledge that Blank, Rome, Comisky & McCauley is not representing the Company in this transaction. 14.3. Publicity. All voluntary public announcements concerning the transactions contemplated by this Agreement shall be mutually acceptable to both Parentco and Owner. Unless required by Law, no party shall make any public announcement or issue any press release concerning the transactions contemplated by this Agreement without the prior written consent of Parentco and Owner. With respect to any announcement that any of the parties is required by Law or stock exchange or NASDAQ regulation to issue, such party shall, to the extent possible under the circumstances, review the necessity for the contents of the announcement with the other party before issuing the announcement. 14.4. Notices. All notices, consents or other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given when delivered personally or one business day after being sent by a nationally recognized overnight delivery service, charges prepaid, to the parties at their respective addresses stated on the first page of this Agreement. Notices may also be given by facsimile and shall be effective on the date transmitted if confirmed within forty-eight (48) hours thereafter by a signed original sent in the manner provided in the preceding sentence. Any notice to Owner shall be sent to the attention of Alan Einhorn, Corporate Counsel. A copy of each notice to Parentco, Newco or the Surviving Corporation shall be simultaneously sent to Arthur H. Miller at Blank, Rome, Comisky & McCauley, 1200 Four Penn Center Plaza, Philadelphia, PA 19103. Any party may change its address for notice and the address to which copies must be sent by giving notice of the new addresses to the other parties in accordance with this Section 14.4, provided that any such change of address notice shall not be effective unless and until received. 14.5. Survival of Representations. All representations and warranties made in this Agreement or pursuant hereto shall survive the date of this Agreement, the Effective Date, the Closing Date and the consummation of the transactions contemplated by this Agreement. -24- 14.6. Interpretation of Representations. Each representation and warranty made in this Agreement or pursuant hereto is independent of all other representations and warranties made by the same parties, whether or not covering related or similar matters, and must be independently and separately satisfied. Exceptions or qualifications to any such representation or warranty shall not be construed as exceptions or qualifications to any other representation or warranty. 14.7. Reliance by Parentco, Newco and the Shareholder. Notwithstanding the right of Parentco, Newco and the Shareholder to investigate the business, Assets and financial condition of the Companies, and notwithstanding any knowledge determined or determinable by Parentco, Newco and the Shareholder as a result of such investigation, Parentco, Newco and the Shareholder have the unqualified right to rely upon, and has relied upon, each of the representations and warranties made by the Owner in this Agreement or pursuant hereto. 14.8. Entire Understanding. This Agreement, together with the Exhibits and Schedules hereto which are hereby incorporated herein as a part of this Agreement, states the entire understanding among the parties with respect to the subject matter hereof, and supersedes all prior oral and written communications and agreements, and all contemporaneous oral communications and agreements, with respect to the subject matter hereof. 14.9. Parties in Interest. This Agreement shall bind, benefit, and be enforceable by and against the parties to this Agreement and their respective successors, permitted assigns, heirs, estates and personal representatives. Nothing in this Agreement is intended to confer, or shall be deemed to confer, any rights or remedies upon any Persons other than the parties hereto and their respective heirs, estates, personal representatives, successors and permitted assigns. 14.10. Amendment. This Agreement may be amended, modified or supplemented by the parties hereto, whether before or after approval by a party's shareholders, provided that any such amendment, modification or supplement shall be in writing and signed by the parties hereto. 14.11. Waivers. No waiver with respect to this Agreement shall be enforceable unless in writing and signed by the party against whom enforcement is sought. Except as otherwise expressly provided herein, no failure to exercise, delay in exercising, or single or partial exercise of any right, power or remedy by any party, and no course of dealing between or among any of the parties, shall constitute a waiver of, or shall preclude any other or further exercise of, any right, power or remedy. 14.12. Severability. If any provision of this Agreement is construed to be invalid, illegal or unenforceable, then the remaining provisions hereof shall not be affected thereby and shall be enforceable without regard thereto. 14.13. Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be an original hereof, and it shall not be necessary in making proof of this Agreement to produce or account for more than one counterpart hereof. 14.14. Section Headings. The section and subsection headings in this Agreement are used solely for convenience of reference, do not constitute a part of this Agreement, and shall not affect its interpretation. -25- 14.15. References. All words used in this Agreement shall be construed to be of such number and gender as the context requires or permits. Unless a particular context clearly requires otherwise, the words "hereof" and "hereunder" and similar references refer to this Agreement in its entirety and not to any specific section or subsection of this Agreement. 14.16. Controlling Law. THIS AGREEMENT IS MADE UNDER, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED SOLELY THEREIN, WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW. 14.17. Schedules. The parties agree that within ten (10) business days of the date of this Agreement, Owner shall furnish to Parentco and Newco and Parentco and Newco shall furnish to Owner, all Schedules called for by this Agreement which were not delivered upon execution of this Agreement. If any party receiving a Schedule from another party pursuant to this Section 14.17 objects, for any reason, to anything disclosed on such Schedule, the objecting party shall have the right to terminate this Agreement by written notice to the other party. Witness the due execution and delivery hereof as of the date first stated above. MEDIQ INCORPORATED By: /s/ Michael S. Sandler --------------------------- Name: Michael S. Sandler Title: MEDIFAC HOLDINGS, INC. By: /s/ James W. Eastwood -------------------------- Name: James W. Eastwood Title: MEDIFAC, INC. By: /s/ Michael S. Sandler -------------------------- Name: Michael S. Sandler Title: MEDIFAC ACQUISITION, INC. By: /s/ James W. Eastwood -------------------------- Name: James W. Eastwood Title: -26- EX-2.4 4 ASSET PURCHASE AGREEMENT ASSET PURCHASE AGREEMENT This AGREEMENT is made on the 11th day of August, 1995 by and among MEDIQ Imaging Services, Inc. and its wholly-owned subsidiaries American Cardiovascular Imaging Labs, Inc. and Southeastern Diagnostics, Inc., with offices located at One Mediq Plaza, Pennsauken, New Jersey 08110 (hereinafter referred to collectively as "Sellers") and NMC Diagnostics Services Inc., a Delaware corporation (hereinafter referred to as "Buyer"). W I T N E S S E T H: WHEREAS, Sellers own and operate a diagnostic testing business throughout the United States (the "Business"); and WHEREAS, Sellers desire to sell to Buyer and Buyer desires to purchase from Sellers certain assets of the Business. NOW, THEREFORE, the parties agree as follows: I. Terms of Purchase and Sale A. Subject to the terms and conditions hereinafter set forth, Sellers hereby agree to sell, convey, transfer and deliver to Buyer, and Buyer agrees to purchase and accept from Sellers, all of Sellers' right, title and interest in and to the following assets of the Business (the "Assets") to the extent such Assets do not constitute Excluded Assets (hereinafter defined): 1. all inventory, wherever located, used or held for sale in connection with the conduct of the Business, including, without limitation, supplies, raw materials, scrap, containers, packaging materials and spares; 2. all machinery, equipment, parts, tooling, motor vehicles, furniture, furnishings, fixtures, supplies, plant and office equipment and all other tangible personal property of the Business, wherever located; 3. all files and operating data and records primarily relating to the Business and the conduct of the Business, including, without limitation, all books, manuals, fixed assets records, documents, 2 computer software, operating procedures, customer lists, sales records, credit information, correspondence, literature, sales and advertising materials, designs and drawings, models, patterns, slogans and books of account; 4. all customer and supplier lists primarily relating to, or otherwise material to the conduct of, the Business; 5. the leases for real property for space solely occupied by Sellers set forth on Exhibit II.I (the "Leases"); 6. leases, subleases and assignments (whether as lessee, sublessee, or assignee) of machinery, equipment and other personal property used primarily by the Business (the "Equipment Leases"); 7. all of the Business' accounts and notes receivable reflected on the books of the Sellers on the Closing Date; 8. all of the Sellers' cash, cash in banks, cash equivalents, deposits, investments, securities, advance payments, prepaid items and expenses, deferred charges, rights of offset and credits and claims for refund; 9. all contracts and agreements of the Sellers relating to the operations of the Business (except as excluded herein); all purchase and sale orders (and orders evidenced solely by order acknowledgements), contracts and agreements of the Sellers relating to the purchase of products, materials or services used in connection with the conduct of the Business; all agreements of the Sellers with medical providers; the Leases; the Equipment Leases; and all other contracts and agreements entered into by Sellers in the conduct of the Business including, without limitation, all agreements set forth on Exhibit II.J, (except those contracts required to be included on Exhibit II.J, but which are not included if such contracts are not in compliance with laws in effect on the Closing Date) (collectively, the 3 "Assigned Contracts"); 10. all intellectual property which is or has been used to conduct the Business, including, without limitation, all patents, patent applications, copyrights and copyright applications; registered and unregistered trademarks and service marks, trademark and service mark registrations, trademark and service mark applications for registration; all patent, trademark, service mark, trade name and know-how rights granted to the Business under licensing or other agreements; and all know-how, proprietary information, production methods, trade and business secrets and computer software; 11. all rights, claims or causes of action against third parties primarily relating to the Assets, Business or operation of the Business; 12. all assignable third party warranties and guarantees with respect to any of the Assets; and 13. all franchises, approvals, permits, licenses, orders, registrations, certificates, variances, tax abatements and other similar permits or rights and all pending applications therefor related to the Business ("Permits"), other than Medicare provider numbers but including such provider numbers for South Carolina and Colorado. B. Excluded Assets. Notwithstanding anything contained in Section I.A. hereof to the contrary, Sellers are not selling, assigning, transferring or conveying to Buyer any asset or item not described in Section I.A. Without limiting the foregoing, the following assets, rights and properties are excluded from the transactions contemplated in this Agreement (the "Excluded Assets"): 1. any equipment and other personal property, wherever located, owned by third parties who are not affiliated with Sellers, and any equipment and other personal property not presently used or being stored, prepared or repaired for use by Sellers primarily in the 4 operation of the Business as it is currently being conducted. 2. the name "MEDIQ" and any derivation thereof: 3. to the extent not reflected as assets on the Closing Balance Sheet, refunds for taxes paid and any claim that Sellers or any of their affiliates may have, have had or will have against a third party with respect to any events or acts occurring prior to the Closing; 4. to the extent not reflected on the Closing Balance Sheet, accounts receivable from Sellers' affiliates, Sellers' pension, profit-sharing or other funded employee benefit plan assets or liabilities; 5. the capital stock of or owned or held by Sellers; 6. all corporate minute books and stock books and records of Sellers; 7. the assets, properties and rights not primarily used in the Business owned or held by any affiliate of any Seller (other than any other Seller); 8. Sellers' Medicare and Medicaid provider numbers other than the provider numbers for South Carolina and Colorado; 9. banking or financial institution accounts or any deposit or concentration accounts or safety deposit boxes (but not the cash or cash equivalents in such accounts or boxes); 10. all bonds and letters of credit including, but not limited to, those posted to support Sellers' and the Business' workers' compensation obligations and general liability and other insurance obligations, policies and premiums; 11. books and records that Sellers are required to retain pursuant to any statute, rule, regulation or ordinance; and 12. assets, properties and rights of any nature that are not reflected on the Closing Balance Sheet and either (i) are used by Sellers or their affiliates (including, without limitation, Mediq or any subsidiary or division thereof) in providing general corporate, insurance and 5 administrative services to divisions, subsidiaries or operating units of Sellers or their affiliates as well as to the Business or (ii) used by Sellers or their affiliates (including, without limitation, Mediq or any subsidiary or division thereof) in any business or businesses other than the Business. C. Obligations Under Assigned Contracts; Assumed Liabilities. 1. Subject to the terms and conditions of this Agreement, at the Closing, Sellers will assign and transfer to Buyer the Assigned Contracts, and Buyer will assume and in a timely fashion will pay, perform and/or discharge: (1) all of Sellers' obligations and liabilities under the Assigned Contracts (other than any such obligations and liabilities which were to be performed on or prior to the Closing Date ("Pre-Closing Performance") unless (x) if such Pre-Closing Performance involved the payment of money, such monetary obligation is reflected as a liability on the Closing Balance Sheet or (y) if such Pre-Closing Performance did not involve the payment of money, such obligation is of a nature arising in the ordinary course of the Business and does not constitute a violation of laws in effect on the Closing Date) and the assigned Permits in accordance with the respective terms thereof; (2) liabilities and expenses of the Sellers of a nature required to be set forth, and that are set forth on the Proposed Balance Sheet; (3) the Liens (as hereinafter defined); (4) the obligations and liabilities of the Business arising from events occurring after Closing; (5) accounts payable and accrued expenses to the extent set forth on the Closing Balance Sheet (6) to the extent of any Unused Basket Amount (as hereinafter defined), any other liabilities of the Sellers; (7) taxes to be paid by Buyer pursuant to Section I.D below and (8) the obligations and liabilities set forth on Exhibit I.C (collectively the liabilities and obligations described in 6 clauses (1) through (8) are referred to as the "Assumed Liabilities"). Buyer assumes no other liabilities of the Sellers unless specifically assumed by Buyer in this Agreement. Without limiting the foregoing, Buyer is not assuming any tax liability accruing prior to the Effective Date, and is not assuming any litigation based solely on events occurring prior to the Effective Date, is not assuming any liability of any nature under any of Sellers' pension plans (other than the obligation, if any, to pay the amount of any payable or expense expressly accrued on the Closing Balance Sheet). 2. Except as herein provided, to the extent that any lease, contract, license, permit, agreement, sales or purchase order, commitment, property interest, qualification or other Asset described in Section I.A, and not otherwise excluded in Section I.B, to be sold, assigned or conveyed to Buyer, cannot be sold, assigned or conveyed, without the approval, consent or waiver ("Consent") of any third person (including any landlord or any government or governmental unit), or if such sale, assignment or conveyance or attempted sale, assignment or conveyance would constitute a breach thereof or a violation of any law, decree, order, regulation or other governmental edict, this Agreement shall not (unless and until such Consent is obtained) constitute or require a sale, assignment or conveyance thereof, or an attempted sale, assignment or conveyance thereof. Buyer and Seller shall each use good faith efforts, and shall cooperate with each other, to obtain all Consents necessary to sell, assign or convey the Assets to Buyer as soon as practicable at no cost or liability to Sellers. If any of the Consents have not been obtained by Buyer or Sellers as of the Closing, (i) the Purchase Price set forth in Section I.E shall not be affected thereby and Buyer shall purchase all remaining Assets and (ii) the liabilities 7 and obligations assumed by Buyer pursuant to Section I.C shall not be affected thereby and Buyer shall assume, pay, perform and discharge the Assumed Liabilities in respect of all Assigned Contracts and Permits as if all consents had been obtained and all Assigned Contracts and Permits were sold, assigned and conveyed to Buyer. 3. In order, however, to provide Buyer the full realization and value of every Assigned Contract on and after the Closing Date the Sellers shall, by themselves or by their agents, at the request and expense of Buyer, and in such manner as Buyer shall reasonably specify and as shall be permitted by law and shall not be in violation of the Assigned Contracts, take all such reasonable action (including without limitation the appointment of the Buyer as attorney-in-fact for the Sellers or, upon receipt of indemnity from Buyer reasonably satisfactory to the Sellers, the subcontracting with Buyer to effect a "pass-through" of the rights and obligations that will remain with the Seller that is a primary party to such Assigned Contract) and do or cause to be done all such things as shall be necessary or proper (i) to assure that the rights and obligations of Sellers under such Assigned Contracts shall be preserved for the benefit of Buyer and (ii) to facilitate receipt of the consideration to be received by the Sellers in and under any such Assigned Contract, which consideration the Sellers shall hold for the benefit of, and upon request of Buyer shall deliver to, Buyer to the extent herein provided D. Payment of Taxes and Other Charges; Prorations. 1. At the Closing or thereafter at the request of Sellers, Buyer shall pay all real property transfer taxes, sales and use taxes, documentary stamp taxes, recording charges and other fees and taxes imposed 8 by any governmental entity in connection with the transfer of the Assets (the "Transactional Taxes"). Buyer shall (a) pay the cost of obtaining title insurance, if any, including, without limitation, all premiums and title closing costs required to be paid in connection therewith, and (b) pay the cost of all real property surveys and investigation, if any, obtained by Buyer in connection with the transactions contemplated hereunder and any costs associated with obtaining landlord or other consents to the transaction contemplated hereby; however, Sellers will be responsible for their internal costs of obtaining such consents. Buyer shall prepare and file, and Sellers shall fully cooperate with Buyer with respect to such preparation and filing of, any returns and other filings relating to any such taxes, fees, charges or transfers, as may be required. 2. Any and all taxes (other than sales and use, excise, payroll, income, franchise, corporate or similar taxes, including any taxes payable to local franchise authorities, which are imposed or assessed against either party based upon or measured by revenues of such party), rents, utilities, payments and receipts, rentals, costs, charges, fees or expenses connected with or used in the operations of the Business, and any and all revenues in connection with the Assumed Contracts shall be prorated between the parties as of the close of business on the date immediately preceding the Effective Date and Sellers shall bear their proportion of the costs and shall be entitled to their proportion of the revenues through the date immediately preceding the Effective Date and Buyer shall bear its proportion of the costs and shall be entitled to its proportion of the revenues from the Effective Date. Taxes (other than sales and use, excise, payroll, income, franchise, corporate or similar taxes, including any taxes payable to local franchise authorities, which are imposed or 9 assessed against either party based upon or measured by revenues of such party) shall be prorated on the basis of the taxable year of the authority levying such taxes as of the close of business on the date immediately preceding the Effective Date and all other amounts shall be prorated as of the close of business on the date immediately preceding the Effective Date based on a thirty (30) day month and a 360-day year. Each party agrees to promptly make payments to the other party in respect of amounts due and owing such other party for adjustments required by this Section as soon as such amounts are determined or determinable. Notwithstanding anything to the contrary herein, in no event shall Sellers have any liability to Buyer for prorations pursuant to this Section to the extent such prorations are reflected on the Closing Balance Sheet. E. The aggregate purchase price for the Assets and covenants not to compete hereunder (the "Purchase Price") shall be the sum of $19,400,000.00. The Purchase Price will be allocated as set forth in Exhibit I.E. The parties hereto agree to file all income, franchise and other tax returns in a manner consistent with such allocation. No party shall take any position with any taxing authority inconsistent with such allocation unless otherwise required by applicable law. F. No sooner than five business days nor later than one business day prior to the Closing Date, Sellers will provide to Buyer a proposed Closing Balance Sheet (as hereinafter defined), and a good faith estimate (the "Estimated Adjustment") of the "Purchase Price Adjustment" (as hereinafter defined) based on the Sellers' consolidated records at such date. Such proposed Closing Balance Sheet ("Proposed Balance Sheet") will be prepared by Sellers based upon Sellers' financial condition at May 31, 1995 updated to reflect an estimate of the results of operations for June 1995 (but without estimate of the results of operations for July 1995 even 10 though such results will be reflected in the Closing Balance Sheet). The Proposed Balance Sheet and Estimated Adjustment are attached hereto as Exhibit I.F(1). The "Purchase Price Adjustment" shall be the amount by which the Adjusted Book Value of the Sellers differs from $5,812,000 (the "Beginning Balance") (e.g. if the Adjusted Book Value exceeds the Beginning Balance, the Purchase Price will be increased by the amount of the excess, or if the Adjusted Book Value is less than the Beginning Balance, the Purchase Price will be decreased by the amount of such difference). As used herein, the "Adjusted Book Value" of the Sellers shall mean the amount by which (a) the aggregate amount of the assets reflected on the Closing Balance Sheet exceeds (b) the aggregate amount of the liabilities reflected on the Closing Balance Sheet, exclusive of goodwill, Sellers' inter-company payables and receivables, federal and state taxes and deferred taxes, all as reflected on the Closing Balance Sheet. The parties agree that the reserve for uncollectible accounts receivable to be used on the Proposed Balance Sheet and Closing Balance Sheet shall be calculated as set forth on Exhibit I.F(2). In the event Buyer collects more than the amount reflected on the Closing Balance Sheet net of such reserve in respect of accounts receivable of the Sellers outstanding on the Closing Date, Buyer shall promptly from time to time remit such excess to Sellers and in any event within twenty (20) days of receipt by Buyer of any applicable payment. G. As soon as practicable, but in any event within 60 days following the Closing Date, Sellers shall prepare and deliver to Buyer (x) a consolidated balance sheet of the Sellers prepared as of a point in time immediately prior to the close of business on the Effective Date (the "Closing Balance Sheet") prepared in accordance with generally accepted accounting principles ("GAAP") and reflecting accounting principles consistent with those used in the preparation of the Proposed Balance Sheet and the 11 consolidated balance sheet of Sellers attached hereto as Exhibit I.G (all such principles not in accordance with GAAP are detailed in notes to Exhibit I.G) (the "Accounting Principles") and (y) a calculation of the proposed final Purchase Price Adjustment (the "Purchase Price Adjustment Calculation"). Buyer acknowledges that the Proposed Balance Sheet was prepared assuming Closing occurred on June 30, 1995 and that the Closing Balance Sheet will be prepared as aforesaid as of the close of business on the actual Effective Date and accordingly will reflect the results of operations and change in financial condition arising between such dates in addition to any other adjustments that would have otherwise been made in preparing the Closing Balance Sheet. If Sellers have not obtained reactivation of existing provider numbers for Florida or New Jersey before the delivery of the Closing Balance Sheet, the receivables with respect to those states which Sellers are unable to collect without such reactivated provider numbers will not be included on the Closing Balance Sheet; provided, however, that at such time as Sellers obtain such reactivated provider numbers, Buyer will collect those receivables pursuant to Section IV.K for Sellers' account and shall promptly pay any such amounts collected to Sellers. Buyer shall give Sellers such access to the employees and books and records of the Business as may be necessary to allow Sellers to prepare the Closing Balance Sheet and the Purchase Price Adjustment Calculation. The Closing Balance Sheet and the Purchase Price Adjustment Calculation (and the resulting Purchase Price Adjustment), when delivered to Buyer, shall be deemed conclusive and binding on the parties, unless Buyer notifies Sellers, within 30 days after receipt of the Closing Balance Sheet, of its disagreement therewith (which notice shall state with reasonable specificity the reasons for any disagreement and the amounts in dispute). If there is a disagreement regarding the Purchase Price Adjustment Calculation (and the resulting 12 Purchase Price Adjustment) and Closing Balance Sheet, and such disagreement cannot be resolved by the parties within 30 days following receipt by Buyer of the Closing Balance Sheet and the Purchase Price Adjustment Calculation, the dispute shall be submitted to a nationally recognized firm of independent auditors acceptable to both Buyer and Sellers, and the determination by such independent auditing firm shall be binding and conclusive upon the parties. Buyer and Sellers shall each pay one-half of the cost of the fees and expenses of such independent auditing firm. Delivery and acceptance of the Closing Balance Sheet will not diminish Buyer's rights under Article V of this Agreement; provided, however, that the amounts accrued for an item on the Closing Balance Sheet will be taken into account in assessing the amount of any damages to which Buyer may be entitled pursuant to Article V. H. To the extent the Purchase Price Adjustment as finally determined pursuant to subsection G exceeds the Estimated Adjustment by a positive amount, Buyer shall pay the difference to Sellers. To the extent the Purchase Price Adjustment is less than the Estimated Adjustment or exceeds the Estimated Adjustment by a negative amount, Sellers shall pay the difference to Buyer. Any amount due pursuant to this Section shall be paid by Buyer to Sellers or by Sellers to Buyer, as the case may be, within 10 days after any disputes have been resolved and the final determination of the Purchase Price Adjustment is made. I. On the Closing Date, Buyer shall pay to Sellers by wire transfer the Purchase Price adjusted by the amount calculated in Section I.F. II. Representations and Warranties of Sellers Sellers represent, warrant, and agree as follows: A. Sellers are corporations duly incorporated, validly existing and in good standing under the laws of their respective states of incorporation, have 13 filed and paid all applicable annual reports and fees with the applicable Secretaries of State, and have the corporate power to own their respective properties and assets and carry on their respective business as is presently being conducted. Sellers have furnished to Buyer certified copies of Articles of Organization and By-Laws and a certificate of good standing certified by the applicable Secretary of State of their respective states of incorporation. These documents are contained in Exhibit II.A. B. Sellers are owned as shown on Exhibit II.B which exhibit sets forth the state of incorporation of each Seller. C. The execution and delivery of this Agreement do not, and the consummation of the purchase and sale will not, violate any provision of, or result in the acceleration of any obligation under any mortgage, lien, lease, agree- ment, instrument, order, license, arbitration award, judgment, or decree to which the Sellers are a party or by which each is bound (other than agreements, if any, wherein the consent of the other party thereto is required and the loan agreement with Congress Financial Corporation) in such a way as to have a material adverse effect on the Business taken as a whole (a "Material Adverse Effect"). D. Except as set forth on Exhibit II.F, Sellers have, or will have prior to the Closing Date, all permits and licenses necessary for the operation of Business as conducted at Closing, including valid Medicare provider numbers, and to receive private, state and federal government payment for furnishing diagnostic testing and related products and services other than any permits or licenses the failure of which to have would not have a Material Adverse Effect. A listing of all such licenses and permits and current license numbers has been provided to Buyer. E. There are now no pending or to Sellers' knowledge, threatened claims, suits, actions, assessments, arbitration awards or proceedings at law or in equity or before any governmental instrumentality or other agency which, 14 if adversely determined, would have a Material Adverse Effect to which Sellers are a party or which the Business is or may be subject except as described in Exhibit II.E attached hereto. No suits or actions by any referring physician of Sellers has been settled in the past year. Sellers are not in violation of or in default with respect to any judgment, order, award, writ, injunction or decree of any court, governmental department, commission, agency, instrumentality, arbitrator, administrative agency or governmental authority, where such violation or default, severally or in the aggregate, would have a Material Adverse Effect or will prevent the consummation of the transactions contemplated hereby. F. Except as disclosed on Exhibit II.F, to Sellers' knowledge, Sellers are not now nor have they ever been at any time during which a majority of their capital stock was owned directly or indirectly by Mediq Incorporated, a Delaware corporation ("Mediq"), investigated, charged or implicated in any violation of any state or federal statute or regulation involving fraudulent and abusive practices with respect to participation in state and/or federally sponsored reimbursement programs, including but not limited to fraudulent billing practices. The Business has properly billed all intermediaries and third party payors for all products supplied and services rendered by the Business and has maintained its records to reflect such billing practices except where any failure to do so would not have a Material Adverse Effect. No funds are now or will be withheld by any Medicare intermediary or other insurance carrier except those disclosed to Buyer on Exhibit II.F. All Medicare or third party overpayments have been properly reported and returned to the applicable party as required by law or contract except where any failure to do so would not have a Material Adverse Effect. G. The consolidated balance sheets of the Sellers as of January 31, 1995, and the related income statements for the period then ended, all attached hereto as Exhibit I.G, (the "Balance Sheet"), fairly present in all material 15 respects the financial position of the Sellers as of January 31, 1995 in accordance with GAAP (except that Buyer acknowledges that such financial statements do not reflect any effect that may result from the matters described in Exhibits II.E, II.F, or II.K). Except as set forth on Exhibit II.K, since January 31, 1995, the Business has been operated in the normal course of business in all material respects. H. Sellers have good and marketable title to and own free and clear of any liens or encumbrances, except for Liens, all the Assets. As used herein, "Liens" shall mean (a) minor imperfections of title, none of which, individually or in the aggregate, materially detracts from the value of or impairs the use of the affected item, affects Buyer's ability to sell the item (other than liens resulting from liabilities reflected on the Proposed Balance Sheet) or impairs the operations of the Business, (b) liens for current taxes not yet due and payable, (c) encumbrances for debts which will be released on or before the Closing Date, and (d) as disclosed on Exhibit II.H. No other warranties, express or implied, are made by Sellers, and Buyer waives all such warranties, other than as set forth expressly in this Agreement, regarding the title, value, condition and use of the Assets, including, but not limited to, warranties, of habitability, merchantability or fitness for a particular purpose. Buyer hereby affirms that Sellers, their agents, employees and/or attorneys have not made nor has Buyer relied upon any representation, warranty or promise with respect to the Assets or any other subject matter of this Agreement except as expressly set forth in this Agreement. The Assets include all of the assets and interests in assets of Sellers and their affiliates that are used in the operation of the Business as presently conducted, other than the Excluded Assets. I. The Leases and the copies of leases annexed to Exhibit II.I are true and complete copies of all real and all material personal property leases of the 16 Sellers. No other warranties, express or implied, are made by Sellers, and Buyer waives all such warranties, other than as set forth expressly in this Agreement regarding the title, value, condition and use of the real properties together with the leasehold improvements, fixtures, and equipment therein which are the subject of such Leases, including, but not limited to, warranties of habitability, merchantability or fitness for a particular purpose. Buyer hereby affirms that Sellers, their agents, employees and/or attorneys have not made nor has Buyer relied upon any representation, warranty or promise with respect to such real property or any other subject matter of this Agreement except as expressly set forth in this Agreement. No party to any Lease has sent written notice to the other claiming that such party is in default thereunder, which default remains uncured. There has not occurred any event which would constitute a breach of or default in the performance of any material covenant, agreement or condition contained in any Lease by Sellers and, to the best of Sellers' knowledge, any other party thereto which would have a Material Adverse Effect. Sellers are not obligated to pay any leasing or brokerage commission relating to any Lease which has not been paid prior to the date hereof, and does not have any enforceable obligation to pay any leasing or brokerage commission upon the renewal or extension of any Lease. Except as expressly set forth in the Leases, none of the Leases imposes any restrictions that would materially interfere with the continued operation of the Business as currently conducted. No renewal option under any Lease has been exercised unless the renewal notice is attached as Exhibit II.I. J. The contracts listed on Exhibit II.J and the copies of such contracts annexed to Exhibit II.J are true and complete copies of all contracts of Sellers relating to the operations of the Business of (i) all employment agreements, consulting agreements in amounts with payments exceeding 17 $40,000.00 per year (unless with a referring physician, all of which are attached), joint venture, and agency agreements to which the Sellers are a party and which would continue to bind the Sellers one year beyond the date hereof; (ii) with principal suppliers of the Business with payments exceeding $40,000.00 per year, $200,000 over the term of the contract or for a term in excess of two years; (iii) bonus, incentive compensation, profit-sharing, deferred compensation and post-termination obligations and trust agreements of the Sellers in effect or under which any amounts which exceed $40,000.00 remain unpaid on the date hereof or are to become effective after the date hereof; (iv) any contract limiting the freedom of the Business to compete in any line of business or with any entity; and (v) all other contracts, the loss of which would have a Material Adverse Effect, not otherwise set forth in other Exhibits hereto. To the best of Sellers' knowledge, except as set forth in Exhibit II.K, there is no existing breach or default by any other party to any Contract, and to the best of Sellers' knowledge, except as set forth in Exhibit II.K, no event has occurred which with the passage of time or giving of notice would constitute a breach or default by any party under an Assigned Contract, result in a loss of rights or result in the creation of any encumbrance under an Assigned Contract, except any of the foregoing which would not have a Material Adverse Effect. K. Except as set forth on Exhibit II.K, since January 31, 1995: 1. There has been no material adverse change in the financial condition, results of operations, assets, liabilities, licenses, permits, material agreements, method of accounting or manner of conducting the Business taken as a whole other than, in each case, changes in the ordinary course of business and other than changes relating to the economy in general or industry conditions. 2. There has been no damage, destruction or other casualty loss 18 materially and adversely affecting the business, properties, financial condition or results of operations of the Business taken as a whole except any such loss which is covered by insurance. 3. There has been no increase in compensation payable or to become payable by the Sellers to any of its officers, employees or agents other than increases in the ordinary course of business. 4. The Sellers have not entered into any material contracts, agreements or licenses which would be required to be forth in Exhibit II.I or II.J other than those set forth in Exhibit II.I or II.J and previously delivered to Buyer. 5. The Sellers have not incurred any indebtedness for borrowed money or purchase money indebtedness other than in the ordinary course of business. L. There are no outstanding options or rights to purchase the stock of the Sellers that would affect this transaction. M. To Sellers' knowledge, as of January 31, 1995, all liabilities of Sellers required by GAAP to be set forth on a balance sheet that was prepared on and as of January 31, 1995, are reflected on the Balance Sheet (except that Buyer acknowledges that such Balance Sheet does not reflect any effect that may result from the matters described in Exhibits II.E, II.F, or II.K). Any and all attorneys' and accountants' fees and disbursements and other costs incurred on behalf of Sellers in connection with this Agreement and related agreements shall not become Assumed Liabilities. N. During each of the past ten calendar years, or such shorter period as such entity has been directly or indirectly majority owned by Mediq, the Sellers have been and presently are insured against the normal risks of their business on a claims-made basis, including, without limitation, professional liability, and general liability insurance in aggregate annual amounts of not 19 less than $5,000,000.00, and with a deductible not exceeding $250,000.00. Sellers will, at Sellers' option, either maintain such claims-made coverage or purchase "tail" coverage affording professional liability and general liability insurance for a period of three years following the Effective Date. Certificates evidencing such policies that are currently in place (the "Insurance Policies") are attached as Exhibit II.N. All premiums due on the Insurance Policies or renewals thereof have been paid and to Sellers' knowledge, Sellers are not in default under any of the Insurance Policies. Sellers have not received any notice or other communication from any issuer of the Insurance Policies canceling or materially amending any of the Insurance Policies, materially increasing any deductibles or retained amounts thereunder, or materially increasing the annual or other premiums payable thereunder, and, to the best of Sellers' knowledge, no such cancellation, amendment or increase of deductibles, retainages or premiums is threatened. O. The present conduct of the Business by Sellers complies in all respects with the applicable provisions of federal, state, and local laws (including the Federal False Claims Act, the RICO Statute, 42 U.S.C. 1320a-7b, 42 U.S.C. 1395 nn, or any related state self-referral statutes) and all government licenses, permits, and other authorizations applicable thereto, except where failure to comply would not have a Material Adverse Effect. P. No work stoppages or other labor disputes involving the Business are pending or, to the best of Sellers' knowledge, threatened during the last 3 years. Sellers have no knowledge that any individual (other than Stephen Doppelt) having an annual salary in excess of $40,000.00 currently has an intention to terminate his/her employment except as set forth in Exhibit II.P. Sellers have no collective bargaining agreements currently in effect. Seller has no material arrearages in the payment of wages, taxes or worker's compensation assessments or penalties. 20 1. Exhibit II.P contains a complete list of Sellers' (i) current pension, profit sharing, stock bonus, deferred compensation, retirement or other "employee pension benefit plans," as that term is defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") (the "Pension Plans"); (ii) current "employee welfare benefit plans" as that term is defined in Section 3(1) of ERISA, whether insured or otherwise (the "Welfare Benefit Plans"); and (iii) other material employee benefit plans, policies and practices including deferred compensation arrangements or other similar programs (the "Non-ERISA Plans"), maintained or contributed to with respect to any employee of the Business (all of such plans shall hereinafter be referred to collectively as "Employee Plans"). A copy of each Employee Plan has been furnished to Buyer. None of the Employee Plans are "voluntary employees' beneficiary associations" ("VEBAs") as described in Section 501(c)(9) of the Internal Revenue Code of 1986, as amended (the "Code"). 2. Sellers do not contribute, are not required to contribute, and have never been required to contribute to any multiemployer plan within the meaning of Section 3(37) of ERISA. 3. Except for medical insurance coverage required by law to be provided to former employees, no Employee Plan provides health or life insurance benefits for retirees. 4. No Employee Plan, any trust created thereunder, or, to the best of Sellers' knowledge, any trustee or fiduciary (as defined in Section 3(21) of ERISA) thereof, has engaged in a "prohibited transaction" as such term is defined in Section 4975 of the Code or Section 406 of ERISA which would have a Material Adverse Effect. 5. Sellers have made all contributions, paid all premiums and satisfied 21 all liabilities with respect to the Employee Plans which are payable as of the date hereof except any of the foregoing which would not have a Material Adverse Effect. Q. Sellers have filed all tax returns required to be filed by them commencing with the taxable period the Sellers were first majority-owned by Mediq through the fiscal year ended September 30, 1993, and has timely filed all extensions of time for the period ending September 30, 1994, and has paid, or has set up adequate reserves for or will have set up adequate reserves for the payment of all taxes (other than the Transactional Taxes) required to be paid in respect of the periods covered by such returns and extensions and, except as aforesaid, has set up adequate reserves for the payment of all income, franchise, property, sales, use, employment, Social Security, or other taxes anticipated to be payable in respect of the period subsequent to September 30, 1993 (including any federal, state or local income, sales or franchise tax or other taxes measured by income or profits arising out of, or attributable to, the transactions contemplated hereby) and, except as aforesaid, for the payment of all other taxes (including, without limitation, all employment taxes, sales or use taxes, or stamp taxes). Sellers are not delinquent in the payment of any tax, assessment or governmental charge nor, except as set forth on Exhibit II.Q, have the Sellers during the time directly or indirectly majority owned by Mediq requested any extensions of time within which to file any tax returns which have not since been filed other than the period ended September 30, 1994 except for those taxes whose nonpayment would not have a Material Adverse Effect. Except as set forth on Exhibit II.Q, no deficiencies for any tax, assessment or governmental charge have been proposed (tentatively or definitively), asserted or assessed against the Sellers during the time directly or indirectly majority-owned by Mediq, and no requests for waivers of the time to assess any such tax are pending. 22 Except as set forth on Exhibit II.Q, the federal, state, local or foreign income tax returns of the Sellers have never been audited by the Internal Revenue Service (or comparable state or foreign agency). Except as set forth on Exhibit II.Q, Sellers are not currently subject to any outstanding federal, state or local tax audit. For the purpose of this agreement, the term "tax" shall include all federal, state, local, and foreign taxes. Copies of all state and federal income tax returns of the Sellers for the preceding three years have been delivered to Buyer prior to Effective Date. R. Exhibit II.R hereto is a complete and accurate list as of the date hereof of the name, position and compensation of each current employee, including any individual on disability or leave of absence (whether paid or unpaid) of the Sellers. All individuals included on Exhibit II.R are herein referred to as the "Employees". S. The Sellers have no patents, trademarks, or applications for the same. To Sellers' knowledge, the Business is not infringing upon the valid patents, trademarks or copyrights of others. T. "Hazardous Substances" means (i) a pollutant or contaminant as defined in 42 U.S.C.ss.9601(33); (ii) any hazardous waste as defined in 40 C.F.R. Part 260 (iii) any "hazardous substance" as defined in 42 U.S.C.ss. 9601(14); (iv) any petroleum, crude oil, natural gas, synthetic gas, or fraction or compound thereof; (v) any radioactive substance; (vi) any radioactive material; or (vii) any other hazardous substance subject to any other law, regulation, or ordinance regulating or establishing standards of conduct concerning the protection of the environment each in effect as of the date hereof. "Environmental Law" means the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended; the Resource Conservation and Recovery Act; the Toxic Substances Control Act; statutes and regulations regulating radioactive material, and the state counterparts 23 of these laws and any regulations promulgated pursuant to such laws each in effect as of the date hereof. "Routine Business Activities" means the use of lubrication, cleaning, and other substances used in building maintenance; the use of office supplies in retail quantities; consumer products; the use of gardening supplies commonly used for normal landscaping and the use, handling, generation, transportation, treatment or disposal of Hazardous Substances in the ordinary course of the diagnostic testing business. The operations of the Company and Subsidiaries are in compliance with the terms of all applicable Environmental Laws and with all permits or orders issued to the Sellers pursuant to any Environmental Law except for such non-compliance which would not reasonably be expected to have a Material Adverse Effect. To the best of Sellers' knowledge, there has been no leak, spill, discharge or release in a reportable quantity of any Hazardous Substance which requires remediation at or from the real property owned or leased by Sellers while a direct or indirect majority-owned subsidiary of Mediq except as set forth on Exhibit II.T. To the best of Sellers' knowledge (other than those used in Routine Business Activities), there are not Hazardous Substances located on or at any of Sellers' business locations in material violation by Sellers of any applicable Environmental Law, nor, to the best of Sellers' knowledge, have there been any underground storage tanks located at any of any such business locations, except as set forth in Exhibit II.T. To the best of Sellers' knowledge, the Business' operating locations have not been used as a regulated hazardous waste site. U. The responses of Sellers contained in the correspondence from Sellers to Sellers' counsel attached hereto as Exhibit II.U are true in all material respects. 24 III. Representation of Buyer Buyer represents and warrants as follows: A. Buyer is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware, and has the corporate power to own the properties and assets to be conveyed herein to Buyer and carry on its business and the Business of Sellers as it is presently being conducted. Buyer has furnished to Sellers a copy of its Articles of Organization and a copy of a Certificate of Good Standing certified by the Secretary of State of Delaware. These documents are contained in Exhibit III.A. B. Buyer has the corporate power to enter into and to perform all of its obligations under this Agreement and all appropriate corporate action has been taken by Buyer to approve the execution, delivery, and performance by Buyer of this Agreement. The execution, delivery, and performance by Buyer of this Agreement have been approved by the Board of Directors of Buyer's parent company. The execution and delivery of this Agreement do not, and the consummation of this purchase and sale will not, violate any provision or result in the acceleration of any obligation under any mortgage, lien, lease, agreement, instrument, order, license, arbitration award, judgment or decree to which Buyer is a party or by which it is bound (other than agreements, if any, wherein the consent of the other party thereto is required) in such a way as to materially affect the Buyer and will not violate and conflict with any other material restriction of any kind or character to which the Buyer is subject. C. Buyer has available to it sufficient resources to pay in full the Purchase Price. The Guaranty by National Medical Care, Inc. ("NMC") set forth on the signature page hereto has been duly executed by NMC and is a legal and valid binding obligation of NMC enforceable against NMC in accordance with its terms. 25 D. There are no pending or to Buyer's knowledge threatened claims, suits, actions, assessments, arbitration awards or proceedings at law or in equity or before any governmental instrumentality or other agency to which Buyer is a party or to which it is subject which would reasonably be expected to restrain or prohibit the consummation of the transactions contemplated hereby. E. The balance sheet attached as Exhibit III.E fairly presents the financial condition of NMC. Buyer is an indirect wholly-owned subsidiary of NMC. IV. Covenants and Agreements of the Parties A. Sellers and Buyer represent and warrant that all negotiations relative to this Agreement have been carried out directly with each other, without the intervention of any person, other than each party's respective counsel, and other than KBL Healthcare, Inc. and Woodbury Associates, Inc. Sellers agree to indemnify and hold Buyer harmless against and in respect of any claim for brokerage or other commissions relative to this Agreement or to the purchase and sale contemplated hereby incurred by Sellers (including amounts owed to KBL Healthcare, Inc.) and also in respect of all expenses of any character incurred by the Sellers in connection with this Agreement or such purchase and sale other than any expenses accrued on the Closing Balance Sheet, to the extent accrued on the Closing Balance Sheet. Buyer agrees to indemnify and hold Sellers harmless against and in respect of any claim for brokerage or other commissions relative to this Agreement or to the purchase and sale contemplated hereby incurred by Buyer (including amounts owed to Woodbury Associates, Inc.) and also in respect of all expenses of any character incurred by the Buyer in connection with this Agreement or such purchase and sale. B. Sellers and Buyer shall cooperate to comply with any and all public health, health planning and licensure statutes and regulations and will, if required, notify the appropriate governmental agencies, either state or federal, of the 26 transactions contemplated by this Agreement, to the extent so required, in order to preserve and/or transfer to Buyer the state and federal approvals and any other permits and licenses of the Business included in the Assets. Sellers shall not be required to pay any third-party expenses or incur any liability in connection with their undertaking under this Section. Buyer will reimburse Sellers for reasonable third-party out-of-pocket expenses. C. Covenant Not to Disclose Trade Secrets Sellers acknowledge that in the course of owning the Assets and operating the Business, Sellers have become privy to various trade secrets of the Business. Sellers agree not to disclose to any person, firm or corporation any information known by Sellers to be trade secrets of the Business included in the Assets, including, but not limited to, information of the Business regarding: the identity and relationships of patients, employees, customers or vendors affiliated with the Business, compensation of employees or independent contractors, financial data, pricing information, regulatory approval and reimbursement strategies, marketing and sales programs, data, operations and clinical manuals and expansion of the Business' market, provided, however, Sellers shall not be prohibited from disclosing any such information to the extent Sellers are required to disclose such information by law, to the extent such information is publicly-known or becomes publicly-known through no unauthorized act or fault of Sellers or in connection with any lawsuit or other judicial or administrative proceeding. Covenant Not to Solicit Employees Sellers agree that the Business has invested substantial time and effort in assembling and training its present staff of personnel. In addition, as a result of employment by the Business such personnel have gained knowledge of the business affairs, marketing, patients and methods of operation of the Business. Accordingly, for a period of two years after the 27 Effective Date, Sellers will not directly or indirectly induce or solicit any of the Employees to leave their employment with the Buyer, provided, however, that Sellers may offer employment at any time to any of such Employees who approach any Seller seeking employment or who are no longer employed by Buyer at the time Sellers approach any such Employee. Nothing contained herein shall affect any right Buyer may have against any Employee pursuant to any agreement between Buyer and such Employee or otherwise. Covenant Not to Compete For a period of 7 years after the Effective Date, Sellers will not engage, directly or indirectly, through a parent, subsidiary or otherwise, either as principal, agent, proprietor, shareholder of more than 5% of the voting rights, owner or partner, or participate in the ownership, management, operation or control of any facility or business providing diagnostic testing of the types set forth on Exhibit IV.C within the United States. Notwithstanding anything to the contrary contained herein, the restrictions contained herein shall not restrict Sellers or any of their affiliates (including, without limitation, Mediq or any subsidiary or division thereof) from operating or owning any of their existing businesses or investments, provided that they do not expand into the foregoing prohibited activities. The restrictions contained in this paragraph shall not be binding upon any third party purchaser of any assets, stock, division or business unit of Mediq or any affiliate thereof or of Mediq; provided such purchaser is not more than 5% owned by Mediq. Sellers acknowledge that the foregoing restrictions are necessary for the protection of the Buyer and that any breach thereof may cause the Buyer irreparable damage. The Buyer shall be entitled to the issuance by a court of competent jurisdiction of an injunction in favor of the Buyer enjoining the breach or threatened breach of said restrictions. The foregoing provision 28 shall not constitute a waiver of any other remedies the Buyer may have in law or in equity. In the event a court of competent jurisdiction determines that the foregoing restrictions are unreasonable, then the restrictions shall be reduced by the court to the extent necessary to be enforced by the court. D. Buyer and Sellers will cooperate in securing all consents, approvals, waivers or permits relating to the sale and transfer of the Assets from each person or governmental authority whose consent, approval, waiver or permit is necessary to or for the operation and conduct of the Business after the Effective Date at no cost or liability to Sellers, including approvals required by the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR Act"). Sellers shall not be required to pay any third-party expenses or incur any liability in connection with their undertaking under this Section. Buyer will reimburse Sellers for reasonable third-party out-of-pocket expenses. E. Subject to the provisions of Sections I.F and IV.K, Sellers and Buyer will cooperate to ensure the orderly transition of collection responsibility to Buyer for any Accounts Receivable outstanding as of the Closing Date at no cost or liability to Sellers. F. For the period of 3 years after the date hereof, Sellers and Buyer agree to keep the terms of this Agreement confidential and will not disclose the terms to any third persons or entity except in connection with claims asserted under this Agreement, as required by law (including, without limitation, any filing with any governmental agency or instrumentality) or for the operation of the Business and except that Sellers or their affiliates may issue press releases regarding this Agreement and the transactions contemplated hereby with Buyer's consent, which consent shall not be unreasonably withheld. G. Buyer and Sellers shall each, from time to time after the date hereof, at the 29 request of the other and without further consideration, execute and deliver such further instruments of assignment, transfer or assumption and take such further action as the other may reasonably request in order more effectively to transfer, reduce to possession and record title to any of the Assets or to implement the assumption of Assumed Liabilities. Any and all out-of-pocket expenses involved in compliance with this Section shall be promptly reimbursed by the requesting party to the other. H. After the Closing Date, Buyer will make available to Sellers and their affiliates, accountants, attorneys and representatives upon reasonable request during normal business hours reasonable access to all records, data and personnel of the Business necessary in connection with Sellers' conduct of litigation and tax matters or as otherwise reasonably requested by Sellers, at no cost to Buyer other than Buyer's internal costs (e.g., Sellers will reimburse Buyer for reasonable third-party out-of-pocket expenses). Sellers will make available to Buyer upon reasonable request during normal business hours reasonable access to all records and data relating to the Business not transferred to Buyer as reasonably necessary to continue operations of the Business at no cost to Sellers other than Sellers' internal costs (e.g., Buyer will reimburse Sellers for reasonable third-party out-of-pocket expenses). I. Buyer shall use commercially reasonable efforts, and shall cooperate with Sellers, to (1) cause Buyer to be substituted in all respects for Sellers or any of their affiliates, effective as of the Effective Date, in respect of all obligations of Sellers and any such affiliate under any contract or agreement included in the Assumed Liabilities and under each of the guaranties, letters of credit, bonds and letters of comfort obtained by Sellers or any of such affiliates relating to the Assets (collectively, the "Guaranties") listed on Exhibit IV.I and (2) cause Sellers and their affiliates to be released from all Assumed Liabilities under the contracts, 30 agreements and Guaranties described in the preceding clause (1). J. Effective as of the Closing Date, Sellers' employment of the Employees shall cease. Effective as of the Closing Date, Buyer shall offer "at-will" employment to all of the Employees except Stephen Doppelt who shall be offered a consulting arrangement on the terms and conditions set forth on Exhibit IV.J. All Employees who accept Buyer's offer of employment are herein referred to as the "Transferred Employees". Buyer's offer of employment to the Transferred Employees shall be at the substantially similar salary or wage level as applicable to such Transferred Employees immediately before the Closing and on terms and conditions that are substantially similar to those provided by Buyer to its current employees of like rank and job title. Effective as of the Closing Date, Buyer shall designate a pre-existing group health insurance plan ("Buyer's Health Plan") that will provide coverage to all Transferred Employees and their dependents. Buyer's Health Plan shall not contain any exclusion or limitation with respect to any pre-existing condition of any Transferred Employees or their dependents. If any Transferred Employee becomes covered by any employee benefit plan, program or policy of the Buyer, such Transferred Employee shall be given credit under such plan, program or policy for all service with Sellers prior to the Closing Date for all purposes; provided, however, that such service shall not be credited for purposes of benefit accruals under any defined benefit pension plan. K. Commencing one month after the Effective Date, Buyer shall provide reports, monthly for the first three months following Closing and quarterly thereafter, to Sellers regarding the amounts collected on the accounts receivable of the Business outstanding as of the Effective Date (the "Accounts Receivable") and Buyer's efforts to collect such accounts. Buyer shall, at Buyer's election, either (i) apply at least the same efforts in the 31 collection of the Accounts Receivable as Buyer applies in the collection of its own accounts receivable or (ii) use the same personnel and procedures to collect the Accounts Receivable as were used by the Business immediately prior to the Effective Date, in the same positions, with the same responsibilities and at the same salaries and hours. The collection of all accounts receivable received from an account debtor of the Business as of the Effective Date shall be applied to the oldest outstanding invoice with such account debtor which is not then in dispute consistent with Buyer's general overpayment policies; provided, however, notwithstanding the foregoing, any payments made by an account debtor in respect of a designated account shall be applied to the account so designated. For purposes of the preceding sentence, a disputed invoice is an invoice that is the subject of a written dispute from the account debtor which is reasonably recognized by Buyer as disputed in accordance with its general policies; upon the resolution of any such dispute, such invoice shall no longer be considered disputed and collections from the account debtor shall be applied in accordance with the previous sentence as if such dispute had not arisen. Provided that Buyer has collected in respect of Accounts Receivable at least the amount set forth on the Closing Balance Sheet in respect of such Accounts Receivable net of the reserve calculated as herein set forth, promptly after the first anniversary of the Effective Date, Buyer shall transfer to Sellers, at no cost to Sellers, all Accounts Receivable that remain uncollected at such time. Following a transfer of any Accounts Receivable to Sellers, Buyer acknowledges that Sellers may collect such Accounts Receivable for Sellers' benefit in any manner Sellers deem appropriate, provided such efforts do not materially jeopardize Buyer's business relationship with the account debtor. Except as expressly provided in Section IV.K, Buyer makes no representation regarding its ability to collect the Accounts Receivable. 32 L. Provided that the failure to pay does not cause Buyer to breach any Assigned Contract, Buyer shall not pay any amounts in respect of bonuses accrued on the Proposed Balance Sheet or Closing Balance Sheet to any Employees until the earlier of (i) 90 days after Closing or (ii) such time as the parties have resolved the Closing Balance Sheet in accordance with Section I.G and any adjustment to the Purchase Price has been paid. M. Buyer acknowledges and agrees that the name and service mark "MEDIQ" and all derivations thereof (the "Name") is owned by Sellers and that by the sale of the Assets, or otherwise, Sellers are not relinquishing any interest in or rights to the Name, nor permitting Buyer (after the Effective Date) to use, license or otherwise have any rights in or to the Name, except on such terms as are expressly set forth in this Section. Sellers will permit use of the name by Buyer for transition purposes during a period not to exceed eight months subsequent to the Effective Date (the "Transition Period"), on the following terms and conditions: a. By the end of the Transition Period, Buyer shall have caused the removal of the Name from all of the Assets including any motor vehicles, stationery, business cards, and other documents. During the Transition Period Buyer shall not affix, or cause to be affixed, the Name to any of the Assets or its assets, vehicles, machinery or equipment. b. Within a reasonable period of time after the Effective Date, Buyer and the Business shall notify its customers, suppliers and others with whom the Buyer and the Business does business of the Business' change of name. c. Buyer may use the name solely in connection with the Business in accordance with this Section IV.M and shall have no right to license, assign or otherwise transfer any rights in or to the Name. V. Survival of Representations and Warranties; Indemnification 33 A. The representations and warranties made by any party hereto in this Agreement or in any Schedule, Exhibit, certificate or other document delivered by or on behalf of any party hereto pursuant to this Agreement shall be deemed to be continuing and shall survive the Effective Date, but shall expire on December 31, 1996, except matters with respect to Section II.Q (taxes) and Section II.P (employee benefits), which shall expire on the expiration of the applicable statute of limitations (the "Representation Expiration Date"), unless a specific claim in writing with respect to any such representation or warranty shall have been made, or any action at law or in equity shall have been commenced or filed in respect thereof, prior to such Representation Expiration Date. Nothing in this section shall terminate or affect the obligations and indemnities of the parties with respect to covenants and agreements contained or referenced in this Agreement that are to be performed by their specific terms, in whole or in part, after the Closing Date or the above-referenced Representation Expiration Date. B. Sellers shall indemnify, defend, save and hold harmless Buyer and its successors and assigns, and their employees, representatives, officers, directors and agents (collectively, the "Buyer Indemnified Parties") from and against any and all debts, losses, claims, damages, costs, demands, fines, judgments, penalties, obligations, payments and liabilities, including, without limitation, those arising out of any breach of warranty, representation or covenant, lawsuit, action or proceeding, together with any reasonable costs and expenses (including, without limitation, reasonable attorneys' fees and out-of-pocket expenses) incurred in connection with any of the foregoing whether by a third party or a party to this Agreement (collectively, "Claims") resulting from (a) any breach of or inaccuracy in any representation or warranty made by Sellers in this Agreement, (b) any breach of any covenant of Sellers contained in this Agreement, (c) any 34 liability of the Business other than the Assumed Liabilities; (d) any amounts Buyer reasonably determines it is required to pay pursuant only to the express terms of, and actually does pay to Employees pursuant only to the express terms of, the agreements set forth on Exhibit V.A ("Key Employee Agreements") solely as a result of Buyer's termination of the employment of such Employee within 60 days of the Effective Date, or (e) enforcing any rights to indemnification under this section. For indemnification purposes, in determining whether a breach of any warranty, representation, or covenant has occurred; any language referring to a Material Adverse Effect or any materiality limits will not be considered. Notwithstanding the foregoing, Sellers shall not be liable for any Claims pursuant to section V.A or V.B until the aggregate amount of such Claims exceeds the Basket Amount and then only to the extent of such excess. The "Basket Amount" shall mean $50,000 less any amounts actually paid by Buyer in respect of liabilities of Sellers pursuant to Section I.C(6) and "Unused Basket Amount" shall mean the positive difference (if any) between $50,000 and the amount of any Claims for which Buyer would be entitled to indemnification pursuant to section V.A or V.B but for the preceding sentence. The Sellers indemnity obligation in respect of Section V.B(d) shall only arise to the extent Buyer reasonably determines an obligation to pay exists and actually does pay under any Key Employee Agreement, there is no modification of the Key Employee Agreements by Buyer and shall exist only to the extent that amounts payable to an Employee covered thereby are in excess of amounts such Employee would be entitled to under Buyer's severance policies as applicable to such Employee in accordance with the terms of this Agreement (and then only for the amount of such excess). The Sellers shall be liable for all other Claims, and the aggregate liability of all Sellers hereunder with respect to any and all Claims shall be limited to the Purchase Price; provided, however, that Buyer's right to 35 indemnification under clause (a) of this Section V.B shall expire on the Representation Expiration Date applicable to such claim unless Sellers shall have received written notice of a specific Claim prior to such expiration date, in which case such indemnification shall not expire with respect to such Claim until it is resolved. C. In addition to the indemnification set forth in Section V.B, Sellers shall indemnify, defend, save and hold harmless the Buyer Indemnified Parties from and against all Claims arising solely from or settlements of, and shall assume the defense and all expenses related thereto of the potential investigation and/or inquiry of the Department of Health and Human Services pending in the United States Attorney's Office in the Northern District of New Jersey. Buyer's right to indemnification under this Section V.C is conditioned upon Sellers' unconditional right, notwithstanding anything to the contrary contained in Section V.E, to assume the defense of the proceedings described in this Section V.C using counsel of Sellers' choice and to control the defense of and settlement of such proceedings without complying with the requirements set forth in Section V.E. unless Buyer becomes a party in the suit (in which case the provisions of Section V.E shall apply). Provided that such Employees are at the time employed by Buyer, Buyer will make available to Sellers such Employees and access to books and records as Sellers may reasonably request in connection with such proceedings, at no expense to Buyer. D. Buyer shall indemnify, defend, save and hold harmless Sellers and their successors and assigns, and their employees, representatives, officers, directors and agents (collectively the "Seller Indemnified Parties") from and against any and all Claims resulting from (a) any breach of or inaccuracy in any representation or warranty made by Buyer in this Agreement, or (b) any breach of any covenant of Buyer contained in this Agreement, or (c) the Assumed Liabilities, or any liabilities or obligations of the Business 36 accruing for acts or omissions taking place after the Effective Date, or (d) any guarantee or obligation to assure performance given or made by Sellers or any of their affiliates with respect to any obligation or liability of Sellers disclosed on Exhibit IV.I. Sellers' right to indemnification under clause (a) shall expire on the Representation Expiration Date unless Buyer shall have received written notice of a specific Claim prior to such expiration date, in which case such indemnification shall not expire with respect to such Claim. E. 1. A party seeking indemnification pursuant to this Article V (an "Indemnified Party") shall give prompt notice to the party from whom such indemnification is sought (the "Indemnifying Party") of the assertion of any matter reasonably anticipated to bring rise to a Claim by a third party or by the Indemnified Party in respect of which indemnity may be sought hereunder (a "Third Party Claim") and shall give the Indemnifying Party such information with respect thereto as the Indemnifying Party may reasonably request, but no failure to give such notice shall relieve the Indemnifying Party of any liability hereunder (except to the extent the Indemnifying Party has suffered actual prejudice thereby). If the Indemnifying Party establishes to the reasonable satisfaction of the Indemnified Party that the Indemnifying Party has (and will continue to have) adequate financial resources to satisfy and discharge such Claim, the Indemnifying Party shall have the right, exercisable by written notice (the "Notice") to the Indemnified Party (which notice shall state that the Indemnifying Party expressly agrees that as between the Indemnifying Party and the Indemnified Party, the Indemnifying Party shall be solely obligated to satisfy and discharge the Third Party Claim) within fourteen (14) days of receipt of notice from the Indemnified Party of the commencement of or assertion of any Third 37 Party Claim, to assume the defense of such Third Party Claim, using counsel selected by the Indemnifying Party and reasonably acceptable to the Indemnified Party; provided that the Indemnifying Party shall not have the right but has the obligation, to the extent set forth herein, if requested by the Indemnified Party to assume the defense of a Third Party Claim (A) seeking an injunction, restraining order, declaratory relief or other non-monetary relief or (B) if the named parties to any such action (including any impleaded parties) includes both the Indemnified Party and the Indemnifying Party, and the Indemnified Party shall have been advised in writing by counsel that under applicable standards of professional conduct (assuming no waiver of conflict is given) the Indemnified Party and Indemnifying Party may not be represented by the same counsel, in which case such Indemnified Party shall have the right to assume control of the defense of a Third Party Claim of the type set forth in clause (A) above and to participate in the defense of a Third Party Claim of the type set forth in clause (B) above and all Claims in connection therewith shall be reimbursed by the Indemnifying Party. In addition, if the Indemnifying Party fails to give the Indemnified Party the Notice complying with the provisions stated above within the stated time period, the Indemnified Party shall have the right to assume control of the defense of the Third Party Claim and all Claims in connection therewith shall be reimbursed by the Indemnifying Party upon demand of the Indemnified Party. 2. If at any time after the Indemnified Party assumes the defense of a Third Party Claim pursuant to Section E.1, the conditions set forth in clauses E.1 (A) or (B) above no longer exist, the Indemnifying Party shall have the right to assume the defense as set forth above as if the Indemnified Party never assumed the defense of such 38 Claim. 3. The Indemnifying Party or the Indemnified Party, as the case may be, shall in any event have the right to participate, at its own expense, in the defense of any Third Party Claim which the other is defending. 4. The Indemnifying Party, if it shall have assumed the defense of any Third Party Claim in accordance with the terms hereof, shall have the right, upon thirty (30) days prior written notice to the Indemnified Party, to consent to the entry of judgment with respect to, or otherwise settle such Third Party Claim unless (i) the Third Party Claim involves equitable or other non-monetary damages or (ii) in the reasonable judgment of the Indemnified Party such settlement would have a Material Adverse Effect on the Indemnified Party's business (including any material impairment of its relationships with customers and suppliers) in which case such settlement only may be made with the written consent of the Indemnified Party, which consent shall not be unreasonably withheld. At the expense of the Indemnifying Party, the Indemnified Party shall have the sole and exclusive right to settle any Third Party Claim, on such terms and conditions as it deems reasonably appropriate, (x) if the Indemnifying Party fails to assume the defense in accordance with the terms hereof or (y) to the extent such Third Party Claim involves only equitable or other non-monetary relief or would have a Material Adverse Effect on the Indemnified Party's business, with the consent of the Indemnifying Party, which consent shall not be unreasonably withheld. 5. Whether or not the Indemnifying Party chooses to defend or prosecute any Claim involving a third party, all the parties hereto shall cooperate in the defense or prosecution thereof and shall 39 furnish such records, information and testimony, and attend such conferences, discovery proceedings, hearings, trials and appeals as may be reasonably requested in connection therewith. F. 1. Buyer and Sellers acknowledge and agree that their sole and exclusive remedy with respect to any and all claims relating to the subject matter of this Agreement shall be pursuant to the indemnification provisions set forth in this Article V. In furtherance of the foregoing, Buyer and Sellers hereby waive, to the fullest extent permitted under applicable law, any and all rights, claims and causes of action (including rights of contribution, if any) it may have against Sellers or any of Sellers' affiliates (in the case of Buyer), or Buyer or any of Buyer's affiliates (in the case of Sellers) arising under or based upon any federal, state or local statute, law, ordinance, rule, regulation or judicial decision (including, without limitation, any such relating to environmental matters or arising under or based upon any securities law, common law or otherwise); provided, however, that no party waives its rights to commence proceedings to enforce its rights under this Article in accordance with the provisions of Section VIII.F. 2. The amount of any Claim for which indemnification is provided under this Article V shall be net of (i) any amounts recovered (less costs of collecting) by the Indemnified Party pursuant to any indemnification by or indemnification agreement with any third party who was primarily liable for the Claim (a "Collateral Source") and (ii) any benefit (including any tax benefit if and when realized) that accrues to Buyer or Sellers in respect of the matter for which a Claim is asserted. If the amount to be netted hereunder from any payment required in Section V.B, V.C or V.D is determined after payment by the Indemnifying Party of any amount otherwise 40 required to be paid to an Indemnified Party pursuant to this Article V, the Indemnified Party shall repay to the Indemnifying Party, promptly after such determination, any amount that the Indemnifying Party would not have had to pay pursuant to this Article V had such determination been made at the time of such payment. Indemnification under this Article V shall not be available to any Indemnified Party unless such Indemnified Party first seeks recovery from a Collateral Source for such Claim before making any claim for indemnification by the Indemnifying Party. Provided an Indemnifying Party has satisfied all Indemnification obligations to the Indemnified Party, any Indemnifying Party may, in its sole discretion, require any Indemnified Party to grant an assignment of the right of such Indemnified Party to assert a Claim against any Collateral Source. In the event of such assignment, the Indemnifying Party shall pursue such Claim at its own expense. G. Notwithstanding anything to the contrary contained herein, no Buyer Indemnified Party shall be entitled to indemnification hereunder for any "Claim" that arises in connection with (1) any cost in respect of a compliance program except with respect to, and to the extent of, the costs of implementing a compliance program that Buyer is required to institute solely as a result of actions of Sellers occurring prior to Closing and not as a result of any event or occurrence taking place after Closing or (2) any loss of business or revenues resulting from a future change in business practice required to comply with law or resulting from the litigation, investigation or inquiry referred to in Section V.C, to the extent the basis and claims of such litigation, investigation or inquiry have been disclosed to Buyer prior to the date hereof, or Buyer is otherwise aware of such basis and claims prior to the date hereof, or (3) any loss of business or revenues resulting from an amendment to any agreement or change in manner of 41 doing business entered into or effected (x) prior to the date hereof that has been disclosed to Buyer by or on behalf of Sellers (or Buyer is otherwise aware of prior to the date hereof) or (y) after the date hereof by Buyer. Nothing in this Section V.G shall be taken to expand Sellers' indemnification obligations set forth in any other Section of this Agreement. VI. Conditions Precedent A. The obligation of Buyer to complete Closing under this Agreement is subject to the waiver by Buyer or the fulfillment prior to, or on the Closing Date of each of the following conditions: 1. Sellers' representations and warranties contained in this agreement shall be true in all material respects on the Closing Date as though such representations and warranties were made at such time except that any such representation and warranty made as of a specified date shall have been true in all material respects on and as of such date. 2. The Sellers shall have performed and complied in all material respects with all agreements and conditions required by this Agreement to be performed or complied with by them prior to or on the Closing Date. 3. Sellers shall have delivered to Buyer a certificate of Sellers executed by the President or any Vice President and the Chief Financial Officer, Treasurer or any Assistant Treasurer and dated as of the Closing Date certifying that the conditions specified in Sections VI.A.1 and VI.A.2 have been satisfied. 4. Sellers shall have delivered to Buyer a favorable opinion of the attorney for Sellers, dated as of the Closing Date and in the form attached as Exhibit VI.A, to the effect that: a. Sellers are duly incorporated and validly existing under the laws of the state where incorporated and are in good 42 standing in that state; that each of the Sellers has corporate power and authority to own all its property and assets; b. The execution and delivery of this Agreement and the consummation of the purchase and sale have been duly authorized by all necessary corporate action on the part of Sellers. 5. Sellers shall have accrued all benefits arising prior to Closing to employees of the Business up through the Effective Date. 6. No claim, action, suit, investigation or other proceeding shall be pending or threatened before any court or governmental agency which presents a substantial risk of the restraint or prohibition of the transactions contemplated by this Agreement. 7. All governmental filings, approvals and consents shall have been accomplished or obtained that are necessary in order that the transactions contemplated hereby may be accomplished in compliance with law and all waiting periods, including the waiting period under the HSR Act shall have expired without extensions or been earlier terminated, other than any such filings, approvals, consents or waiting periods as are not (in the aggregate) material. B. All obligations of Sellers to complete Closing under this Agreement are subject to the waiver by Sellers or the fulfillment prior to, or on, the Closing Date of each of the following conditions: 1. Buyer's representations and warranties contained in this Agreement shall be true in all material respects on the Closing Date as though such representations and warranties were made at such time except that any such representation and warranty made as of a specified date shall have been true in all material respects on and as of such date. 2. Buyer shall have performed and complied in all material respects 43 with all agreements and conditions required by this Agreement to be performed or complied with by them prior to or on the Closing Date. 3. Buyer shall have paid the Purchase Price as adjusted pursuant to Section I.F to Sellers on the Closing Date. 4. Buyer shall have delivered to Sellers a favorable opinion of the attorney for Buyer dated as of the Closing Date and in the same form attached hereto as Exhibit VI.B. 5. Buyer shall have delivered to Sellers a certificate of Buyer executed by the President or any Vice President and the Treasurer or Assistant Treasurer of Buyer and dated as of the Closing Date certifying that the conditions specified in Sections VI.B.1 and VI.B.2 have been satisfied. 6. No claim, action, suit, investigation or other proceeding shall be pending or threatened before any court or governmental agency which presents a substantial risk of the restraint or prohibition of the transactions contemplated by this Agreement. 7. All governmental filings, approvals and consents shall have been accomplished or obtained that are necessary in order that the transactions contemplated hereby may be accomplished in compliance with law and all waiting periods, including the waiting period under the HSR Act shall have expired without extension or been earlier terminated, other than any such filings, approvals, consents or waiting periods as are not (in the aggregate) material. VII. Right To Proceed; Closing A. The purchase and sale hereby contemplated shall be consummated and closed (the "Closing") at the offices of counsel to Sellers at 10:00 a.m. local time on Friday, August 11, 1995, or at such time and place as the parties shall agree (the "Closing Date") and is effective as of the close of business on July 31, 1995 (the "Effective Date"). 44 B. On the Effective Date, Sellers shall deliver to Buyer the following: All documents necessary to transfer the Assets to Buyer, including all documents to be attached as Exhibits hereto. 1. The certificate required by Section VI.A.3. 2. The opinion of counsel required by section VI.A.4. 3. Access to all records, and other instruments and documents held by Sellers relating to the Business, or the properties or business of the Business. 4. The Lease Assignments attached as Exhibit VII.B(4) (a), for the sites attached as Exhibit VII.B(4)(b). 5. The Assignment of Contracts attached as Exhibit VII. B(5). C. On the Closing Date, Buyer shall deliver to Sellers the following: 1. The Purchase Price as adjusted pursuant to Section I.F by wire transfer of immediately available funds to an account designated by Seller. 2. The opinion of counsel and certificates referred to in Section VI.B. 3. An Assumption Agreement in the form of Exhibit VII.C. VIII. Miscellaneous A. Any notices or other circumstances required or permitted hereunder shall be sufficiently given if hand-delivered (by express delivery service or otherwise), sent by certified mail, express mail service or overnight delivery service, postage prepaid, addressed as follows: To Buyer: NMC Diagnostics Services, Inc. c/o National Medical Care, Inc. Reservoir Place 1601 Trapelo Road Waltham, MA 02154 Attention: DSD/Law Department To Sellers: 45 MEDIQ, Inc. One Mediq Plaza Pennsauken, NJ 08110 Attn: Michael Sandler and Alan S. Einhorn With Copies To: Dechert Price & Rhoads 4000 Bell Atlantic Tower 1717 Arch Street Philadelphia, PA 19103 Attn: Henry N. Nassau or such other address as shall be furnished in writing by either party, and such notice or communication shall be deemed to have been given when delivered if delivered by hand (by express delivery or otherwise), or five days after the date of mailing if mailed prepaid and properly addressed. B. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors, heirs, and assigns, provided that this Agreement may not be assigned by either party without the consent of the other party. Any attempted assignment of this Agreement in violation of the provisions of this section is void. C. This Agreement may be amended with respect to any of the terms contained herein only by means of a writing signed by all the parties hereto. D. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other party. E. This Agreement shall be governed by and interpreted in accordance with the laws of the Commonwealth of Massachusetts. F. In the event that any dispute or controversy arises between the parties out 46 of or relating to this Agreement, a party shall notify the other party in writing of the existence of the dispute or controversy, and the parties shall meet and negotiate in good faith to attempt to resolve the matter. If such efforts do not resolve the dispute or controversy, each party shall appoint an arbitrator of choice from a list of arbitrators recognized by the American Arbitration Association. The appointed arbitrators will appoint a third arbitrator from the list to hear the parties and settle the dispute or controversy. The proceedings shall be governed by the Commercial Rules of the American Arbitration Association then in effect and shall be conducted in Philadelphia, Pennsylvania. The arbitrators shall have no power to award punitive or exemplary damages, to ignore or vary the terms of the Agreement, and shall be bound to apply controlling law. Arbitration shall be binding and the exclusive remedy for the settlement of the dispute or controversy. The party who prevails on entry of the award of judgment shall be entitled to its costs and expenses, including reasonable attorney's fees incurred in connection therewith. G. Whether the transactions contemplated by this Agreement are consummated or fail to be consummated for any reason whatsoever, each of the parties hereto shall pay its own expenses and the fees and expenses of its counsel and accountants and other experts, except as otherwise specifically provided herein. H. If any term, provision, covenant or restriction of this Agreement that is not material to the benefits to be received or obligations to be performed hereunder by either party hereto is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. I. This Agreement contains the entire agreement between the parties hereto with respect to the subject matter hereof and, except for the Confidentiality 47 Agreement, supersedes all prior and contemporaneous agreements and understandings, oral or written, with respect to such transactions. J. As used in this Agreement, all references to "Seller's knowledge" shall mean the actual knowledge of Stephen Doppelt, David Perocchi, Nancy Pacious, Daniel Burneika, Mark Foley, Michael Sandler, John Mitchell, Daniel Nye, Susan Van Houten and Edward Crouch. All representations and warranties in this Agreement regarding or made by any Seller are made only with respect to time periods during which such Seller was directly or indirectly majority owned by Mediq. K. Any information disclosed in any Exhibit will be considered as disclosed in each of the Exhibits. The disclosure of any matter in the Exhibits should not be construed as indicating that such matter is required to be disclosed in order for any representation or warranty in this Agreement to be true and correct. L. The section and other headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. All references to Sections or Articles contained herein mean Sections or Articles of this Agreement unless otherwise stated. All capitalized terms defined herein are equally applicable to both the singular and plural forms of such terms. M. It is understood and agreed that neither the specification of any dollar amount in the representations and warranties contained in this Agreement nor the inclusion of any specific item in the Schedules or Exhibits is intended to imply that such amounts or any higher or lower amount, or the items so included or other items, are or are not material, or are required to be included in the Exhibits, and neither party shall use the fact of the setting of such amounts or the fact of the inclusion of any such item in the Exhibits in any dispute or controversy between the parties as to whether any obligation, item or matter is or is not material or are required to be 48 included in the Exhibits, for purposes of this Agreement. N. Except as expressly contemplated herein, nothing in this Agreement is intended (i) to confer any right or benefit on any person other than the parties to this Agreement and their respective successors and permitted assigns; or (ii) to modify or discharge the obligation or liability of any third person to any party to this Agreement, and no provision hereof shall give any third person any right of subrogation or action against any party to this Agreement. In no event shall Sellers be liable to third parties other than Buyer's successor, if any, in connection with any aspect of the transactions contemplated by this Agreement, nor shall any third party be or become a beneficiary of such rights, nor shall Buyer act or hold itself out as Sellers' agent in any activity including, but not limited to, dealings with any such third party. 49 IN WITNESS WHEREOF, this Agreement has been signed by the parties and each of the corporate parties has caused this Agreement to be executed by a duly authorized person, all as of the day first above written. MEDIQ IMAGING SERVICES, INC., AMERICAN CARDIOVASCULAR IMAGING LABS, INC., and SOUTHEASTERN DIAGNOSTICS, INC. By:/s/ Stephen Doppelt ----------------------------- Stephen Doppelt President NMC DIAGNOSTICS SERVICES, INC. By:/s/ Leon Maraist ---------------------------- Leon Maraist Vice President 50 GUARANTEE: The performance of all of the covenants, liabilities and obligations of NMC Diagnostics Services, Inc. hereunder are unconditionally and irrevocably guaranteed as surety by National Medical Care, Inc., its parent. By:/s/ Ernestine M. Lowrie ---------------------------------- Ernestine M. Lowrie Senior Vice President GUARANTEE: The performance of all of the covenants, liabilities and obligations of Mediq Imaging Services, Inc., American Cardiovascular Imaging Labs, Inc. and Southeastern Diagnostics, Inc. hereunder are unconditionally and irrevocably guaranteed as surety by Mediq Incorporated, its parent and Mediq Incorporated agrees to be bound by the provisions of Section IV.C hereof. By:/s/ Michael F. Sandler ---------------------------------- Michael F. Sandler Senior Vice President of Finance 51 EXHIBITS -------- EXHIBIT I.C Assumed Liabilities EXHIBIT I.E Purchase Price Allocation EXHIBIT I.F(1) Proposed Closing Balance Sheet and Estimated Adjustment EXHIBIT I.F(2) Receivables Reserve EXHIBIT I.G Balance Sheet EXHIBIT II.A Articles of Incorporation, By-Laws, Certificate of Good Standing of Sellers EXHIBIT II.B Ownership EXHIBIT II.E Claims EXHIBIT II.F Medicare and Third Party Investigations/Funds Withheld EXHIBIT II.H Liens EXHIBIT II.I Leases EXHIBIT II.J Contracts EXHIBIT II.K Financial or Business Changes EXHIBIT II.N Insurance EXHIBIT II.P Employee Benefit Plans EXHIBIT II.Q Taxes EXHIBIT II.R List of Employees EXHIBIT II.T Hazardous Material Disclosure EXHIBIT III.A Corporate Documents of the Buyer EXHIBIT III.E Balance Sheet of National Medical Care, Inc. EXHIBIT IV.C Sellers' PRNs EXHIBIT IV.I Guaranties EXHIBIT IV.J Doppelt Consulting Agreement EXHIBIT V.A Key Employee Agreement EXHIBIT VI.A Legal Opinion Letter of Sellers EXHIBIT VI.B Legal Opinion Letter of Buyer EXHIBIT VII.B(4)(a) Lease Assignments EXHIBIT VII.B(4)(b) List of Business Locations EXHIBIT VII.B(5) Assignment of Contracts EXHIBIT VII.C Assumption Agreement
EX-3.1 5 CERTIFICATE OF INCORPORATION STATE OF DELAWARE Office of SECRETARY OF STATE I, Glenn C. Kenton Secretary of State of the State of Delaware, do hereby certify that the Certificate of Incorporation of the "HCI, INC.", was received and filed in this office the eighth day of December, A.D. 1977, at 9 o'clock A.M. And I do hereby further certify that the said "HCI, INC.", filed a Certificate of Agreement of Merger, changing its corporate title to "MEDIQ INCORPORATED", on the thirty-first day of December, A.D. 1980, at 9 o'clock A.M. And I do hereby further certify that the aforesaid Corporation is duly incorporated under the laws of the State of Delaware and is in good standing and has a legal corporate existence so far as the records of this office show and is duly authorized to transact business. And I do hereby further certify that the said "MEDIQ INCORPORATED", is the last known title of record of the aforesaid Corporation. In Testimony Whereof, I have hereunto set my hand and official seal at Dover this seventeenth day of March in the year of our Lord one thousand nine hundred and eighty-one. /s/ Glenn C. Kenton ------------------------------------------ Glenn C. Kenton, Secretary of State laws of the States of Delaware, Pennsylvania, New Jersey and Nevada, do hereby agree as follows: 1. Merger. The Constituent Corporations other than HCI shall be merged with and into HCI (thereafter to be known as MEDIQ INCORPORATED) on the effective date hereinafter set forth in accordance with the applicable laws of the states of Delaware New Jersey, Pennsylvania and Nevada, and on the terms and conditions set forth in this Plan and Agreement of Merger. From and after such effective date, HCI shall be the surviving corporation (the "Surviving Corporation") and shall continue to do business as a corporation organized and existing under the laws of the State of Delaware, unaffected and-unimpaired by the Merger with all rights, privileges, immunities and powers, and subject to all the duties and liabilities of a corporation organized and existing under the laws of the State o Delaware. 2. Certificate of Incorporation of Surviving Corporation. The Certificate of Incorporation of the Surviving Corporation, upon the effective date of this merger, shall be and shall read as follows: CERTIFICATE OF INCORPORATION I. The corporate name is MEDIQ INCORPORATED. II. The address of the registered office of the Corporation in the State of Delaware is 901 Market Street in the City of Wilmington, County of New Castle. The registered agent in charge thereof is Corporation Guarantee and Trust Company. -2- III. The nature of the business or objects or purposes to be transacted, promoted or carried on by the Corporation are as follows: To buy, sell, lease, dispose of, distribute, import, export, manufacture, produce, and trade and in general deal in and with all materials, devices, implements, goods, wares, merchandise, and services of any and every character, either as principal, broker, or agent of others; To construct, repair, operate and maintain, trade and deal in any and all kinds of machinery. and any and all kinds of mechanical apparatus, and any and all kinds of fixtures and supplies; To manufacture, purchase or otherwise acquire, invest in, own, create a security interest in, pledge, sell, assign, transfer, rent, lease or otherwise dispose of; trade, deal in, and deal with goods, wares, merchandise and personal property of every class and description: To acquire, and to pay, for in cash, stock, bonds or other indebtedness of this Corporation or otherwise, the good will, rights, assets and property and to undertake or assume the whole or any part of the obligations or liabilities of, any person, firm, association or corporation; To subscribe, for, purchase or otherwise acquire, own, hold, invest, in, sell, assign, transfer, exchange, pledge, mortgage, grant security interests in or otherwise deal and trade in, or with, shares of stock, bonds, Coupons, promissory notes, -3- pledges, obligations, contracts, leases, evidences of indebtedness, or securities of any company corporation or association, domestic or foreign, and of any governmental or quasi-governmental entity or authority; To receive, collect, hold, and dispose of, interest, dividend; and income of and from any of the shares of stock, bonds, coupons, promissory notes, pledges, obligations, contracts, leases, evidence of indebtedness, securities or other property held or owned by it; To issue bonds, debentures or obligations of this Corporation and borrow money on the note or notes of this Corporation for any of the objects or purposes of the Corporation and to secure the same by pledge, mortgage, deed, security interest, or trust or otherwise in or upon any property, real or personal, of any kind and nature. at any time owned by the Corporation; To purchase, hold, sell and transfer the shares of its own capital stock; and To do anything and everything necessary, suitable convenient, or proper for the accomplishment of any of the purposes or the attainment of one or more of the objects herein enumerated, or incidental to the powers herein named, or which shall at any time appear conducive or expedient to the benefit or protection of the Corporation, and in general to carry on any other business in connection with the foregoing; to have and exercise all the powers conferred by the laws of the State of -4- Delaware upon corporations formed under the General Corporation Law of the State of Delaware and to do any, and all of the acts and things hereinabove set forth to the same extent as natural persons might or could do. The foregoing clauses shall be construed both as objects and powers; and it is hereby expressly provided that the foregoing enumeration of specific powers shall not be held to limit or restrict in any manner the powers of the Corporation. IV. The total number of shares of all classes of stock which the Corporation shall have the authority to issue is 100,000 shares of preferred stock of a par value of $100.00 per share, and 10,000,000 shares of common stock of a par value of $1.00 per share. The preferred stock may be issued with the voting rights, designations, preferences, qualification, privileges, limitations, options, conversion rights, and other special rights, if any, as shall be stated or expressed in the resolution or resolutions providing for the issuance of such stock, adopted by the Board of Directors. Authority is hereby expressly granted to and vested in the Board of Directors to authorize the issuance of the shares of the preferred stock and to fix by resolution or Resolutions the terms thereof, including without limitation, the following: a. The dividends payable and preferences in respect to the payment thereof; -5- b. The terms and conditions an which, and the price or prices at which, such shares may be made subject to redemption; c. The rights of such shares upon the voluntary or involuntary dissolution of, or upon any other distribution of the assets of, the Corporation; d Whether or not such shares shall be made convertible into, or exchangeable for, shares of any other classes or of any series of any other class or classes of stock of the Corporation, and if made so convertible or exchangeable, the conversion price or prices, or the rates of exchange, and the adjustments, if any, at which, and the other terms and conditions upon which, any such conversion or exchange may be made; and e. Whether or not such shares shall be entitled to other special rights in addition to those in the Articles provided for. No stockholder of the Corporation shall by reason of his holding shares of any class have any pre-emptive or preferential right to purchase or subscribe to any shares of any class of this Corporation, now or hereafter to be authorized, or any notes, debentures, bonds or other securities convertible into or carrying options or warrants to purchase shares of any Class, now or hereafter to be authorized, whether or not the issuance of any such shares, or such notes, debentures, bonds or other securities, would adversely affect the dividend or voting rights of such stockholder, other than such rights, if any, as the Board -6- of Directors, in its discretion from time to time may grant and at such price as the Board of Directors in its discretion may fix; and the Board of Directors may issue shares of any class of this Corporation, or any notes debentures, bonds or other securities convertible into or carrying options or warrants to purchase shares of any class, either in whole or in part, to the existing stockholders of any class. Except as otherwise specifically required by law or as specifically provided in the resolutions of the Board of Directors authorizing the issuance of the preferred stock, the exclusive voting power of the Corporation shall be vested in the common stock of the Corporation. Each holder of common stock shall be entitled to one vote for each share held by such holder. The holders of the shares of the Corporation's common stock shall not be entitled to cumulative voting in voting for directors, i.e. they shall not be entitled in so voting to multiply the number of votes to which they are entitled by the number of directors to be elected by them in the same election. V. The name and address of the Incorporator is as follows: Name Address ---- ------- Ira S. Pim, Jr. 2225 Land Title Building Philadelphia, PA 19101 VI. The Corporation is to have perpetual existence. VII. Private property of the shareholders shall not be subject to the payment of corporate debts to any extent whatsoever. -7- VIII. All corporate powers of the Corporation shall be exercised by the Board of Directors except as otherwise provided by law. Directors need not be shareholders. The Board of Directors may, by resolution or resolutions passed by a majority of the whole Board designate an executive Committee and one or more other committees, each committee to consist of two or more of the directors of the Corporation, which, to the extent provided in such resolution or resolutions or in the By-Laws of the Corporation, shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the Corporation, and may have power to authorize the seal of the Corporation to be affixed to all papers which may require it. The number of the directors of the Corporation shall be fixed from time to time by the By-Laws, and may be altered from time to time by amendment.of the By-Laws, but never shall be less than three. The By-Laws may also prescribe the number of directors necessary to constitute a quorum of the Board, which number shall not be more than a majority nor less than one-third of the total number of directors, and in no event less than two directors. The shareholders and the directors may hold their meetings, and the Corporation may have an office or offices, outside the State of Delaware if the By-Laws so provide, and the books and records of the Corporation may be kept outside the State of Delaware to the extent permitted by the laws of that State. -8- None of the directors need be a resident of the State of Delaware. Subject to By-Laws made by the shareholders the Board of Directors may make By-Laws and from time-to-time may alter, amend, or repeal any By-Laws, but any By-Laws made by the Board of Directors may be altered, amended, or repealed by the shareholders at any annual meeting or at any special meeting, provided that notice of such proposed alteration, amendment or repeal is included in the notice of such special meeting. The Board of Directors shall have power from time to time to fix the amount to be reserved by the Corporation over and above its capital stock paid in and to fix and determine and to vary the amount of the working capital of the Corporation, and to direct. and determine he use and disposition of the working capital and of any surplus or net profits over and above the capital stock paid in. The Board of Directors may from time to time, in such manner and upon such terms and.conditions as the Board of Directors may determine, enter into, establish, reestablish, amend, alter,or repeal, and may put into effect and carry out, agreements or plans for distributing, selling, or granting options on shares of stock of the Corporation or any other securities or property of the Corporation, to or for the benefit of the officers and employees of the Corporation or any of them, or for their participation in any manner in the profits of the Corporation, in addition to or apart from their regular -9- compensation, or for providing such officers and employees, or any of them, at the expense of the Corporation, in whole or in part, with medical services, insurance against accident, sickness, or death, pensions or payments during old age, disability, or unemployment, and education, housing, social service, recreation, or other aids and benefits for their relief or general welfare. The Board of Directors from time to time shall determine whether and to what extent and at what times and place a and under what conditions and regulations the accounts and books of the Corporation, or any of them, shall be open to the inspection of the shareholders, and no shareholder shall have any right to inspect any account, book, or document of the Corporation, except as conferred by statute or as authorized by resolution of the Board of Directors. In addition to the powers and authorities hereinbefore or by statute expressly conferred upon them, the Board of Directors may exercise all such powers and do all such acts and things as maybe .exercised or done by the Corporation, subject, nevertheless, to the express provisions of the laws of Delaware, of this Certificate of Incorporation; and of the By-Laws, of the Corporation. In the absence of fraud, no contractor other transaction of the corporation shall be affected or invalidated in any way by the fact that any of the directors of the Corporation are in any wise interested in or connected with any -10- other party to such contract or transaction or are themselves parties to such contract or transaction, provided that such interest shall be, fully disclosed or otherwise known to the Board of Directors at its meeting at which such contract or transaction is authorized or confirmed; and provided further that at the meeting of the Board of Directors authorizing or confirming such con.tract or transaction there shall be present a quorum of directors not so interested or connected and such contractor transaction shall be ap proved by a majority of such quorum, which majority shall consist of directors not so interested or connected. Any such contract, transaction, or act of the Corporation or of the Board of Directors or by any committee, thereof which shall be required to be, and shall be ratified by the holders of a majority of the; shares of stock of the Corporation having voting power and voting at any annual meeting or at any special meeting called for such purpose, shall be as valid and as binding as though ratified by every shareholder of the Corporation. Any director of the Corporation may vote upon any contract or other transaction between the Corporation and any subsidiary or affiliated Corporation without regard to the fact that he is also a director of such subsidiary or affiliated corporation. IX. The Corporation re.serves the right to amend, alter, change, or repeal any provision contained in this Certificate of Incorporation in the manner now and hereafter prescribed by -11- statute; and all rights herein conferred upon the shareholders are granted subject to this reservation. 3. By-Laws of Surviving Corporation. The By-Laws of HCI in force on the effective date of the merger shall be the By-Laws of the Surviving Corporation until altered, amended or repealed. 4. Directors and Officers. (a) The following persons shall be and become the directors of the Surviving Corporation upon the effective date of the merger and shall hold office until the first annual meeting of the shareholders of the Surviving Corporation after the effective date of the merger and until their respective successors are elected and shall have duly qualified: Bernard B. Rotko, M.D. Bernard J. Korman Lionel R. Felzer Michael J. Rotko, Esquire Harvey J. Comita Maurice Wiener Ian J. Berg Eugene M. Schloss, Jr. If on the effective date of the merger a vacancy shall exist in the Board of Directors of the Surviving Corporation for any reason whatsoever, such vacancy may be filled by the Board of Directors of the Surviving Corporation as provided in its By-Laws. (b) The first annual meeting of the shareholders of the Surviving Corporation after the effective date of the merger, shall be the annual meeting provided for in its By-Laws, for the fiscaL year ending September 30, 1981. -12- (c) The following persons shall be executive or administrative officers of the Surviving Corporation, from and after the effective date of the merger, subject to the provisions of the By-Laws of the Surviving Corporation, and shall hold office until the first annual meeting of the directors of the Surviving Corporation after the effective date of the merger and until their respective successors are elected and shall have duly qualified: Bernard B. Rotko. M.D. Chairman of the Board Bernard J. Korman President Lionel H. FeLzer Vice President Harvey J. Comita, Vice President Robert Mathews Vice President Norman E. Martin Vice President Ian J. Berg Vice President Lionel Felzer Treasurer Eugene M. Schloss, Jr. Secretary The Board of Directors.shall elect or appoint such additional officers as they shall determine, subject to the provisions of the By-Laws of the Surviving Corporation. If, on the effective date of the merger a vacancy shall existing any office, for any reason whatsoever, such vacancy may be filled by the Board of Directors of the Surviving Corporation as provided in its By-Laws. (d) The first regular meeting of the Board of Directors of the Surviving Corporation after the effective date of the merger shall be held as soon as practicable thereafter. 5. Conversion of Shares of the Constituent Corporations. The manner of converting the outstanding shares of the capital stock of the Constituent Corporations into the new shares of the -13- common capital stock of the Surviving Corporation created by Paragraph 2 of this Plan and Agreement of Merger (which shares for such purpose shall be validly issued, fully paid and non-assessable) shall be as follows: (a) Each common share without par value of A-PRN outstanding on the effective date of the merger shall be changed and converted into 451.005 shares of the Common Stock of the Surviving Corporation, which shares of common stock of the Surviving Corporation shall thereupon be issued and outstanding. (b) Each common share of the par value of $1 of HCI outstanding on the effective date of the merger shall be changed and converted into 27.465 shares of the Common Stock of the Surviving Corporation, which shares of common stock of the Surviving Corporation shall thereupon he issued and outstanding. (c) Each common share of the par value of $1 of HOSQUIP outstanding on the effective date of the merger shall be changed and converted into 16.240 shares of the Common Stock of the Surviving Corporation, which shares of common stock of the Surviving Corporation shall thereupon be issued and outstanding. (d) Each common share of the par value of $1 of MMG outstanding on the effective date of the merger shall be changed and converted into 115.64 shares of the Common Stock of the Surviving Corporation, which shares of common stock of the Surviving Corporation shall thereupon be issued and outstanding. (e) Each common share of the par value of $1 of Olney outstanding on the effective date of the merger shall be changed -14- and converted into 1.0144 shares of the Common Stock of the Surviving Corporation, which shares of common stock of the Surviving Corporation shall thereupon be issued and outstanding. (f) Each common share of the par value of $100 of Oxford outstanding on the effective date of the merger shall be changed and converted into 85.593 shares of the Common Stock of the Surviving Corporation, which shares of common stock of the Surviving Corporation shall thereupon be issued and outstanding. (g) Each common share of the par value of $.01 of Pan-Optics Outstanding on the effective date of the merger shall be changed and converted into .94738 shares of the Common Stock of the Surviving Corporation. which shares of common stock of the Surviving Corporation shall thereupon be issued and outstanding. (h) Each common share of the par value of $1 of RERM outstanding on the effective date of the merger shall be changed and converted into 1.542 shares of the Common Stock of the Surviving Corporation, which shares of common stock of the Surviving Corporation Shall thereupon be issued and outstanding. (i) Each common share of each class of the par value of $.01 of FMC outstanding on the effective date of the merger shall be changed and converted into .00204 shares of the Surviving Corporation, which shares common stock of the Surviving Corporation shall thereupon be issued and outstanding, unless dissenters' rights are exercised. (j) Each common share of the par value of $10 of Medifac outstanding on the effective date of the merger shall be -15- changed and converted into 413.54 shares of the Common Stock of the Surviving Corporation, which shares of Common stock of the Surviving Corporation shall thereupon be issued and outstanding. 6. Effect of Merger. Upon this merger becoming effective: (a) The separate corporate existence of each of the Constituent Corporations, except HCI, and the Surviving Corporation shall become the owner, without other transfer or further act or deed, of all of the rights, privileges, powers, property franchises, estates and interests every kind of the Constituent Corporations, as effectually the property the Surviving Corporation as they were of the respective Constituent Corporations; and the Surviving Corporation shall be subject to all debt and liabilities of the Constituent Corporations in the same manner as the Surviving Corporation had itself incurred them; and the Surviving Corporation shall be subject to all of the restrictions, disabilities duties of each of the merged Constituent Corporations shall not revert be in any way impaired by reason of this merger; and rights of credits and liens upon any property of any of Constituent Corporations shall be preserved unimpaired. (b) The assets and liabilities of the merged Constituent Corporation shall be taken up on the books of the Surviving Corporation in the amount at which they shall at that time be carried on the books of each of the merged Constituent Corporations. -16- 7. Right to Amend Certificate of Incorporation. The Surviving Corporation shall have, and reserves hereby, the right to amend, alter, change or repeal its amended Certificate of Incorporation in the manner now or hereafter prescribed by the Statute; and all rights or powers conferred herein and in such amended Certificate of Incorporation on shareholders, directors and officers are subject to this reservation. 8. Submission to Shareholders. This Plan and Agreement of Merger shall be submitted to the shareholders of each of the Constituent Corporations hereto for approval, at meetings to be held on or before the filing hereof. or otherwise approved by the unanimous written consent of all shareholders of each such respective Constituent Corporation in the manner provided by the applicable laws of the States of Delaware, Pennsylvania, New Jersey and Nevada respectively. Upon such required approval, the proper officers of each Constituent Corporation shall, and hereby are authorized and directed to, perform all such further acts and execute and deliver to the proper authorities for filing, all documents as the same may be necessary or proper to render effective the merger contemplated by this Plan and Agreement. 9. Prohibited Actions. From and after the date hereof, and prior to the effective date of the merger, none of the Constituent Corporations will engage in any activity or transaction other than in the ordinary course of business without first obtaining the approval of the others. None of the -17- Constituent Corporations will declare or pay any dividend on its stock of any class prior to the effective date of this merger. 10. Expenses of Merger. The Surviving Corporation shall pay all expenses of carrying this Plan and Agreement into effect and of accomplishing the merger, not paid by the merged Constituent Corporations, prior to the effective date of the merger. 11. Delivery of Deed and Instruments. From time to time, as and when requested by the Surviving Corporation or by its successors or assigns, each of the Constituent Corporations shall execute and deliver, or cause to be executed and delivered, all deeds and other instruments and shall take, or cause to be taken, all such other and further actions as the Surviving Corporation may deem necessary and desirable in order more fully to vest in and confirm to the Surviving Corporation title to and possession or all the property, rights, privileges, powers and franchises referred to in Paragraph 1 hereof, and otherwise to carry out the intent and purposes of this Plan and Agreement of Merger. For the convenience of the parties, and to facilitate the filing and recording of this Plan and Agreement of Merger, any number of counterparts hereof maybe executed and each such executed counterpart shall be deemed to be original instrument. 12. Service of Process. The Secretaries of State of the States of Pennsylvania, New Jersey and Nevada are hereby designated as the agents for the serviced of process upon the Surviving Corporation in any proceeding for the enforcement of -18- any obligation of any Constituent Corporation formerly incorporated in their respective states. 13. Abandonment of Merger. Anything herein or elsewhere to the contrary notwithstanding, this Plan and Agreement of Merger may be terminated and abandoned before it becomes effective: (a) By mutual consent of the Boards of Directors of all Constituent Corporations; (b) By the Board of Directors of any of the Constituent Corporations if any material litigation shall be pending or threatened against or affecting any of the Constituent Corporations, or any of their respective assets, or the merger; which litigation, in the judgment of such Board, renders it inadvisable to proceed with the merger. 12. Effective Date of Merger. Notwithstanding the date upon which this Agreement and Plan of Merger and/or any Certificate or other document required in connection therewith, shall be filed and/or recorded and/or certified by the Secretary of State of Delaware, Pennsylvania, New Jersey or Nevada, or recorded in any other office in which the same shall be required, this Plan and Agreement of Merger shall be effective as of the close of business on December 31, 1980, for accounting purposes only. IN WITNESS WHEREOF, each of the Constituent Corporations has caused this Plan and Agreement of Merger to be executed by its -19- respective duly authorized officers and its Corporate Seal affixed, the day and year first above written. A-PRN, Inc. By: /s/ Lee F. Weiler ------------------------------------------ Lee F. Weiler, Vice President Attest: /s/ Eugene M. Schloss Jr. ------------------------------------------ Eugene M. Schloss Jr., Secretary HCI, INC. By: /s/ Lionel H. Felzer ------------------------------------------- Lionel H. Felzer, President Attest: /s/ Eugene M. Schloss Jr. ------------------------------------------ Eugene M. Schloss Jr., Secretary HOSQUIP Leasing, Inc. By: /s/ Lionel H. Felzer ------------------------------------------ Lionel H. Felzer, President Attest: /s/ Eugene M. Schloss Jr. ----------------------------------------- Eugene M. Schloss Jr., Secretary Medical Management Group, Inc. By: /s/ Lionel H. Felzer ----------------------------------------- Lionel H. Felzer, Vice President Attest: /s/ Eugene M. Schloss Jr. ----------------------------------------- Eugene M. Schloss Jr. Assistant Secretary -20- Olney Hospital By: /s/ Bernard B. Rotko ------------------------------------------- Bernard B. Rotko, M.D., President Attest: /s/ Eugene M. Schloss Jr. ------------------------------------------- Eugene M. Schloss Jr., Secretary Oxford Hospital, Inc. By: /s/ Lionel H. Felzer ------------------------------------------- Lionel H. Felzer, President Attest: /s/ Eugene M. Schloss Jr. ------------------------------------------ Eugene M. Schloss Jr. Assistant Secretary Pan-Optics, Inc. By: /s/ Lionel H. Felzer ------------------------------------------- Lionel H. Felzer, Vice President Attest: /s/ Eugene M. Schloss Jr. ------------------------------------------- Eugene M. Schloss Jr. Assistant Secretary R. H. Realty Management, Inc. By: /s/ Lionel H. Felzer ------------------------------------------- Lionel H. Felzer, President Attest: /s/ Eugene M. Schloss Jr. ------------------------------------------- Eugene M. Schloss Jr., Secretary -21- Family Medical Care, Inc. By: /s/ Eugene M. Schloss Jr. -------------------------------------------- Eugene M. Schloss Jr., President Attest: /s/ Leonard Herscovici ------------------------------------------- Leonard Herscovici, Secretary Medifac Inc By: /s/ Peter I. Bentivegna ------------------------------------------- Peter I. Bentivegna Executive Vice President Attest: /s/ Eugene M. Schloss ------------------------------------------- Eugene M. Schloss, Esq., Secretary -22- I, EUGENE M. SCHLOSS, JR., Secretary, of HCI, INC., a corporation organized and existing under the laws of the State of Delaware, hereby certify, as such secretary and under the seal of the aid corporation, that the Plan and Agreement of Merger to which this certificate is attached, after having been first duly signed on behalf of said corporation by the President and Secretary of HCI, INC., a corporation of the State of Delaware, was duly submitted to the sole stockholder of said HCI, INC. for the purpose of considering and taking action upon said Plan and Agreement of Merger, that 1,000 shares of stock of said corporation were on said date issued and outstanding and that the holder of 1,000 shares voted by he execution of a written consent in favor of said Plan and Agreement of Merger and the holders of no shares voted against same, the said affirmative vote representing at least a majority of the total number of shares of the outstanding capital stock of said corporation, and that thereby the Plan and Agreement of Merger, was at said meeting duly adopted as the act of the stockholders of said HCI, INC., and the duly adopted agreement of the said corporation. WITNESS my hand and seal of said HCI, INC. on this 30th day of December 1980. Corporate Seal: /s/ EUGENE M. SCHLOSS, JR. ---------------------------------------- EUGENE M. SCHLOSS, JR. SECRETARY THE ABOVE PLAN AND AGREEMENT OF MERGER, having been executed by the President and Secretary of each corporate party hereto, and having been adopted separately by the stockholders of each corporate party thereto, in accordance with the provisions of, the General Corporation Law of the State of Delaware, and the fact having been certified on said Plan and Agreement of Merger by the Secretary of each corporate party thereto, the Vice President and Secretary of RCI, INC., a Delaware corporation, do now hereby execute the said Plan and Agreement of Merger under the corporate seals of the said corporation by the Authority of the directors and stockholders thereof, as the respective act, deed and agreement of each of said corporation, on the 30th day of December, 1980. HCI, INC. Corporate Seal: By: /s/ BERNARD J. KORMAN ---------------------------------------- BERNARD J. KORMAN, VICE PRESIDENT Attest: /s/ EUGENE M. SCHLOSS JR. ---------------------------------------- EUGENE M. SCHLOSS JR., SECRETARY CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF MEDIQ INCORPORATED MEDIQ Incorporated, a corporation organized and existing under and by virtue of t he General Corporation Law of the State of Delaware; does hereby certify: FIRST: That the Board of Directors of this Corporation, at a meeting duly convened pursuant to notice, at which a quorum was present and acting throughout, adopted a resolution proposing and declaring advisable the following amendment to the Corporation's certificate of Incorporation: RESOLVED, that the Certificate of Incorporation of this Corporation be amended by changing Article IV so that, as ended, that Article shall be read in its entirety as follows: am "IV. The total number of shares of all classes of stock which the Corporation shall have the authority to issue is 100,000 shares of preferred stock of a par value of $100.00 per share, and 25,000,000 shares of common stock of a par value of $1.00 per share. The preferred stock may be issued with the voting rights, designations, preferences, qualifications, privileges, limitations, options, conversion rights, and other special rights, if any, as shall be stated or expressed in the resolution or resolutions providing for the issuance of such stock, adopted by the Board of Directors. Authority is, hereby expressly granted to and vested in the Board of Directors to authorize the issuance of the shares of the preferred stock and to fix by resolution or resolutions the terms thereof, including without limitation, the following: a. The dividends payable and preferences in respect to the payment thereof; b. The terms and conditions on which, and the price or prices at which, such shares may be made subject to redemption; c. The rights of such shares upon the voluntary or involuntary dissolution of, or upon any other distribution of the assets of, the Corporation d. Whether or not such shares shall be made convertible into, or exchangeable for, shares of any other classes or of any series. of any other class or classes of stock of the Corporation, and if made so convertible or exchangeable, the conversion price or prices, or the rates of exchange, and the adjustments, if any, at which, and the other terms and conditions upon which, any such conversion or exchange may be made; and e. Whether or not such shares shall be entitled to other special rights in addition to those in the Articles provided for. No stockholder of the Corporation shall, by reason of his holding shares of any class, have any preemptive or preferential right to purchase or subscribe to any shares of any class of this Corporation, now or hereafter to be authorized, or -2- any notes, debentures, bonds or other securities convertible into, or carrying options or warrants to purchase, shares of any class, now or hereafter to be authorized, whether or not the issuance of any such shares, or such notes, debentures, bonds or other securities, would adversely affect the dividend or voting rights or such stockholder, other than such rights, if any, as the Board of Directors, its discretion, from time to time may grant, and at such price as the Board of Directors, in its discretion, may fix; and the Board of Directors may issue shares of any class of this Corporation, or any.notes, debentures, bonds or other securities convertible into, or carrying options or warrants to purchase, shares of any class, either in whole or in part, to the existing stockholders of any class. Except as otherwise specifically required by law or as Specifically provided in the resolutions of the Board of Directors authorizing the issuance of the preferred stock, the exclusive voting power of the Corporation shall be vested in the common stock of the Corporation. Each holder of common stock shall be entitled to one vote for each share held by such holder. The holders of the shares of the Corporation's common stock shall not be entitled to cumulative voting in voting for directors; i.e. they shall not be entitled in so voting, to multiply the number of votes to which they are entitled by the number of directors to be elected by them in the same election." SECOND: That the Stockholders of the Corporation, at a meeting duly convened pursuant to notice, at which a quorum -3- was present and acting throughout, have given consent to the amendment in accordance with the provisions of the General Corporation Law of the State of Delaware. THIRD: That the amendment was duly adopted in accordance with the applicable provisions of Section 242 of the General Corporation Law of the State of Delaware. FOURTH: That the capital of the Corporation will not be reduced, under or by reason of said amendment. IN WITNESS WHEREOF, MEDIQ Incorporated has caused this Certificate of Amendment to be signed by Bernard J. Korman, its President, and attested by Eugene M. Schloss, Jr., its Secretary, this 28th day of February, 1984. MEDIQ Incorporated By: /s/ Bernard J. Korman --------------------------------------- Bernard J. Korman, President Attest: /s/ Eugene M. Schloss Jr. --------------------------------------- Eugene M. Schloss Jr., Secretary -4- State of Delaware Office of the Secretary of State --------------------------------- I, WILLIAM T. QUILLEN, 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 INCORPORATED" FILED IN THIS OFFICE ON THE SEVENTEENTH DAY OF MARCH, A.D. 1993, AT 3 O'CLOCK P.M. A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO NEW CASTLE COUNTY RECORDER OF DEEDS FOR RECORDINGS. * * * * * * * * * * /s/ William T. Quillen -------------------------------------- William T. Quillen, Secretary of State AUTHENTICATION: DATE: 03/18/1993 CERTIFICATE OF AMENDMENT TO THE CERTIFICATE OF INCORPORATION OF MEDIQ INCORPORATED The undersigned, being the Senior Vice President Chief Financial officer of MEDIQ incorporated, 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 at the annual meeting of stockholders duly called and held on March 17, 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 20,000,000 shares of Preferred Stock of a par value of $.50 per share and 40,000,000 shares of Common Stock of a par value of $1.00 per share. IN WITNESS WHEREOF, MEDIQ Incorporated has caused its corporate seal to be hereunto affixed and this Certificate to be signed by it Senior Vice President Chief Financial Officer, Michael F. Sandler, and attested by its Secretary, Eugene M. Schloss, Jr., this 17th day of March, 1993. (Corporate Seal] MEDIQ INCORPORATED By: /s/ Michael F. Sandler ---------------------------------------- Michael F. Sandler Senior Vice President - Chief Financial Officer Attest: /s/ Eugene M. Schloss Jr. ---------------------------------------- Eugene M. Schloss Jr., Secretary STATE OF DELAWARE OFFICE OF SECRETARY OF STATE ---------------------------- I, MICHAEL HARKINS, 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 INCORPORATED FILED IN THIS OFFICE ON THE TWENTY-SEVENTH DAY OF FEBRUARY, A.D. 1987. AT 3:30 O'CLOCK P.M. * * * * * * * * * * /s/ Michael Harkins ----------------------------------- Michael Harkins, Secretary of State AUTHENTICATION: DATE: 03/05/1987 CERTIFICATE OF AMENDMENT TO CERTIFICATE OF INCORPORATION OF MEDIQ Incorporated The undersigned, being vice President of MEDIQ Incorporated (the "Corporation"), 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 at the annual meeting of stockholders duly called and held on February 27, 1987: RESOLVED, that the Corporation amend its Certificate of Incorporation as permitted by Section 102 (b) (7) of the General Corporation Law of the State of Delaware, by adding a new Article X thereto, as follows: "X. A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation 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 an improper personal benefit. If the Delaware General Corporation Law is hereafter amended to authorize the further elimination or limitation of the liability of a director, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the amended Delaware General Corporation Law. Any repeal or modification of the foregoing paragraph by the stockholders of the Corporation shall be prospective only, and shall not adversely affect any elimination or limitation of the personal liability of a director of the corporation existing at the time of such repeal or modification." IN WITNESS WHEREOF, MEDIQ Incorporated has caused its corporate seal to be hereunto affixed and this certificate to be signed by its Vice President, Ian J. Berg and attested by its Assistant Secretary, Jordan W. Felzer this 27th day of February, 1987. MEDIQ Incorporated By: /s/ Ian J. Berg -------------------------------------- Ian J. Berg, Vice President Attest: /s/ Jordan W. Felzer ---------------------- Jordan W. Felzer Assistant Secretary Sworn to and subscribed before me this 27th day of February, 1987. /s/ Jacqueline L. Swann - ------------------------------ (Notary Public) -2- STATE OF DELAWARE OFFICE OF SECRETARY OF STATE ---------------------------- I, MICHAEL HARKINS, SECRETARY OF STATE OF THE STATE OF DELAWARE DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF STOCK DESIGNATION OF MEDIQ INCORPORATED FILED IN THIS OFFICE ON THE TWENTY-FIRST DAY OF MAY, A.D. 1986, AT 9 O'CLOCK A.M. * * * * * * * * * * /s/ Michael Harkins ----------------------------------- Michael Harkins, Secretary of State AUTHENTICATION: DATE: -3- CERTIFICATE OF DESIGNATION OF MEDIQ Incorporated UNDER SECTION 151 OF THE DELAWARE GENERAL CORPORATION LAW, MEDIQ Incorporated, a Delaware Corporation (the "Corporation"), certifies as follows: FIRST: Under the authority contained in Article IV of the Certificate of Incorporation of the Corporation, the Board of Directors of the Corporation has designated 100,000 of the authorized but unissued shares of Preferred Stock of the Corporation, par value $100 per share, as shares of "Series A Preferred Stock." SECOND: The following resolution was duly adopted by the Board of Directors, and such resolution has not been modified and is in full force and effect on the date hereof: RESOLVED, that the Board of Directors hereby designates, from the authorized but unissued shares of Preferred Stock of the Corporation, par value $100 per share (the "Preferred Stock"), a series of Preferred Stock to consist of 100,000 shares, and hereby fixes the voting powers, designations, preferences, and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, of the shares of such series, in addition to those set forth in the Certificate of Incorporation as follows: (a) Designation. The designation of the series of Preferred Stock created by this resolution shall be "Series A Preferred Stock" and the number of shares constituting the Series A Preferred Stock shall be 100,000 shares. The number of authorized shares of the Series A Preferred Stock may be increased or reduced by further resolution duly adopted by the Board of Directors and by the filing of a certificate pursuant to the provisions of the General Corporation Law of the State of Delaware stating that such increase or reduction has been so authorized. (b) Dividends. (1) The annual rate of cash dividends on each share of the Series A Preferred Stock shall be equal to one hundred twenty times the then current rate of cash dividends payable on each share of Common Stock of the Corporation, par value $1 per share (the "Common Stock"), including any extraordinary dividends or distributions, whether payable in cash or other property, except a dividend payable solely in shares of any class of capital stock of the Corporation. Notwithstanding the foregoing, however, at such time as the shareholders of the Corporation shall approve an amendment of the Corporation's Certificate of Incorporation to increase the authorized Preferred Stock to not less than 20,000,000 shares and such amendment shall have been filed in Delaware in accordance with the Delaware General Corporation Law (the "Effective Date"), the Board of Directors hereby authorizes a 200-for-1 stock split of the Series A Preferred Stock, resulting in the designation (under Paragraph (a)) hereby of 20,000,000 shares of authorized -2- Series A Preferred Stock (the "Preferred Stock Split"), and as of the Effective Date the above annual rate of cash dividends on each share of Series A Preferred Stock shall be equal to 60% of the then current rate of cash dividends payable on each share of Common Stock. In calculating the amount of any dividend payable on the Series A Preferred Stock, such dividend shall be rounded to the closest one-hundredth of one cent ($.0001). (2) Dividends of shares of Series A Preferred Stock may be paid to holders of Series A Preferred Stock, if a dividend of shares of Common Stock at the same rate per share is paid simultaneously to holders of Common Stock, and dividends of Common Stock may be paid to holders of Common Stock, if a dividend of shares of Series A Preferred Stock at the same rate per share is paid simultaneously to holders of Series A Preferred Stock. Dividends shall be payable, where, as and if declared by the Board of Directors, provided, however, that concurrently with the declaration of any dividend on the Common Stock, the Corporation shall declare the requisite dividend on the Series A Preferred Stock. Each such dividend shall be paid to the holders of record of shares of the Series A Preferred Stock as they appear on the stock books of the Corporation on such record date, not more than 60 or less than 10 days preceding the payment date thereof, as shall be fixed by the Board of Directors or a duly authorized Committee thereof. -3- (3) Notwithstanding the foregoing provisions of this Paragraph (b), dividends on the Series A Preferred Stock may not be paid if (i) the Corporation is insolvent or would be rendered insolvent thereby or (ii) such payment would impair the Corporation's capital. (c) Conversion into Common Stock. (1) At such time as the shareholders of the Corporation shall approve an amendment of the Corporation's Certificate of Incorporation to increase the authorized common stock Of the Corporation to not less than 50,000,000 shares of common stock (the "Common Stock Increase"), and such amendment shall have been filed in Delaware in accordance with the Delaware General Corporation law, the shares of Series A Preferred Stock (after giving effect to the Preferred Stock Split) shall thereafter be convertible, at the option of the holder thereof, at any time into fully paid and nonassessable shares of Common Stock of the Corporation at an initial rate (the "conversion rate"), subject to adjustment as hereinafter provided, of one share of Common Stock for each share of Series A Preferred Stock. If the shareholders of the Corporation shall not have approved the Common Stock Increase, then the shares of Series A Preferred Stock shall not be convertible into shares of common stock as set forth above and all the provisions in this Paragraph (c) shall be null and void and shall be of no further force or effect. Any holder who converts the shares of Series A Preferred Stock after the record date for any dividend payment on -4- shares of Series A Preferred Stock but prior to such dividend payment date shall nonetheless be entitled to receive any such dividend. (2) In order to convert shares of Series A Preferred Stock into Common Stock, the holder thereof shall surrender the certificate or certificates for such shares of Series A Preferred Stock, duly endorsed to the Corporation or in blank, at the office of the Transfer Agent for Series A Preferred Stock (or at such other place as may be designated by the Corporation), shall give written notice to the Corporation at said office that such holder elects to convert said shares of Series A Preferred Stock, and shall state in writing therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. As soon as practicable thereafter, the Corporation shall issue or deliver at said office to the person for whose account such shares of Series A Preferred Stock were so surrendered, or to the nominee or nominees of such person, certificates for the number of full shares of Common Stock to be issued as aforesaid, together with a cash adjustment in respect of any fraction of a share as hereinafter provided if not convertible into a number of whole shares. Subject to the following provisions of this subparagraph (c)(2), such conversion shall be deemed to have been made as of the date of such surrender of certificates for the shares of Series A Preferred Stock to be converted; and the person or persons entitled to receive Common Stock issuable upon the conversion of such shares -5- of Series A Preferred Stock shall be treated for all purposes as the record holder or holders of such Common Stock on such date. The Corporation shall not be required to convert any shares of Series A Preferred Stock, and no surrender of shares of Series A Preferred Stock shall be effective for that purpose, while the stock transfer books of the Corporation are closed for any purpose, but the surrender of shares of Series A Preferred Stock for conversion during any period while such books are so closed shall become effective for conversion immediately upon the reopening of such books, but at the conversion rate in effect at the date of such surrender. (3) The number of shares of Common Stock into which the shares of Series A Preferred Stock shall be convertible shall be subject to adjustment from time to time as detailed below; provided, however, that if an adjustment in the shares of Series A Preferred Stock is required and made pursuant to Paragraph (g) hereof, no adjustment under this Paragraph (c)(3) shall be made on account of the transaction that required the aforementioned adjustment under Paragraph (g): (i) In case the Corporation shall (A) subdivide its outstanding shares of Common Stock, (B) combine its outstanding shares of Common Stock into a smaller number of shares or (C) issue by reclassification of its shares of Common Stock any shares of the capital stock of the Corporation, then the conversion rate in effect immediately prior thereto -6- shall be adjusted as provided below so that the holder of any share of Series A Preferred Stock thereafter surrendered for conversion shall be entitled to receive the number of shares of the capital stock of the Corporation which he would have owned or have been entitled to receive after the happening of any of the events described above, had such share of Series A Preferred Stock been converted on or immediately prior to the effective date of such subdivision, combination or reclassification, as the case may be. An adjustment made pursuant to this clause (i) shall become effective at the opening of business on the business day next following the effective date of a subdivision, combination or reclassification. (ii) In case the Corporation shall issue rights or warrants (excluding the right to convert the Series A Preferred Stock into Common Stock as provided herein) to all holders of its Common Stock entitling them (for a period expiring within 45 days after the record date mentioned below) to purchase shares of Common Stock at a price per share less than the current market price per share (as defined in clause (v) below) of Common Stock at the record date mentioned below, the number of shares of Common Stock into which each share of Series A Preferred Stock shall thereafter be convertible shall be determined by multiplying the -7- number of shares of Common Stock into which such share of Series A Preferred Stock was theretofore convertible by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding on the record date for the issuance of such rights or warrants plus the number of additional shares offered for subscription or purchase, and the denominator of which shall be the number of shares of Common Stock outstanding on the record date for the issuance of such rights or warrants plus the number of shares which the aggregate offering price of the total number of shares so offered would purchase at such current market price. Such adjustment shall be made when ever such rights or warrants are issued, and shall become effective at the opening of business on the business day next following the record date for the determination of the shareholders entitled to receive such rights or warrants. (iii) In case the Corporation shall distribute to all holders of its Common Stock evidences of its indebtedness or assets (excluding cash dividends to the extent payable under applicable state law) or rights to subscribe applicable to its Common Stock (excluding those referred to in clause (ii) above), then in, each such case the number of shares of Common Stock into which each share of Series A Preferred Stock -8- shall thereafter be convertible shall be determined by multiplying the number of shares of Common Stock into which such share of Series A Preferred Stock was theretofore convertible by a fraction, the numerator of which shall be the current market price per share (as defined in clause (v) below) of Common Stock on the date of such distribution, and the denominator of which shall be such current market price per share of the Common Stock less the then fair market value (as determined by the Board, whose determination shall be conclusive and described in a statement filed with the Transfer Agent) of the portion of the assets or evidences of indebtedness so distributed or of such subscription rights applicable to one share of the Common Stock. Such adjustment shall be made whenever any such distribution is made, and shall be come effective at the opening of business on the business day next following the record date for the determination of stockholders entitled to receive such distribution. (iv) The corporation may make such adjustments in the conversion rate, in addition to those required by the foregoing provisions, as it considers to be advisable in order that any event treated for federal income tax purposes as a dividend -9- of stock or stock rights shall not be taxable to the recipients. (v) For the purpose of any computation under clauses (ii) and (iii) above and clause (x) below, the current market price per share of Common Stock at any date shall be deemed to be the average of the daily closing prices for the 30 consecutive business days commencing 45 business days before the day in question. The closing price for each day shall be the last reported sales price regular way or, in case no such reported sale takes place on such day, the average of the reported closing bid and asked prices regular way, in either case on the American Exchange, or, if the Common Stock is not then listed or admitted to trading on such exchange, on the principal national securities exchange on which the Common Stock is then listed or admitted to trading, or if not then listed or admitted to trading on any national securities exchange, the average of the closing bid and asked prices as furnished by any New York Stock Exchange firm selected from time to time by the Corporation for the purpose. (vi) All calculations under this subparagraph (c) shall be made to the nearest one- hundredth of a share. (vii) Whenever the number of shares of Common Stock deliverable upon the conversion of each -10- share of Series A Preferred Stock shall be adjusted pursuant to the provisions of this subparagraph (3), the Corporation shall promptly (i) file with the Transfer Agent a certificate, signed by the Chairman of the Board or the President or a Vice President of the Corporation, and (ii) mail to all record holders of shares of Series A Preferred Stock, at their last addresses as they shall appear upon the stock registry books of the Corporation, a notice setting forth the increased or decreased number of shares of Common Stock thereafter deliverable upon the conversion of each share of Series A Preferred Stock. The certificate filed with the Transfer Agent shall show in reasonable detail the method of calculation and the facts requiring such adjustment and upon which such calculation is based. (viii) For the purposes of this subparagraph (3), the term "Common Stock" shall mean (a) the class of stock designated as the Common Stock of the Corporation at the date of initial issuance of Series A Preferred Stock, or (b) any other class of stock resulting from successive changes or reclassifications of such Common Stock consisting solely of changes in par value, or from par value to no par value, or from no par value to par value. In the event that at any time the holder co of any share of Series A Preferred -11- Stock surrendered for conversion shall become entitled to receive any shares of the Corporation other than shares of its Common Stock, thereafter the number of such other shares so receivable upon conversion of any share of Series A Preferred Stock shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in clauses (i) through (v), inclusive. (ix) After the shares of Series A Preferred Stock become convertible, at all times a sufficient number of shares of the authorized but unissued shares of the class of stock to be issued upon conversion of the Series A Preferred Stock shall be reserved by the Corporation for the purpose of converting all shares of Series A Preferred Stock at the time outstanding. (x) The Corporation shall not be required, in connection with any conversion of Series A Preferred Stock, to issue a fraction of a share of its Common Stock nor to deliver any stock certificate representing a fraction thereof, but in lieu thereof the Corporation shall make a cash payment equal to such fraction multiplied by the market price of the Common Stock on the date of conversion. (xi) In case at any time the Corporation shall propose: -12- (A) to pay any dividend payable in shares upon its Common Stock or make any distribution (other than cash dividends) to the holders of its Common Stock; or (B) to offer for subscription to the holders of its Common Stock any additional shares of any class or any other rights; or (C) any capital reorganization or reclassification of its shares (except a change in par value), or the consolidation or merger of the Corporation with another corporation; or (D) the voluntary dissolution, liquidation or winding up of the Corporation; then, and in any one or more of said cases, the Corporation shall cause at least fifteen days' prior notice of the date on which (a) the books of the Corporation shall close, or a record shall be taken for such stock dividend, distribution or subscription rights or (b) such capital reorganization, reclassification, consolidation, merger, dissolution, liquidation or winding up shall take place, as the case may be, to be mailed to the Transfer Agents for the Series A Preferred Stock and for the Common Stock and to the holders of record of the Series A Preferred Stock. -13- (xii) In case the Corporation or any successor company shall consolidate or merge with, or sell all or substantially all of its assets to, any other company, the right which the holders of Series A Preferred Stock have to receive additional shares of Common Stock on conversion of their Series A Preferred Stock on account of any adjustment made pursuant to the provisions of this subparagraph (3) shall continue and be preserved in respect of any stock or other securities of the successor company into which the Series A Preferred Stock shall thereafter become convertible. (xiii) Irrespective of any adjustments in the initial conversion rate, certificates representing shares of the Series A Preferred Stock theretofore or thereafter issued which express the initial conversion rate shall nevertheless be valid for all purposes. (d) Voting Rights. (1) Except as otherwise set forth in this resolution and except in statutory proceedings in which, and then only to the extent to which, their vote is at the time required by law, on matters subject to a vote by holders of the Common Stock, the holders of Series A Preferred Stock shall be entitled to 2,000 votes per share; provided, however, that upon the occurrence of the Preferred Stock Split, the holders of Series A Preferred Stock shall thereafter be entitled to 10 votes for each share of Series A Preferred Stock held. On all such -14- matters the holders of shares of Series A Preferred Stock and shares of Common Stock shall vote together and not as separate classes, except as otherwise required by law and except as provided in Paragraph (d)(3) below. (2) Unless the vote or consent of the holders of a greater number of shares shall then be required by law, and except as may otherwise be provided with respect to a series of Preferred Stock in the Certificate of Designation for that series, the consent of holders of at least 66 2/3% of the shares of the Series A Preferred Stock at the time outstanding, voting as a single class, given in person or by proxy, by vote at a meeting called for that purpose (or consented to in writing by such holders), shall be necessary for authorizing, effecting or validating the amendment, alteration or repeal of any provisions of the Certificate of Incorporation or of any certificate amendatory thereof or supplemental thereto (including any Certificate of Designation, preference and rights or any similar document relating to any series of Preferred Stock) which would adversely affect the preferences, rights or powers of the Series A Preferred Stock. (3) Notwithstanding anything to the contrary herein contained, the rights of the holders of Series A Preferred Stock to vote in the election of Directors shall be limit ed to the extent that the holders of Series A Preferred Stock shall not have the right to elect any person who is not an officer or employee of the Corporation ("Outside Director'), and each such -15- Outside Director will be elected by the Common shareholders voting as a separate class; provided, however, that this Paragraph (d)(3) shall become null and void and shall be of no further force or effect (i) if the number of outstanding shares of Series A Preferred Stock should decrease below an amount equal to 15% of the aggregate number of the then outstanding shares of Series A Preferred Stock and Common Stock, (ii) the Company's securities are no longer listed and traded on the American Stock Exchange, or (iii) the American Stock Exchange shall change its policies and procedures with respect to the conditions under which the Exchange will approve the listing of securities that are entitled to voting rights in excess of one vote per share. (4) Corporate Notices and Report. The Corporation shall transmit to the holders of Series A Preferred Stock (a) all quarterly, annual and other reports sent by the Corporation to its shareholders generally and (b) all notices and reports required by law or the Corporation's Certificate of Incorporation to be furnished by the Corporation to holders of Common Stock. (e) Liquidation Rights. (1) Upon the dissolution, liquidation or winding up of the Corporation, the holders of the shares Of the Series A Preferred Stock shall be entitled to receive from assets of the Corporation available for distribution to its stockholders, before any payment or distribution shall be made on the Common Stock or any other class of stock ranking junior to the Series A -16- Preferred Stock upon liquidation, an amount equal to $100 per share (as appropriately adjusted for stock splits and recapitalizations); provided, however, that upon the occurrence of the Preferred Stock Split, the above liquidation amount shall thereafter be equal to $.SO per share (as appropriately adjusted for any future stock splits and recapitalizations). (2) None of the sale, transfer or lease of all or substantially all of the property or business of the Corporation, the merger or consolidation of the Corporation into or with any other corporation or the merger or consolidation of any other corporation into or with the Corporation or any dissolution, liquidation, winding up or reorganization of the Corporation, shall be deemed to be a dissolution, liquidation or winding up, voluntary or involuntary, for the purposes of this Paragraph (e), provided that in each case effective provision is made in the Certificate of Incorporation of the resulting and surviving corporation or otherwise for the protection of the rights of the holders of Series A Preferred Stock. (3) If after the payment to the holders of the shares of the Series A Preferred Stock of the full preferential amounts provided for in this Paragraph (e), assets or surplus funds remaining this Corporation upon any dissolution, liquidation or winding up of the Corporation then the holders of the Series A Preferred Stock shall be entitled to share in all such remaining assets or surplus funds in the same manner as if -17- all shares of Series A Preferred Stock had been converted into Common Stock as provided herein. (4) In the event the assets of the Corporation available for distribution to the holders of shares of the Series A Preferred Stock upon any dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, shall be insufficient to pay in full all amounts to which such holders are entitled pursuant to Paragraph (e)(1), no such distribution shall be made on account of any shares of any other class or series of preferred stock ranking on a parity with the shares of the Series A Preferred Stock upon such dissolution, liquidation or winding up unless proportionate distributive amounts shall be paid on account of the shares of the Series A Preferred Stock, ratably, in proportion to the full distributable amounts for which holders of all such parity shares are respectively entitled upon such dissolution, liquidation or winding up. (f) Ranking. For purposes of this resolution, any stock of any class or classes of the Corporation shall be deemed to rank: (1) Prior to shares of the Series A Preferred Stock, either as to dividends or upon liquidation, if the holders of such class or classes shall be entitled to the receipt of dividends, or of amounts distributable upon dissolution, liquidation or winding up of the Corporation, as the case may be, in preference or priority to the holders of shares of the Series A Preferred Stock. -18- (2) On a parity with shares of the Series A Preferred Stock, either as to dividends or upon liquidation, whether or not the dividend rates, dividend payment dates or redemption or liquidation prices per share be different from those of the Series A Preferred Stock, if the holders of such stock shall be entitled to the receipt of dividends, or of amounts distributable upon dissolution, liquidation or winding up of the Corporation, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority, one over the other, as between the holders of such stock and the holders of the Series A Preferred Stock; and (3) Junior to shares of the Series A Preferred Stock, either as to dividends or upon liquidation, if the holders of shares of the Series A Preferred Stock shall be entitled to receipt of dividends, or of amounts distributable upon dissolution, liquidation or winding up of the Corporation, as the case may be, in preference or priority to the holders of shares of such class or classes. (g) Adjustment. (1) The number of shares of Series A Preferred Stock outstanding shall be subject to adjustment as follows: (A) If and whenever the Corporation shall declare any dividend or distribution on the Common Stock payable in shares of Common Stock, the Corporation shall, concurrently with the declaration of such dividend or distribution on the -19- Common Stock, declare an equivalent dividend or distribution, as the case may be, on the shares of Series A Preferred Stock. The terms and provisions of any such dividend or distribution declared on such shares shall be identical to the terms and provisions of any such dividend or distribution declared on the Common Stock, except that the dividend or distribution declared on the shares of Series A Preferred Stock shall be payable in shares of Series A Preferred Stock. Without limiting the generality of the foregoing, whenever any such dividend or distribution payable in shares of Common Stock and Series A Preferred Stock are declared on the Common Stock and Series A Preferred Stock, respectively, (i) the number of shares payable in respect of the dividend or distribution on the Common Stock and the dividend or distribution on the shares of Series A Preferred Stock shall be the same in respect of each outstanding share of Common Stock and Series A Preferred Stock, and (ii) the record and payment dates, respectively, in respect of the dividend or distribution on the Common Stock and the dividend or distribution on Series A Preferred Stock shall be the same. If and whenever the Corporation shall declare any dividend or distribution on the Common Stock payable in shares of the capital stock of the Corporation (excluding those referred to in the preceding paragraph), the Corporation shall, concurrently with the declaration of such dividend or distribution, declare an identical dividend or distribution, as the case may be, on the shares of Series A Preferred Stock. -20- (B) If and whenever the Corporation shall grant rights or warrants to the holders of Common Stock, as such, entitling them (for a period of not more than 45 days after the record date fixed for the issuance of such rights or warrants) to subscribe for or to purchase (i) shares of Common Stock (or securities convertible into shares of Common Stock) or (ii) shares of any other capital stock of the Corporation (or securities convertible into any capital stock of the Corporation), the Corporation shall, concurrently with the granting of such rights or warrants to the holders of Common Stock, grant to the holders of the shares of Series A Preferred Stock equivalent rights or warrants. The terms and provisions of any such rights or warrants granted to the holders of the shares of Series A Preferred Stock shall be identical to the terms and provisions of any such rights or warrants granted to the holders of Common Stock, except that the rights or warrants granted to the holders of the shares of Series A Preferred Stock, as a result of rights or warrants granted holders of Common Stock to subscribe for or to purchase shares of Common Stock (or securities convertible into Common Stock), shall be rights or warrants to subscribe for or to purchase shares of Series A Preferred Stock (or securities convertible into shares of Series A Preferred Stock). Without limiting the generality of the foregoing, whenever any such rights or warrants to subscribe for or to purchase shares of Common Stock (or securities convertible into shares of Common Stock) and Series A Preferred Stock (or -21- securities convertible into shares of Series A Preferred Stock) are granted to the holders of Common Stock and Series A Preferred Stock, respectively, (i) the number of such rights or warrants granted in respect of each outstanding share of Common Stock and Series A Preferred Stock shall be identical, (ii) the number of shares of Common Stock, Series A Preferred Stock and shares of any other capital stock purchasable upon exercise of each such right or warrant granted to the respective holders of Common Stock and Series A Preferred Stock shall be identical, and (iii) the ratio of the price per share of Common Stock to the price per share of Series A Preferred Stock, each purchasable upon exercise of such rights or warrants granted to the respective holders of Common Stock and Series A Preferred Stock, shall be identical to the ratio of the Current Market Price (as hereinafter defined) of a share of Common Stock to the Current Market Price of a share of Series A Preferred Stock. If and whenever the Corporation shall grant rights to the holders of Series A Preferred Stock, as such, entitling them (for a period of not more than 45 days after the record date fixed for the issuance of such rights) to subscribe for or to purchase at a price per share less than the Current Market Price per share (as defined in paragraph (g)(6) hereof) (i) shares of Series A Preferred Stock (or securities convertible into shares of Series A Preferred Stock) or (ii) shares of any other capital stock of the Corporation (or securities convertible into any capital stock of the Corporation), the Corporation shall, -22- concurrently with the granting of such rights to the holders of Series A Preferred Stock, grant to the holders of the shares of Common Stock equivalent rights. The terms and provisions of any such rights granted to the holders of the shares of Common Stock shall be identical to the terms and provisions of any such rights granted to the holders of Series A Preferred Stock, except that the rights granted to the holders of the shares of Common Stock, as a result of rights granted holders of Series A Preferred Stock to subscribe for or to purchase shares of Series A Preferred Stock (or securities convertible into shares of Series A Preferred Stock), shall be rights to subscribe for or to purchase shares of Common Stock (or securities convertible into shares of Common Stock). Without limiting the generality of the foregoing, whenever any such rights to subscribe for or to purchase shares of Series A Preferred Stock (or securities convertible into shares of Series A Preferred Stock) and Common Stock (or securities convertible into shares of Common Stock) are granted to the holders of Series A Preferred Stock and Common Stock, respectively, (i) the number of such rights granted in respect of each outstanding share of Common Stock and Series A Preferred Stock shall be identical, (ii) the number of shares of Common Stock, Series A Preferred Stock and shares of any other capital stock purchasable upon exercise of each such right granted to the respective holders of Common Stock and Series A Preferred Stock shall be identical, and (iii) the ratio of the price per share of Common Stock to the price per share of Series A Preferred Stock, -23- each purchasable upon exercise of such rights granted to the respective holders of Common Stock and Series A Preferred Stock shall be identical to the ratio of the Current Market Price (as hereinafter defined) of a share of Common Stock to the Current Market Price of a share of Series A Preferred Stock. (C) The Corporation shall not split or subdivide or combine its outstanding shares of Common Stock unless, currently therewith, the Corporation shall make a proportionate split or subdivision or combination of the outstanding shares of Series A Preferred Stock. (2) In the event of an increase or decrease, as the case may be, pursuant to Paragraphs (g)(1)(A) and (C) hereof, in the number of shares of Series A Preferred Stock outstanding, the liquidation preference per share of Series A Preferred Stock shall be proportionately decreased or increased, as the case may be, so that the aggregate liquidation preference on all outstanding shares of Series A Preferred Stock shall be unchanged. (3) Irrespective of any of the adjustments in the number of shares of Series A Preferred Stock, stock certificates theretofore or thereafter issued may continue to express the number of shares as are stated in a similar stock certificate issuable initially or at some subsequent time and such number of shares of Series A Preferred Stock specified therein shall be deemed to have been so adjusted. Fractional shares resulting from any adjustment pursuant to this Paragraph (g) shall be -24- treated in the same manner as fractional shares resulting from the same adjustment to the Common Stock. (4) Shares of Series A Preferred Stock and Common Stock at any time owned by the Corporation shall not be deemed to be outstanding for purposes of any computation herein. (5) In the case of any event which requires that an adjustment to increase the number of shares of Series A Preferred Stock be made effective as of a record date, the Corporation may elect to defer issuing the additional shares of Series A Preferred Stock until the occurrence of such event; provided, however, that the Corporation shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares upon the occurrence of the event requiring such adjustment. (6) For the purpose of any computation herein, the Current Market Prices per share of Common Stock, Series A Preferred Stock or any other capital stock (or securities convertible into any of such securities) on any date shall be the average of the highest reported bid and the lowest reported asked prices at the close of business as reported by the National Association of Securities Dealers Automated Quotation System, or if the Common Stock or.Series A Preferred Stock is listed on a national securities exchange, the average of the closing sale prices on the principal stock exchange on which the Common Stock or Series A Preferred Stock is listed, in each case for 30 consecutive trading days commencing 45 trading days before the -25- date in question. In the absence of one or more such quotations, the Board of Directors shall determine the current Market Price on the basis of such quotation or other valuation method as it, in its sole discretion, considers appropriate. (7) No adjustment shall be made because the Corporation issues, in exchange for cash, property or services, shares of Common Stock, or any securities convertible into or exchangeable for shares of Common Stock, or securities carrying the right to purchase shares of Common Stock or such convertible or exchangeable securities. Furthermore, no adjustment need be made under this Paragraph (g) for sale of shares of Common Stock pursuant to a Corporation plan providing for reinvestment of dividends or interest. (8) Whenever the number of shares of Series A Preferred Stock is adjusted, as herein provided, the Corporation shall promptly mail by first class, postage prepaid, to each holder notice of such adjustment or adjustments, setting forth the number of shares of Series A Preferred Stock after such adjustment, together with a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made. Such notice shall be conclusive evidence of the correctness of such adjustment. (9) The Corporation will pay any and all taxes that may be payable in respect of the issuance or delivery of additional shares of this Series upon adjustment pursuant hereto. The Corporation shall not, however, be required to pay any tax -26- which may be payable in respect of any transfer involving issue and delivery of Series A Preferred Stock in the name other than in which the outstanding shares of Series A Preferred Stock so adjusted were registered and no such issue and delivery shall be made unless and until the person requesting such issue has paid to the Corporation the amount of any such tax, or has established, to the satisfaction of the Corporation, that such tax has been paid. (h) Restrictions on Certain Action. So long as any shares of Series A Preferred Stock are outstanding, the Corporation shall not, without the consent, given in writing or by resolution adopted at a meeting duly called for the purpose by the holders of record, of the applicable percentage stated below of the holders of the shares of Series A Preferred Stock then outstanding, (1) Without the consent, given as aforesaid, of such holders of at least 66 2/3% of the outstanding shares of Series A Preferred Stock, (a) Authorize (or increase the authorized number of shares of) any class of stock ranking senior to the Series A Preferred Stock in any respect ('Prior Stock') or any class of stock ranking on a parity with the Series A Preferred Stock ("Parity Stock"); or (b) Make any changes in the preferences, qualifications, limitations, restrictions or special or relative -27- rights of the Series A Preferred Stock so as to affect the Series A Preferred Stock adversely; or (2) Without the consent, given as aforesaid, of such holders of at least a majority of the outstanding shares of Series A Preferred Stock, merge or consolidate with any other corporation, or sell or otherwise dispose of all or substantially all of its assets, unless (i) under the terms of such merger, consolidation or sale or other disposition of assets (A) the Series A Preferred Stock shall remain outstanding with no adverse changes in its preferences, qualifications, limitations, restrictions or special or relative rights or (B) each holder of Series A Preferred Stock shall receive, in exchange for such Series A Preferred Stock, securities of the surviving, resulting or acquiring entity which shall in the aggregate possess preferences, qualifications, limitations, restrictions or special or relative rights which are at least as favorable as those possessed by the Series A Preferred Stock immediately prior to the effective date of such merger, consolidation or sale or other disposition of assets, and adequate provision shall be made whereby such securities received in exchange for the Series A Preferred Stock shall thereafter be convertible into the number of shares of Common Stock (or into such shares of stock, securities or assets as may be issuable or payable with respect to, or in exchange for, the number of shares of common Stock or the other shares of stock, securities or assets, as the case may be) into which the Series A Preferred Stock would have been -28- convertible immediately prior to such merger, consolidation or sale or other disposition of assets, and (ii) immediately after such merger, consolidation or sale or other disposition of assets, there shall be no shares of Prior Stock or Parity Stock outstanding (except to the extent that any Prior Stock or Parity Stock shall have been issued in accordance with the provisions of this paragraph (h) prior thereto). (i) Reissuance of Shares. Shares of Series A Preferred Stock which have been purchased, or which have been converted into shares of stock of any other class or classes, shall have the status of authorized and unissued shares of Preferred Stock and may be reissued as part of a series of which they were originally a part or may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board or as part of any other series of Preferred Stock, all subject to the conditions or restrictions on issuance set forth in any resolution or resolutions adopted by the Board providing for the issue of any series of Preferred Stock and the filing of the appropriate Certificate of Designation in accordance with the Delaware General Corporation law. (j) No Other Rights. The shares of the Series A Preferred Stock shall not have any relative, participating, optional or other special rights and powers other than as set forth above in this Certificate of Designation and in the certificate of Incorporation of the Corporation. -29- (k) Amendment. The Board of Directors shall have the power to resolve any ambiguity or correct any error in this Certificate of Designation and its action in so doing, as evidenced by a Board resolution, shall be final and conclusive. IN WITNESS WHEREOF, MEDIQ Incorporated has caused its corporate seal to be hereunto affixed and this Certificate to be signed by its President, Bernard J. Korman, and attested by its Secretary, Eugene M. Schloss, Jr., this 20th day of May, 1986. MEDIQ Incorporated By: /s/ Bernard J. Korman --------------------------------- [Corporate Seal] ATTEST: ____________________________ -30- STATE OF DELAWARE OFFICE OF SECRETARY OF STATE ---------------------------- I, MICHAEL HARKINS, 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 INCORPORATED FILED IN THIS OFFICE ON THE FOURTEENTH DAY OF JULY, A.D. 1986, AT 3:30 O'CLOCK P.M. * * * * * * * * * * /s/ Michael Harkins ----------------------------------- Michael Harkins, Secretary of State AUTHENTICATION: DATE: CERTIFICATE OF AMENDMENT TO CERTIFICATE OF INCORPORATION OF MEDIQ Incorporated The undersigned, being the Senior Vice President Finance of MEDIQ Incorporated, certifies that the following amendment to the Certificate of Incorporation was duly considered and approved by the holders of a majority of the outstanding stock qualified to vote thereon at a special meeting duly called and held on July 14, 1986, in accordance with Section 242 of the Delaware General Corporation Law: RESOLVED, that the Certificate of Incorporation of the Company be amended by changing the first sentence of Article IV so that as amended the first sentence of such Article 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 200,000,000 shares of Preferred Stock of a par value of $.SO per share and 200,000,000 shares of Common Stock of a par value of $1.00 per share." IN WITNESS WHEREOF, MEDIQ Incorporated has caused its corporate seal to be hereunto affixed and this certificate to be signed by its Senior Vice President Finance, Lionel Felzer, and attested by its Secretary, Eugene M. Schloss, Jr., this 11th day of July, 1986. MEDIQ Incorporated By: /s/ Lionel H. Felzer --------------------------------------- Lionel H. Felzer Senior Vice President - Finance [CORPORATE SEAL] Attest: /s/ Eugene M. Schloss Jr. -------------------------- Eugene M. Schloss Jr. Secretary -2- OFFICE OF SECRETARY OF STATE ---------------------------- I, MICHAEL HARKINS, SECRETARY OF STATE OF THE STATE OF DELAWARE DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF STOCK DESIGNATION OF MEDIQ INCORPORATED FILED IN THIS OFFICE ON THE FOURTEENTH DAY OF JULY, A.D. 1986, AT 3:31 O'CLOCK P.M. * * * * * * * * * * /s/ Michael Harkins ----------------------------------- Michael Harkins, Secretary of State AUTHENTICATION: DATE: 07/15/1986 CERTIFICATE OF INCREASE TO CERTIFICATE OF DESIGNATION OF MEDIQ Incorporated The undersigned being the Senior Vice President Finance of MEDIQ Incorporated, certifies that the following increase to the Certificate of Designation of MEDIQ incorporated filed on May 21, 1986 was duly considered and approved by the Board of Directors of MEDIQ Incorporated, and such resolution has not been modified and is in full force and effect oh the date hereof, all in accordance with Section 151(g) of the Delaware General Corporation Law: RESOLVED, that,the Board of Directors hereby designates, effective upon approval by shareholders of an increase in the authorized shares of Preferred Stock to 200,000,000 shares and a reduction in the par value of such stock to $.50 per share, that the number of shares constituting the Series A Preferred Stock of the Company shall.be 20,000,000 shares. IN WITNESS WHEREOF, MEDIQ Incorporated has caused its corporate seal to be hereunto affixed and this increase to the Certificate of Designation to be signed by its Senior Vice President - Finance, Lionel Felzer, and attested by its Secretary, Eugene M. Schloss, Jr., this 11th day of July, 1986. MEDIQ Incorporated By: /s/ Lionel H. Felzer ---------------------------------- Lionel H. Felzer Senior Vice President - Finance [CORPORATE SEAL] Attest: /s/ Eugene M. Schloss Jr. ---------------------------- Eugene M. Schloss Jr. Secretary -2- STATE OF DELAWARE OFFICE OF SECRETARY OF STATE ---------------------------- I, GLENN C. KENTON, 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 INCORPORATED FILED IN THIS OFFICE ON THE TWELFTH DAY OF MARCH, A.D. 1984, AT 9 O'CLOCK A.M. * * * * * * * * * * /s/ Michael Harkins ----------------------------------- Michael Harkins, Secretary of State AUTHENTICATION: DATE: 03/27/1984 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF MEDIQ INCORPORATED MEDIQ Incorporated, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware; does hereby certify: FIRST: That the Board of Directors of this Corporation, at a meeting duly convened pursuant to notice, at which a quorum was present and acting throughout, adopted a resolution proposing and declaring advisable the following amendment to the Corporation's Certificate of Incorporation: RESOLVED, that the Certificate of incorporation of this Corporation be amended by changing Article IV so that, as amended, that Article shall be read in its entirety as follows: "IV. The total number of shares of all classes of stock which the Corporation shall have the authority to issue is 100,000 shares of preferred stock of a par value of $100.00 per share, and 25,000,000 shares of common stock of a par value of $1.00 per share. The preferred stock may be issued with the voting rights, designations, preferences, qualifications, privileges, limitations, options, conversion rights and other special rights, if any, as shall be stated or expressed in the resolution or resolutions providing for the issuance of such stock, adopted by the Board of Directors. Authority is hereby expressly granted to and vested in the Board of Directors to authorize the issuance of the shares of the preferred stock and to fix by resolution or resolutions the terms thereof, including without limitation, the following: a. The dividends Payable And preferences in respect to the payment thereof; b. The terms and conditions on which, and the price or prices at which, such shares may be made subject to redemption; c. The rights of such shares upon the voluntary or involuntary dissolution of, or upon any other distribution of the assets of, the Corporation; d. Whether or not such shares shall be made convertible into, or exchangeable for, shares of any other classes or of any series. of any other class or classes of stock of the Corporation, and if made so convertible or exchangeable, the conversion price or prices, or the rates of exchange, and the adjustments, if any, at which, and the other terms and conditions upon which, any such conversion or exchange may be made; and e. Whether or not such shares shall be entitled to other special rights in addition to those in the Articles provided for. No stockholder of the Corporation shall, by reason of his holding shares of any class, have any preemptive or preferential right to purchase or subscribe to any shares of any class of this Corporation, now or hereafter to be authorized, or -2- any notes, debentures, bonds or other securities convertible into, or carrying options or warrants to purchase, shares of any class, now or hereafter to be authorized, whether or not the issuance of any such shares, or such notes, debentures, bonds or other securities, would adversely affect the dividend or voting rights or such stockholder, other than such rights, if any, as the Board of Directors, in its discretion, from time to time may grant, and at such price as the Board of Directors, in its discretion, may fix; and the Board of Directors may issue shares of any class of this Corporation, or any notes, debentures, bonds or other securities convertible into, or carrying options or warrants to purchase, shares of any class, either in whole or in part, to the existing stockholders of any class. Except as otherwise specifically required by law or as specifically provided in the resolutions of the Board of Directors authorizing the issuance of the preferred stock, the exclusive voting power of the Corporation shall be vested in the common stock of the Corporation. Each holder of common stock shall be entitled to one vote for each share held by such holder. The holders of the shares of the Corporation's common stock shall not be entitled to cumulative voting in voting for directors; i.e. they shall not be entitled in so voting, to multiply the number of votes to which they are entitled by the number of directors to be elected by them in the same election. SECOND: That the Stockholders of the Corporation, at a meeting duly convened pursuant to notice, at which a quorum was -3- present and acting throughout, have given consent to the amendment in accordance with the provisions of the General Corporation Law of the State of Delaware. THIRD: That the amendment was duly adopted in accordance with the applicable provisions of Section 242 of the General Corporation Law of the State of Delaware. FOURTH: That the,capital of the Corporation will not be reduced, under or by reason of said amendment. IN WITNESS WHEREOF, MEDIQ Incorporated has caused this Certificate of Amendment to be signed by Bernard J. Korman, its President, and attested by Eugene M. Schloss, Jr., its Secretary, this 28th day of February, 1984. MEDIQ INCORPORATED By: /s/ Bernard J. Korman --------------------------------------- Bernard J. Korman, President Attest: /s/ Eugene M. Schloss Jr. -------------------------------------- Eugene M. Schloss Jr. Secretary -4- EX-3.2 6 BY-LAWS MEDIQ INCORPORATED RESTATED BY-LAWS (Including Amendments through November 6, 1995) ARTICLE I Section 1. The address of the registered office of the corporation in the State of Delaware is 901 Market Street in the City of Wilmington, County of New Castle. The registered office need not be identical with the principal office of the corporation and may be changed from time to time by the board of directors. Section 2. The corporation may have its principal office and other offices at such other places within and without the State of Delaware as the board of directors may from time to time determine or the business of the corporation requires. ARTICLE II MEETINGS OF STOCKHOLDERS Section 1. All meetings of the stockholders for the election of directors shall be held at the registered office of the corporation in the State of Delaware, at such place as may be fixed from time to time by the board of directors, or at such other place either within or without the State of Delaware as shall be designated from time to time by the board of directors and stated in the notice of the meeting. Meetings of stockholders for any other purpose may be held at such time and place, within or without the State of Delaware, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. Section 2. Annual meetings of stockholders shall be held on such date and at such time as shall be designated from time to time by the board of directors and stated in the notice of the meeting. At such meetings, they shall elect a board of directors, which election shall be by written ballot and transact such other business as may properly be brought before the meeting. Section 3. Written notice of the annual meeting, stating the place, date and hour of the meeting, shall be given to each stockholder entitled to vote at such meeting not less than ten (10) nor more than sixty (60) days before the date of the meeting. Section 4. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the certificate of incorporation, may be called by the Chairman or President and shall be called by the President or Secretary at the request in writing of a majority of the board of directors, or at the request in writing of stockholders owning -2- not less than twenty percent (20%) in amount of the entire capital stock of the corporation issued and outstanding and entitled to vote. Such request shall state the purpose or purposes of the proposed meeting. Section 5. Written notice of a special meeting, stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called, shall be given to each stockholder entitled to vote at such meeting, not less than ten (10) nor more than sixty (60) days before the date of the meeting. Section 6. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. Section 7. Subject to the provisions of any series of Preferred Stock at the time outstanding, the holders of record of shares of any class entitled to vote representing a majority of the total number of votes authorized to be cast by shares of all classes then issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum for all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the -3- stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, whether or not a quorum is present, without notice other than announcement at the meeting. 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 notified. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. 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 8. At each meeting of the stockholders, every holder of Common Stock entitled to vote thereat shall be entitled to one vote in person or by proxy for each share of common stock held by such stockholders and each holder of Preferred Stock having voting power shall be entitled to such vote as may be provided in the resolution of the board of directors providing for such shares. Except as may otherwise be provided for any series of Preferred Stock which may at the time be outstanding, neither fractional shares nor scrip fractional shares shall be entitled to any vote. When any share is held jointly by several persons, any one of them may vote at any meeting in person or by -4- proxy in respect of such share, but if more than one of them shall be present at such meeting in person or by proxy, and such joint owners or their proxies so present disagree as to any vote to be cast, such vote shall not be received in respect of such share. A proxy purporting to be executed by or on behalf of a stockholder shall be deemed valid unless challenged at or prior to its exercise, and the burden of proving invalidity shall rest on the challenger. If the holder of any such share is a minor or a person of unsound mind, and subject to guardianship, or to the legal control of any other person as regards the charge or management of such share, he may vote by his guardian or such other person appointed or having such control, and such vote may be given in person or by proxy. No proxy shall be entitled to vote after three (3) years from its date, unless the proxy provides for a longer period. Every proxy shall have been executed in writing (which shall include telegraphing, cabling or telephotographic transmission), and shall be filed with the secretary of the corporation, or with such other officer or agent of the corporation as the secretary may direct, before or at the time of the meeting. When a quorum is present at any meeting, the vote of the holders of the majority of the shares having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes or of the certificate of incorporation or these by-laws a -5- different vote is required, in which case such express provision shall govern and control the decision of such question. Section 9. The board of directors may appoint a judge or judges of election to serve at any election of directors and at voting on any other matter that may properly come before a meeting of stockholders. The judge or judges of election shall decide all questions regarding the qualifications of voters, the validity of proxies and the acceptance or rejection of votes. If no such appointment shall be made, or if any of the judges so appointed shall fail to attend, or refuse or be unable to serve, then such appointment may be made by the presiding officer of the meeting. Section 10. Unless otherwise provided in the certificate of incorporation, 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 shares 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 -6- shall be given to those stockholders who have not consented in writing. ARTICLE III DIRECTORS Section 1. The number of directors which shall constitute the whole board shall be set at ten (10). Within the limits above specified, the number of directors shall be determined by resolution of the board of directors, or by the stockholders at the annual meeting. No reduction in the number of directors shall have the effect of removing any director from office prior to the expiration of his term. The directors shall be elected at the annual meeting of stockholders, except as provided in Section 2 of this Article, and each director shall hold office until the next annual meeting of stockholders and thereafter until his successor is duly elected and qualified, unless a prior vacancy shall occur by reason of his death, resignation or removal from office. Directors need not be stockholders. Section 2. 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, though less than a quorum, or by the stockholders, and the directors so chosen shall hold office until the next annual meeting of stockholders and until his successor is duly elected -7- and qualified, unless a prior vacancy shall occur by reason of his death, resignation or removal from office. If there are no directors in office, then an election of directors may be held in the manner provided by statute. If, at the time of filling any vacancy or any newly created directorship, the directors then in office shall constitute less than a majority of the whole board (as constituted immediately prior to any such increase), the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten percent (10%) of the total number of the shares at the time outstanding giving the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office. Section 3. The business and affairs of the corporation shall be managed by its board of directors, which may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the certificate of incorporation or by these by-laws directed or required to be exercised or done by the stockholders. MEETINGS OF THE BOARD OF DIRECTORS Section 4. The board of directors of the corporation may hold meetings, both regular and special, either within or without the State of Delaware. -8- Section 5. The first meeting of each newly elected board of directors shall be held at such time and place as shall be fixed by the vote of the stockholders at the annual meeting and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present. In the event of the failure of the stockholders to fix the time or place of such first meeting of the newly elected board of directors, or in the event such meeting is not held at the time and place so fixed by the stockholders, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the board of directors, or as shall be specified in a written waiver signed by all of the directors. Section 6. Regular meetings of the board of directors may be held without notice at such time and at such place as shall from time to time be determined by the board. Section 7. Special meetings of the board may be called by the Chairman, the President, the Secretary or any two directors on two (2) days' notice to each director, either personally or by mail or by telegram. The attendance of a director at a meeting shall constitute waiver of notice of such meeting except where a director attends a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting has not been lawfully called or convened. -9- Section 8. At all meetings of the board, a majority of the directors in office shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum shall not be present at any meeting of the board of directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 9. Unless otherwise restricted by the cer- tificate of incorporation or these by-laws, 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 of committee. Section 10. Members of the board of directors, or any committee designated by such board, may participate in a meeting of such board or committee by means of conference telephone or similar communications equipment by means of which all such persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at such meeting. -10- COMMITTEES OF DIRECTORS Section 11. The board of directors may, by resolution passed by a majority of the whole board, designate one or more committees, each committee to consist of one or more of the directors, and may designate one or more directors as alternative members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the board of directors to act at any meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the board of directors, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the certificate of incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the by-laws of the corporation; and, unless the resolution or the certificate of incorporation expressly so provides, no such committee shall have the power or authority to declare a dividend -11- or to authorize the issuance of stock. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the board of directors. Section 12. Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required. COMPENSATION OF DIRECTORS Section 13. Unless otherwise restricted by the certificate of incorporation or by these by-laws, the board of directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the board of directors and may be paid a fixed sum for attendance at each meeting of the board of directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed similar compensation for attending committee meetings. -12- REMOVAL OF DIRECTORS Section 14. At any special meeting of the stock- holders, duly called as provided in these by-laws, any director or directors may, by the affirmative vote of the holders of a majority of all the shares of stock outstanding and entitled to vote for the election of directors, be removed from office, either with or without cause. At such meeting, a successor or successors may be elected, or if any such vacancy is not so filled, it may be filled by the directors as provided in Section 2 above. ARTICLE IV NOTICES Section 1. Whenever, under the provisions of statute or of the certificate of incorporation or of these by-laws, notice is required to be given to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such director or stockholder, at his address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given by telegram or telephone. -13- Section 2. Whenever any notice is required to be given under the provisions of statute or of the certificate of incorporation or of these by-laws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent to notice. ARTICLE V OFFICERS Section 1. The officers of the corporation shall be chosen by the board of directors and shall be a Chairman, a President, a Secretary and a Treasurer. The board of directors may also choose one or more Vice Presidents, a Controller and one or more assistant secretaries, assistant treasurers and assistant controllers. Any number of offices may be held by the same person unless otherwise provided by the certificate of incorporation or these by-laws. Section 2. The board of directors at its first meeting after each annual meeting of stockholders shall elect the appropriate officers of the corporation. Section 3. The board of directors may appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers -14- and perform such duties as shall be determined from time to time by the board. Section 4. The salaries of all officers and agents of the corporation shall be fixed by the board of directors. Section 5. The officers of the corporation shall hold office until their successors are elected and qualified. Any officer elected or appointed by the board of directors may be removed at any time by the affirmative vote of a majority of the board of directors. Any vacancy occurring in any office of the corporation shall be filled by the board of directors. CHAIRMAN OF THE BOARD Section 6. The Chairman of the Board shall preside at all meetings of the stockholders and of the board of directors, shall act in an advisory capacity to the other principal officers and shall have such powers and perform such duties as the board may prescribe. PRESIDENT AND VICE PRESIDENTS Section 7. The President shall be the chief executive officer of the corporation and shall perform such executive and administrative functions and duties as are delegated to him by -15- the board of directors and shall, in the absence of or inability to act of the Chairman, temporarily act in his place, and shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. Section 8. The President shall execute bonds, mort- gages and other contracts requiring a seal, under the seal of the corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the board of directors to some other officer or agent of the corporation. Section 9. A Vice-President shall perform such executive and administrative functions and duties as are delegated to him by the board of directors or the President and shall perform such other duties and have such other powers as the board of directors or the President may from time to time prescribe. Section 10. In the absence or inability to act of the President, the Vice-President (or in the event there be more than one Vice-President, the Vice-Presidents in the order designated, or in the absence of any designation, then in the order of their election) shall perform the duties of the President, and when so acting shall have all the powers of and be subject to all the restrictions upon the President. -16- THE SECRETARY AND ASSISTANT SECRETARY Section 11. The Secretary shall attend all meetings of the board of directors and all meetings of the stockholders and shall record all the proceedings of the meetings of the stockholders and of the board of directors in a book to be kept for that purpose and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the board of directors, and shall perform such other duties and have such other powers as may be prescribed from time to time by the board of directors or President, under whose supervision he shall be. He shall have custody of the corporate seal of the corporation and he or an Assistant Secretary shall have authority to affix the same to any instrument requiring it. When so affixed, it may be attested by his signature or by the signature of such Assistant Secretary. The board of directors may give general authority to any other officer to affix the seal of the corporation and to attest the affixing by his signature. Section 12. The assistant secretary, or if there be more than one, the assistant secretaries in the order determined by the board of directors (or if there be no such determination, then in the order of their election), shall, in the absence of the Secretary or in the event of his inability to act, perform the duties and exercise the powers of the Secretary and shall -17- perform such other duties and have such other powers as the board of directors or the President may from time to time prescribe. THE TREASURER, CONTROLLER AND ASSISTANT TREASURERS Section 13. The Treasurer shall be the chief financial and accounting officer of the corporation and shall have the 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 deposit all monies and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the board of directors. The Treasurer also have such other duties and have such other powers as the board of directors or the Section 14. The Treasurer shall disburse the funds of the corporation as may be ordered by the board of directors, taking proper vouchers for such disbursements, and shall render to the President and the board of directors, at its regular meetings, or when the board of directors so requires, an account of all his transactions as treasurer and of the financial condition of the corporation. Section 15. If required by the board of directors, the Treasurer and Controller shall give the corporation a bond (which shall be renewed every six years) in such sum and with such -18- surety or sureties as shall be satisfactory to the board of directors for the faithful performance of the duties of their offices and for the restoration to the corporation, in case of their death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in their possession or under their control belonging to the corporation. Section 16. The Controller, if one be appointed by the board of directors, shall perform such of the duties of the Treasurer and exercise such of the powers of the Treasurer as shall be delegated to him by the Treasurer, and shall perform such other duties and exercise such other powers as the board of directors or the President may from time to time prescribe. Section 17. The Assistant Treasurer, or if there shall be more than one, the Assistant Treasurers in the order determined by the board of directors (or if there be no such determination, then in the order of their election), shall, in the absence of the Treasurer or in the event of his inability to act, perform the duties and exercise the powers of the Treasurer to the extent not being performed and exercised by the Controller, and shall perform such other duties and have such other powers as the board of directors or the President may from time to time prescribe. -19- Section 18. A person may hold more than one office, except that no one may be President and Treasurer or President and Secretary or Treasurer and Secretary at the same time. ARTICLE VI CERTIFICATES OF STOCK Section 1. Every holder of stock in the corporation shall be entitled to have a certificate, signed by, or in the name of the corporation by the Chairman, the President or a Vice- President, and the Secretary or an Assistant Secretary of the corporation, certifying the number of shares owned by him in the corporation. If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, a statement that the corporation will furnish without charge to each stockholder who -20- so requests the designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Section 2. Where a certificate is countersigned (1) by a transfer agent other than the corporation or its employee, or, (2) by a registrar other than the corporation or its employee, any other signature on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. LOST CERTIFICATES Section 3. The President or any Vice President together with the Secretary or any Assistant Secretary may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the -21- board of directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed. TRANSFERS OF STOCK Section 4. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books, subject only to the powers of the board of directors to prohibit certain transfers of stock set forth in the certificate of incorporation of the corporation. FIXING RECORD DATE Section 5. In order that the corporation may determine the stockholders entitled to (a) notice of or to vote at any meeting of stockholders or any adjournment thereof, (b) express consent to corporate action in writing without a meeting, (c) -22- receive payment of any dividend or other distribution or allotment of any rights or (d) 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 less than ten (10) nor more than sixty (60) days before the date of such meeting, nor more than sixty (60) days prior to any other action. 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. REGISTERED STOCKHOLDERS Section 6. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote such shares as the owner thereof, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and the corporation shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice of such claim or interest, except as otherwise provided by the laws of Delaware. -23- ARTICLE VII CONTRACTS, LOANS, CHECKS, DEPOSITS AND PROXIES Section 1. The board of directors may authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances. Section 2. No loans shall be contracted on behalf of the corporation, and no evidences of indebtedness shall be issued in its name unless authorized by a resolution of the board of directors. Such authority may be general or confined to specific instances. Section 3. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the corporation shall be signed by such officer or officers, agent or agents of the corporation and in such manner as shall from time to time be determined by resolution of the board of directors. Section 4. All funds of the corporation not otherwise employed shall be deposited from time to time to the credit of the corporation in such banks, trust companies or other depositories as the board of directors may select. -24- Section 5. Proxies to vote with respect to shares of stock of other corporations owned by or standing in the name of the corporation may be executed and delivered from time to time on behalf of the corporation by the Chairman, President or a Vice-President or by any other person or persons thereunto authorized by the board of directors. ARTICLE VIII GENERAL PROVISIONS INDEMNIFICATION Section 1. Third Party Actions. Any person who was or is a party, or is threatened to be made a party, to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a director, officer, employee, or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, shall be indemnified and held harmless by the Corporation to the full extent authorized by the Delaware General Corporation Laws, 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 -25- indemnification rights than said law permitted the Corporation to provide prior to such amendment), against expenses, liability and loss including attorneys' fees) judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Corporation, and, with respect to any criminal action or proceedings, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceedings by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in, or not opposed to, the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. The right to indemnification conferred in this Section shall be a contract right. Section 2. Derivative Actions. Any person who was or is a party, or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the -26- request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including service with respect to employee benefits plans, 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 expenses, liability and loss (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation; except, however, that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery of the county in which the registered office of the Corporation is located or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the court of Chancery or such other court shall deem proper. -27- Section 3. Mandatory Indemnification. To the extent that a director, officer, employee or agent as above described has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in paragraph 1 or 2 of this Article or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. Section 4. Procedure for Effecting Indemnification. Any indemnification under paragraphs 1 or 2 of this Article (unless ordered by a court) shall be made only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in such subsection. Such determination shall be made: (a) By the vote of the Board of Directors consisting of directors who were not parties to such action, suit or proceedings; or (b) If such action is not obtainable, or even if obtainable the vote of the disinterested directors so directs, by independent legal counsel in a written opinion; or (c) By the stockholders. -28- Section 5. Advancement of Expenses. Expenses (including attorneys' fees) incurred in defending a civil, criminal, administrative or investigative action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized in this Article. Such expenses (including attorneys' fees) incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the Board of Directors deems appropriate. Section 6. Supplementary Coverage. The indemnification and advancement of expenses provided by, or granted pursuant to, the other paragraphs of this Article shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, 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. Section 7. Power to Purchase Insurance. The Corporation may, by action of the Board of Directors, purchase and maintain insurance on behalf of any person who is or was a -29- director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article. Section 8. Extension of Coverage. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. DIVIDENDS Section 1. Dividends upon the capital stock of the corporation, subject to the provisions of the certificate of incorporation, if any, may be declared by the board of directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property or in shares of its capital stock, subject to the provisions of the certificate of incorporation. Such dividends, if any, shall be paid to the -30- holders of Common Stock in proportion to their respective ownership of Common Stock and shall, subject to the provisions of such series, be paid to the holders of each series of Preferred Stock, if any, in proportion to their respective ownership of Preferred Stock of such series. The declaration and payment of such dividends or other distributions and the determination of earnings, profit, surplus (including paid-in capital) and capital available for dividends and other purposes shall, to the extent permitted by law, lie wholly in the discretion of the board of directors, and no stockholder shall be entitled to receive or be paid any dividends or to receive any distribution except as determined by the board in the exercise of said discretion. Subject to the provisions of any series of Preferred Stock which may at the time be outstanding, the board may also distribute to the holders of capital stock of each class (and series) in proportion to their respective ownership of such class (or series), additional shares of such class (and of any series) or of any other class in such manner and on such terms as they may deem proper. Section 2. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for -31- such other purpose as the directors shall think conducive to the interest of the corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. ANNUAL STATEMENT Section 3. The board of directors shall present at such annual meeting, and at any special meeting of the stock- holders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation. FISCAL YEAR Section 4. The fiscal year of the corporation shall be fixed by resolution of the board of directors. SEAL Section 5. The corporate seal shall have inscribed thereon the name of the corporation, the year of its organization and the words "Corporate Seal, Delaware." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced otherwise. -32- ARTICLE IX AMENDMENTS Section 1. These Bylaws may be altered, amended or repealed or new Bylaws may be adopted by the board of directors or by the stockholders at any regular meeting of the board of directors or of the stockholders, or at any special meeting of the board of directors or of the stockholders if notice of such alteration, amendment, repeal or adoption of now Bylaws is contained in the notice of such special meeting. -33- EX-4.7(B) 7 AMEND. NO. 1 TO LOAN AND SECURITY AGMT. as of December 31, 1995 CONGRESS FINANCIAL CORPORATION 1133 Avenue of the Americas New York, New York 10036 RE: Amendment and Consent Gentlemen: Reference is further made to certain financing agreements including, but not limited to, a Loan and Security Agreement dated September 30, 1994 (the "Loan Agreement"), a Term Promissory Note dated September 30, 1994, in the original principal amount of $43,000,000 and other agreements, documents and guaranties granting collateral security or creating or evidencing indebtedness, each executed by MEDIQ/PRN LIFE SUPPORT SERVICES-I, INC. ("Borrower") in favor of CONGRESS FINANCIAL CORPORATION ("Lender"), pursuant to which Lender has extended and may hereafter extend certain loans, advances and other financial accommodations to Borrower (the foregoing, together with all related agreements, documents or instruments, as the same may now exist or hereafter be amended or supplemented, are collectively referred to herein as the "Financing Agreements"). All capitalized terms used herein shall have the respective meanings specified in the Loan Agreement unless otherwise defined herein. Borrower has requested that Lender amend certain provisions of the Loan Agreement and waive the breach by Borrower of certain covenants and Lender is willing to do so subject to the terms and provisions hereof. In consideration of the foregoing, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. Notwithstanding anything to the contrary contained in the Loan Agreement, all revenues, income, expenses, assets and liabilities related to the transfer to Borrower (in accordance with GAAP and the requirements of the Securities and Exchange Commission) of the subordinated indebtedness owed by Holdings to KCI, and all goodwill related thereto, shall be excluded from the calculation of the covenants contained in Sections 9.9, 9.11, 9.13, 9.14 and 9.15 of the Loan Agreement. 2. With regard to the covenant contained in Section 9.7 of the Loan Agreement, Lender hereby consents to the purchase by Borrower of certain equipment from Mediq Mobile X-Ray Services Inc. for a purchase price of $1,875,000 and the resale of such equipment by Borrower to Mediq Mobile X-Ray Services Inc. for a purchase price of $1,453,125. 3. Except as specifically set forth herein, no other changes, amendments or modifications to the Loan Agreement or the other Financing Agreements are intended or implied and, in all other respects, the Loan Agreement and other Financing Agreements shall remain in full force and effect and are hereby specifically ratified and confirmed in accordance with their terms as of the date hereof. In the event that any term or provision of this letter conflicts with any term or provision of the Financing Agreements, the term or provision of this letter agreement shall control. Very truly yours, MEDIQ/PRN LIFE SUPPORT SERVICES-I, INC. By: /s/ Jay M. Kaplan ------------------------------- Title: Sr. VP - CFO READ AND AGREED: CONGRESS FINANCIAL CORPORATION By: /s/ Frank S. Chiovari ------------------------------- Title: Vice Pres. EX-10.6 8 EXECUTIVE SECURITY PLAN MEDIQ, INC. EXECUTIVE SECURITY PLAN ARTICLE I PURPOSE The purpose of the Mediq, Inc. Executive Security Plan is to provide designated executives of Mediq, Inc. and its divisions and subsidiaries with a tax-favored investment opportunity. By providing a means whereby base salary and/or bonuses may be deferred to some period after termination of employment, the Plan will aid in retaining and attracting executives of exceptional ability, providing executives with a means to supplement their standard of living at retirement. Compensation reductions made pursuant to the Plan will be credited with interest for the benefit of each Participant. The value of a Participant's deferrals, and interest earned on compensation reductions, will vary by such factors as the amount and duration of the compensation reductions, the Participant's age at the time of reduction, the date benefits commence, and other factors. The intent of the Plan is to credit Participant's compensation reductions with a specific rate of interest, rather than to provide defined benefits. However, to provide additional financial security, and to protect the purpose of the Plan, a supplemental death benefit is provided to qualifying Participants. ARTICLE II DEFINITIONS 2.1 "Administrator" shall mean the individual appointed to administer the Plan pursuant to Article IX. 2.2 "Age" shall mean the Participant's chronological age at any time of reference. 2.3 "Beneficiary" shall mean the person or persons designated by a Participant pursuant to Section 6.8. 2.4 "Board" shall mean the Company's Board of Directors in office at any time of reference. 2.5 "Change In Control" shall mean the sale of the Company or substantially all of its assets, in any form whatsoever, including merger, acquisition, consolidation or other reorganization or a significant stock acquisition. Significant stock acquisition shall be deemed to have occurred, if during any two year period, more than 51% of the votes attributed to the Company's equity securities shall be acquired by any corporation, person or group. Group shall mean persons who act in concert as described in Section 14(d)(2) of the Securities Exchange Act of 1934, as amended. 2.6 "Company" shall mean Mediq, Inc. and any successor thereto. 2.7 "Compensation" shall mean the total compensation paid by the Company for a Plan Year, as reported for Federal Income Tax purposes on Form W-2 or any replacement thereof, and any compensation deferred to a retirement plan which qualifies under Section 401(k) of the Internal Revenue Code. 2.8 "Deferral Election Form" shall mean a written agreement between a Participant and the Company, whereby a Participant agrees to defer a portion of his Compensation pursuant to the provisions of the Plan, and the Company agrees to make benefit payments in accordance with the provisions of the Plan. 2.9 "Deferred Benefit Account" means the accounts maintained on the books of the Company pursuant to Article V. A separate Deferred Benefit Account shall be maintained for each Participant. A Participant's Deferred Benefit Account shall be utilized solely as a device for the measurement and determination of the amounts to be paid to the Participants pursuant to the Plan and shall be subject to Article VII hereof. A Participant's Deferred Benefit Account shall not constitute or be treated as a trust fund of any kind. 2.10 "Determination Date" shall mean each December 31 of each calendar year and, for each Participant, his date of death, his Normal Retirement Date or the date of his Retirement, as applicable. 2.11 "Effective Date" shall mean October 1, 1985. 2.12 "Eligible Employee" shall mean any officer of the Company who has completed at least six months of active full-time employment. 2.13 "Normal Retirement Date" shall mean the later of a Participant's Age 65 or the date on which a Participant has fully deferred all the amounts which he had elected to defer with respect to each Deferral Election Form. -2- 2.14 "Participant" shall mean each Eligible Employee who has executed a Deferral Election Form in accordance with Article III, and any former Eligible Employee who remains entitled to a benefit pursuant to Article VI. 2.15 "Payout Period" shall mean the period of time throughout which benefits are payable under the terms of this Plan. The Payout Period shall be an uninterrupted period of time of 180 months. Alternatively, at a Participant's or Beneficiary's election, the Payout Period may be any uninterrupted period of time ranging from 60-180 months. Such election shall be made in accordance with procedures established by the Administrator. 2.16 "Plan" shall mean the Mediq, Inc. Executive Security Plan as described in this instrument, as amended from time to time. 2.17 "Plan Year" shall initially mean the period beginning on October 1, 1985 and ending December 31, 1985. Thereafter Plan Year shall mean the 12 consecutive month period beginning on January 1 and ending on December 31. 2.18 "Retirement" shall mean any severance from full-time employment after attaining his Normal Retirement Date. 2.19 "Retirement Interest Yield" shall mean the average for the Plan Year or part thereof preceding the Determination Date of Moody's Seasoned Corporate Bond Yield Index as published by Moody's Investor Service, Inc., or if no longer published, a substantially similar average selected by the Administrator, plus 2 percentage points. 2.20 "Termination Interest Yield" shall mean the average for the Plan Year or part thereof preceding the Determination Date of Moody's Seasoned Corporate Bond Yield Index as published by Moody's Investor Service, Inc. or, if no longer published, a substantially similar average selected by the Administrator. 2.21 "Termination of Employment" means voluntary or involuntary termination of employment for reasons other than death or Retirement. ARTICLE III PARTICIPATION 3.1 Each Eligible Employee who elects to participate in the Plan shall execute a Deferral Election Form prior to the -3- first day of the Plan Year in which the deferral shall first occur. 3.2 Each employee who shall subsequently become an Eligible Employee may elect to participate in the Plan by executing a Deferral Election Form no less than thirty (30) days prior to that date on which the deferral shall first occur. The election to participate shall be effective only upon receipt by the Administrator of the Deferral Election Form, properly completed and executed in conformity with the Plan. ARTICLE IV RULES GOVERNING DEFERRALS 4.1 At the time he executes his Deferral Election Form, a Participant shall direct the Plan Administrator as to the timing and amounts of Compensation to be deferred. In the event a Participant requests that a Compensation deferral be applied against any future bonus payment, and such bonus payment is insufficient to meet the Participant's deferral request, the remaining Compensation deferral shall be applied against salary remaining to be paid during the Plan Year. Notwithstanding the preceding, an Eligible Employee may not elect to defer any portion of any bonus payment attributable to service performed at any time during the same Plan Year in which the Deferral Election form has been executed. 4.2 An Eligible Employee who elects to participate in the Plan must agree to defer a portion of his Compensation for a period of not less than one Plan Year or more than four Plan Years. 4.3 Throughout any one Plan Year, a Participant may not defer less than $5,000 (excepting Plan Years in which the Participant elects not to defer any portion of his Compensation) or more than $50,000. 4.4 In the aggregate, a Participant may not elect to defer less than $20,000 or more than $200,000. 4.5 Prior to any Plan Year, a Participant may elect to make additional deferrals pursuant to a new Deferral Election Form provided, however, such additional deferral conforms with limitations set forth in Section 4.3 and 4.4. 4.6 An election to defer income pursuant to this Plan is irrevocable and shall continue until the earlier of the -4- Termination of Employment, death or that time otherwise provided by the terms of the applicable Deferral Election Forms. ARTICLE V DEFERRED BENEFIT ACCOUNT 5.1 For recordkeeping purposes only, the Company shall maintain separate Deferred Benefit Accounts for each Participant. The existence of these accounts shall not require any segregation of assets. More than one Deferred Benefit Account may be maintained for each Participant as may be necessary to reflect each Deferral Election Form. 5.2 The amount of Compensation that a Participant elects to defer shall be credited to the Participant's Deferred Benefit Account through each Plan Year at the same time as the Participant is paid the non-deferred portion of the Compensation which is the source of the deferral. 5.3 On each Determination Date, the Company shall credit a Participant's Deferred Benefit Account, an additional sum equal to interest at either the Retirement Interest Yield or, to the extent benefits are to be determined in accordance with Section 6.2, the Termination Interest Yield. ARTICLE VI BENEFITS 6.1 Termination Within Initial Four Plan Years. Upon Termination of Employment at any time within the first four Plan Years of Plan participation, the Company shall pay to the Participant, a termination benefit equal to his aggregated deferrals through the date of Termination credited with an interest yield of 6%, compounded annually. The termination benefit shall be payable in a lump sum within 120 days following Termination of Employment. Upon such Termination of Employment, the Participant shall immediately cease to be eligible for any other benefit otherwise provided in this Plan. 6.2 Termination After Four Plan Years. Upon Termination of Employment at any time after the first four Plan Years of Plan participation, the Company shall continue to maintain the Participant's Deferred Benefit Account. Upon Participant's attaining his Normal Retirement Date, the Company shall pay Participant (or his designated Beneficiary, to the extent applicable, if Participant -5- shall die prior to the expiration of the Payout Period) a retirement benefit equal to the Participant's Deferred Benefit Account determined pursuant to Section 5.3, using the Retirement Interest Yield through the month preceding Participant's Termination of Employment and the Termination Interest Yield for the period beginning with the first day of the month of Participant's Termination of Employment and ending on the month preceding Participant's Normal Retirement Date. 6.3 Death. Upon the death of a Participant, while an active employee of the Company, the Company shall pay the designated Beneficiary of the deceased Participant a death benefit, in lieu of any other benefit provided hereunder, equal to the greater of (i) the Participant's Deferred Benefit Account determined pursuant to Section 5.3, using the Retirement Interest Yield, or (ii) an amount specified in the Participant Deferral and Participant Agreement. 6.4 Retirement. If a Participant remains continuously employed by the Company until he attains his Normal Retirement Date, the Company shall pay to the Participant, a Retirement benefit, commencing upon the first month subsequent to his Retirement, equal to his Deferred Benefit Account, determined pursuant to Section 5.3 using the Retirement Interest Yield. 6.5 For the purposes of this Article VI, elections to make additional deferrals pursuant to Section 4.5, shall be considered separately, and the Plan Year for which such additional deferral becomes effective shall be treated as the first year of Plan participation on Plan entry with respect to such segregated amounts. 6.6 Form of Distribution: A. Upon the initiation of benefits as described in Section 6.2, the Company shall annuitize the amount specified therein utilizing an interest rate equal to the average of the Termination Interest Yield during the five calendar years immediately preceding the commencement of benefits and pay the benefit to Participant or his Beneficiary, if applicable, in equal monthly installments commencing upon the first day of the first month following Participant's Normal Retirement Date and continuing uninterrupted throughout the Payout Period. B. Upon Participant's death, as described in Section 6.3, the Company shall annuitize the amount specified therein utilizing an interest rate equal to 8% and pay the benefit to Participant's Beneficiary in equal -6- monthly installments commencing upon the first day of the first month following Participant's death and continuing uninterrupted throughout the Payout Period. C. Upon Participant's Retirement as described in Section 6.4, the Company shall annuitize the amount specified therein utilizing an interest rate equal to the average of the Retirement Interest Yield during the five calendar years immediately preceding the commencement of benefits and pay the benefit to Participant or his Beneficiary, if applicable, in equal monthly installments commencing upon the first day of the first month following Participant's Retirement and continuing uninterrupted throughout the Payout Period. 6.7 To the extent required by the law in effect at the time payments are made, the Company shall withhold any taxes required by the federal or any state or local government from payments made hereunder. 6.8 Unless the Participant files a written notice of a different Beneficiary designation with the Committee, the Participant's Beneficiary shall be the Beneficiary designated in the Employee Savings Plan. The Participant may designate a Beneficiary by filing a written notice of such designation with the Committee in such form as the Company requires and may include contingent beneficiaries. The Participant may from time to time change the designated Beneficiary or Beneficiaries without the consent of such Beneficiary or Beneficiaries by filing a new designation in writing with the Committee. (If a Participant maintains his primary residence in a state which has community property laws, the spouse of a married Participant shall join in any designation of a Beneficiary or Beneficiaries other than the spouse.) If no designation shall be in effect at the time when any benefits payable under this Plan shall become due, the Beneficiary shall be the spouse of the Participant, or if no spouse is then living, the representatives of the Participant's estate. -7- ARTICLE VII CHANGE IN CONTROL 7.1 If there is a Change in Control, notwithstanding any other provision of this Plan: A. each Participant or his Beneficiary who is then receiving a benefit hereunder shall have the right to request to be paid by the Company a lump sum payment equal to the present value of the remaining payments due him under this Plan based upon an interest rate which is set forth in Section 6.6 C. hereof; B. each Participant at any time during an eighteen (18) month period immediately following a Change in Control shall have the right to request and be paid a lump sum settlement equal to the amount of his Deferred Benefit Account. 7.2 Amounts payable pursuant to Section 7.1 shall be paid to the Participant or his Beneficiary, as applicable, as soon as possible following the date of the request, but in no instance prior to the first day of the first Plan Year following the date of the request. In the event no such request is made, the Plan and Deferral Election form shall remain in full force and effect. ARTICLE VIII UNFUNDED PLAN 8.1 Benefits are payable as they become due irrespective of any actual investments the Company may make to meet its obligations. The Company is under no obligation to purchase or maintain any asset, and any reference to investments is solely for the purpose of computing the value of benefits. Neither this Plan nor any action taken pursuant to the provisions of this Plan shall create or be considered to create a trust of any kind, or a fiduciary relationship between the Company and the Participating Employees, or any other person. To the extent a Participant or any other person acquires a right to receive payments from the Company under this Plan, such right shall be no greater than the right of an unsecured creditor of Company. -8- ARTICLE IX ASSIGNMENT 9.1 No Participant, Beneficiary or heir shall have any right to commute, sell, transfer, assign or otherwise convey the right to receive any payment under the terms of this Plan. Any such attempted assignment shall be considered null and void. ARTICLE X ADMINISTRATION 10.1 The Board shall appoint, on behalf of all Participants, an Administrator. The Administrator may be removed by the Board at any time and he may resign at any time by submitting his resignation in writing to the Board. A new Administrator shall be appointed as soon as possible in the event that the Administrator is removed or resigns from his position. Any person so appointed shall signify his acceptance by filing a written acceptance with the Board. 10.2 The Administrator is responsible for the day to day administration of the Plan. He may appoint other persons or entities to perform any of his fiduciary functions. Such appointment shall be made and accepted by the appointee in writing and shall be effective upon the written approval of the Board. The Administrator and any such appointee may employ advisors and other persons necessary or convenient to help him carry out his duties including his fiduciary duties. The Administrator shall have the right to remove any such appointee from his position. Any person, group of persons or entity may serve in more than one fiduciary capacity. 10.3 The Administrator shall maintain or shall cause to be maintained accurate and detailed records and accounts of Participants and of their rights under the Plan and of all investments, receipts, disbursements and other transactions. Such accounts, books and records relating thereto shall be open at all reasonable times to inspection and audit by the Board and by persons designated thereby. -9- 10.4 In addition to any powers, rights and duties set forth elsewhere in the Plan, the Administrator shall have the following powers and duties: A. To adopt such rules and regulations consistent with the provisions of the Plan; B. To enforce the Plan in accordance with its terms and any rules and regulations he establishes; C. To maintain records concerning the Pan sufficient to prepare reports, returns and other information required by the Plan or by law; D. To construe and interpret the Plan and to resolve all questions arising under the Plan; E. To direct the Company to pay benefits under the Plan, and to give such other directions and instructions as may be necessary for the proper administration of the Plan; F. To be responsible for the preparation, filing and disclosure on behalf of the Plan of such documents and reports as are required by any applicable Federal or State law. 10.5 The Company shall furnish the Administrator such data and information as he may require. The records of the Company shall be determinative of each Participant's period of employment, termination of employment and the reason therefor, leave of absence, reemployment, years of service, personal data, and compensation or bonus reductions. Participants and their Beneficiaries shall furnish to the Administrator such evidence, data, or information, and execute such documents as the Administrator requests. 10.6 Neither the Administrator nor the Board nor the Company shall be liable to any person for any action taken or omitted in connection with the administration of this Plan unless attributable to his own fraud or willful misconduct; nor shall the Company be liable to any person for any such action unless attributable to fraud or willful misconduct on the part of a director, officer or employee of the Company. -10- 10.7 Each Member or Beneficiary must claim any benefit to which he is entitled under this Plan by a written notification to the Administrator. If a claim is denied, it must be denied within a reasonable period of time, and be contained in a written notice stating the following: A. The specific reason for the denial. B. Specific reference to the Plan on which the denial is based. C. Description of additional information for the claimant to present his claim, if any, and an explanation of why such material is necessary. D. An explanation of the Plan's claim review procedure. The claimant will have 60 days to request a review of the denial by the Administrator, who will provide a full and fair review. The request for review must be written and submitted to the same person who handles initial claims. The claimant may review pertinent documents, and he may submit issues and comments in writing. The decision by the Administrator with respect to the review must be given within 60 days after receipt of the request, unless special circumstances require an extension (such as for a hearing). In no event shall the decision be delayed beyond 120 days after receipt of the request for review. The decision shall be written in a manner calculated to be understood by the claimant, and it shall include specific reasons and refer to specific Plan provisions as to its effect. ARTICLE XI AMENDMENT AND TERMINATION 11.1 The Plan may be amended in whole or in part by the Company any time. Notice of any such amendment shall be given in writing to each Participant and each Beneficiary of a deceased Participant. 11.2 Subject to Section 11.3, no amendment hereto shall permit amounts accumulated pursuant to the Plan prior to the amendment to be paid to a Participant or Beneficiary prior to the time he would otherwise be entitled thereto. 11.3 The Company reserves the sole right to terminate the Plan an/or the Deferral Election Form pertaining to the Participant at any time prior to the commencement of -11- payment of his benefits, but only in the event that the Company, in its sole discretion, shall determine that the economics of the Plan have been adversely and materially affected by a change in tax laws, other government action or other event beyond the control of the Participant and the Company. In the event of any such termination, the Participant shall be entitled to a Deferred Benefit equal to the amount of his Deferred Benefit Account determined under Section 5.3, using the Retirement Interest Yield as of the date of termination of the Plan and/or his Deferral Election Form. ARTICLE XII MISCELLANEOUS 12.1 The benefits provided for the Participants under this Plan are in addition to benefits provided by any other plan or program of the Company and, except as otherwise expressly provided for herein, the benefits of this Plan shall supplement and shall not supersede any plan or agreement between the Company and any Participant or any provisions contained herein. 12.2 The Plan shall be governed and construed under the laws of the State of New Jersey as in effect at the time of its adoption. 12.3 The courts of the State of New Jersey shall have exclusive jurisdiction in any or all actions arising under this Plan. 12.4 The terms of this Plan shall be binding upon and inure to the benefit of the parties hereto, their respective heirs, executors, administrators and successors. 12.5 The interest of any Participant or any beneficiary receiving payments hereunder shall not be subject to anticipation, nor to voluntary or involuntary alienation until distribution is actually made. 12.6 All headings preceding the text of the several Articles hereof are inserted solely for reference and shall not constitute a part of this Plan, nor affect its meaning, construction or effect. -12- 12.7 Where the context admits, words in the masculine gender shall include the feminine and neuter genders. DATE OF ADOPTION BY THE BOARD OF DIRECTORS OF MEDIQ, INC. November 15, 1985 /s/ LIONEL H. FELZER - ----------------------------- ----------------------------- Title: Senior Vice President -13- EX-10.7 9 STOCK OPTION PLAN MEDIQ INCORPORATED 1987 STOCK OPTION PLAN 1. Definitions As used in this Plan, the following definitions apply to the terms indicated below: A. "Board" means the Board of Directors of the Company. B. "Committee" means the Stock Option Committee appointed by the Board from time to time to administer the Plan. The Committee shall consist of at least three persons, who shall be directors of the Company, and who shall not be or have been eligible, while serving on the Committee or within one year prior thereto, to receive grants of Options pursuant to this Plan or any plan of the Company or any of its affiliates entitling the participants therein to acquire stock, stock options, or stock appreciation rights of the Company or any of its affiliates. C. "Company" means MEDIQ Incorporated. D. "Fair Market Value" of a Share on a given day means the mean between the highest and lowest quoted selling prices of a Share as reported on the principal securities exchange on which the Shares are then listed or admitted to trading, or if not so reported, the mean between the highest and lowest selling prices as reported on the National Association of Securities Dealers Automated Quotation System, or if not so reported, as furnished by any members of the National Association of Securities Dealers, Inc. selected by the Committee. If the price of a Share shall not be so quoted, the Fair Market Value shall be determined by the Committee taking into account all relevant facts and circumstances. E. "Grantee" means a person who is either an Optionee or an Optionee-Shareholder. F. "Incentive Stock Option" means an Option that qualifies as an incentive stock option within the meaning of Section 422A of the Internal Revenue Code. G. "Nonqualified Option" means an option that is not an Incentive Stock Option. H. "Option" means a right to purchase Shares under the terms and conditions of this Plan as evidenced by an option certificate or agreement for Shares in such form, not inconsistent with this Plan, as the Committee may adopt for general use or for specific cases from time to time. I. "Optionee" means a person other than an Optionee- Shareholder to whom an option is granted under this Plan. J. "Optionee-Shareholder" means a person to whom an option is granted under this Plan and who at the time such option is granted owns, actually or constructively, stock of the Company possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company, or its parent or subsidiary corporations. K. "Plan" means this MEDIQ Incorporated 1987 Stock Option Plan, including any amendments to the Plan. -2- L. "Share" means a share of the Company's common stock, par value $1 per share, now or hereafter owned by the Company as treasury stock, or authorized but unissued shares of the Company's common stock, subject to adjustment as provided in this Plan. M. "Subsidiary" means any corporation, now or hereafter existent, in an unbroken chain of corporations beginning with the Company if, at the time of granting an Option, each of the corporations in the unbroken chain owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. N. Options shall be deemed "granted" under this Plan on the date on which the Committee, by appropriate action, approves the grant of an Option hereunder or on such subsequent date as the Committee may designate. O. As used herein, the masculine includes the feminine, the plural includes the singular, and the singular includes the plural. 2. Purpose The purposes of the Plan are as follows: A. To secure for the Company and its shareholders the benefits arising from share ownership by those officers and key employees of the Company and its Subsidiaries who will be responsible for the Company's future growth and continued success. The Plan is intended to provide an incentive to -3- officers and key employees by providing them with an opportunity to acquire an equity interest or increase an existing equity interest in the Company, thereby increasing their personal stake in its continued success and progress. B. To enable the Company and its Subsidiaries to obtain and retain the services of key employees, by providing such key employees with an opportunity to acquire Shares under the terms and conditions and in the manner contemplated by this Plan. 3. Plan Adoption and Term A. This Plan shall become effective upon its adoption by the Board or by the Committee acting pursuant to authority duly vested in it by the Board, and options may be issued upon such adoption and from time to time thereafter; provided, however, that the Plan, if adopted by the Committee, shall be submitted to the Board for its approval at its next regularly scheduled meeting, and further, that the Plan shall be submitted to the Company's shareholders for their approval at the next annual meeting of shareholders, or prior thereto at a special meeting of shareholders expressly called for such purpose; and provided further, that the approval of the Company's shareholders shall be obtained within 12 months of the date of adoption of the Plan. If the Plan is not approved at such a meeting by the affirmative vote of a majority of all shares entitled to vote upon the matter, then this Plan and all Options then outstanding -4- under it shall forthwith automatically terminate and be of no force and effect. B. Subject to the provisions hereinafter contained relating to amendment or discontinuance, this Plan shall continue to be in effect for ten (10) years from the date of adoption of this Plan by the Committee or the Board or the date of Shareholder approval, whichever is earlier. No Options may be granted hereunder except within such period of ten (10) years. 4. Administration of Plan A. This Plan shall be administered by the Committee. Except as otherwise expressly provided in this Plan, the Committee shall have authority to interpret the provisions of the Plan, to construe the terms of any Option, to prescribe, amend and rescind rules and regulations relating to the Plan, to determine the terms and provisions of Options granted hereunder, and to make all other determinations in the judgment of the Committee necessary or desirable for the administration of the Plan. Without limiting the foregoing, the Committee, shall, to the extent and in the manner contemplated herein, exercise the discretion granted to it to determine who shall participate in the Plan, how many Shares shall be sold to each such participant, and the prices at which Shares shall be sold to participants. The Committee may correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any Option in the manner and to the extent it shall deem expedient to carry the -5- Plan into effect and shall be the sole and final judge of such expediency. B. No member of the Committee shall be liable for any action taken or omitted or any determination made by him in good faith relating to the Plan, and the Company shall indemnify and hold harmless each member of the Committee and each other director or employee of the Company to whom any duty or power relating to the administration or interpretation of the Plan has been delegated against any cost or expense (including counsel fees) or liability (including any sum paid in settlement of a claim with the approval of the Committee) arising out of any act or omission in connection with the Plan, unless arising out of such person's own fault or bad faith. C. Any power granted to the Committee either in this Plan or by the Board, except the granting of any Option or the determination of eligibility of individual employees to participate in the Plan, may at any time be exercised by the Board, and any determination by the Committee, other than with respect to the granting of any Option or the determination of eligibility of individual employees to participate in the Plan, shall be subject to review and reversal or modification by the Board on its own motion. 5. Eligibility Officers and key employees of the Company and its Subsidiaries shall be eligible for selection by the Committee to participate in the Plan. No member of the Board shall be -6- eligible to participate in the Plan unless he or she is also an officer or employee of the Company or a Subsidiary and no member of the Committee shall be eligible to participate in the Plan. An employee who has been granted an Option may, if he or she is otherwise eligible, be granted an additional Option or Options if the Committee shall so determine. 6. Options A. Subject to adjustment as provided in Paragraph 13 hereof, Options may be issued pursuant to the Plan for the purchase of not more than 1,000,000 Shares; provided, however, that if prior to the termination of the Plan, an Option shall expire or terminate for any reason without having been exercised in full, the unpurchased Shares subject thereto shall again be available for the purposes of the Plan. B. All Options granted under the Plan shall be clearly identified either as Incentive Stock Options or as Non- qualified Options. Each Option granted under the Plan shall be evidenced by an option certificate in such form, not inconsistent with this Plan, as the Committee may adopt for general use or for specific cases from time to time. C. The aggregate Fair Market Value (determined as of the time Options are granted) of the Shares with respect to which incentive stock options are exercisable for the first time by an Optionee during any calendar year (whether granted under this Plan or any other plan of the Company or any parent or Subsidiary -7- of the Company under which incentive stock options may be granted), shall not exceed $100,000. 7. Option Price A. The purchase price per Share deliverable upon the exercise of an Option shall be determined by the Committee; provided, however, that the purchase price per Share at which Shares may be purchased pursuant to any Incentive Stock Option shall not be less than 100% of the Fair Market Value of such Shares on the date an Option is granted to an Optionee and shall not be less than 110% of the Fair Market Value of such Shares on the date an Option is granted to an Optionee-Shareholder. B. Payment for Shares purchased by exercise of an Option may be made (1) in cash; (2) in Shares valued at their, Fair Market Value on the date of exercise, or (3) in a combination of cash and Shares. 8. Duration of Options Each Incentive Stock Option and all rights thereunder shall expire and such Incentive Stock Option shall no longer be exercisable on a date not later than ten (10) years from the date on which the Incentive Stock Option was granted. Each Non- qualified Option and all rights thereunder shall expire and such Nonqualified Option shall no longer be exercisable on a date not later than ten (10) years and one (1) day from the date on which the Nonqualified Option was granted. Options may expire and cease to be exercisable on such earlier date as the Committee may determine at the time of grant. Provided, however, that any -8- Incentive Stock Option granted to an Optionee-Shareholder and all rights thereunder shall expire and such Incentive Stock Option shall no longer be exercisable on a date not later than five (5) years from the date on which such Incentive Stock Option was granted. All Options regardless of to whom granted shall be subject to earlier termination as provided herein. 9. Conditions Relating to Exercise of Options A. The Shares subject to any Option may be purchased at any time during the term of the option, unless, at the time an Option is granted, the Committee shall have fixed a specific period or periods in which exercise must take place. To the extent an Option is not exercised when it becomes initially exercisable, or is exercised only in part, the Option or remaining part thereof shall not expire but shall be carried forward and shall be exercisable until the expiration or termination of the Option. Partial exercise is permitted from time to time provided that no partial exercise of an Option shall be for a number of Shares having a purchase price of less than $1,000. B. No Option shall be transferable by the Grantee thereof other than by will or by the laws of descent and distribution and Options shall be exercisable during the lifetime of a Grantee only by such Grantee or, to the extent that such exercise would not prevent an Option from qualifying as an incentive stock option under the Internal Revenue Code, by his or her guardian or legal representative. -9- C. Certificates for Shares purchased upon exercise of Options shall be issued either in the name of the Grantee or in the name of the Grantee and another person jointly with the right of survivorship. Such certificates shall be delivered as soon as practical following the date the Option is exercised. D. An Option shall be exercised by the delivery to the Company at its principal office, to the attention of its Secretary, of written notice of the number of Shares with respect to which the Option is being exercised, and of the name or names in which the certificate for the Shares is to be issued, and by paying the purchase price for the Shares in accordance with Paragraph 7 hereof. E. Notwithstanding any other provision in this Plan, no Option may be exercised unless and until (i) this Plan has been approved by the Board and by the shareholders of the Company, (ii) the Shares to be issued upon the exercise thereof have been registered under the Securities Act of 1933 and applicable state securities laws, or are, in the opinion of counsel to the Company, exempt from such registration. The Company shall not be under any obligation to register under applicable Federal or state securities laws any Shares to be issued upon the exercise of an Option granted hereunder, or to comply with an appropriate exemption from registration under such laws in order to permit the exercise of an Option or the issuance and sale of Shares subject to such Option. If the Company chooses to comply with such an exemption from registration, the -10- certificates for Shares issued under the Plan, may, at the direction of the Committee, bear an appropriate restrictive legend restricting the transfer or pledge of the Shares represented thereby, and the Committee may also give appropriate stop transfer instructions to the transfer agent of the Company. Provided, however, that if the operation of this Paragraph 9E would cause Incentive Stock Options to become exercisable in such a way as to violate Paragraph 6C hereof, the exercisability of such Incentive Stock Options shall be delayed as necessary to avoid such a violation. F. Any person exercising an Option or transferring or receiving Shares shall comply with all regulations and requirements of any governmental authority having jurisdiction over the issuance, transfer, or sale of securities of the Company or the requirements of any stock exchange on which the Shares may be listed, and as a condition to receiving any Shares, shall execute all such instruments as the Committee in its sole discretion may deem necessary or advisable. G. Each Option shall be subject to the requirement that if the Committee shall determine that the listing, registration or qualification of the Shares subject to such Option upon any securities exchange or under any state or Federal law, or the consent or approval of any governmental or regulatory body is necessary or desirable as a condition of, or in connection with, the granting of such Option or the issuance or purchase of Shares thereunder, such option may not be exercised in -11- whole or in part unless such listing, registration, qualification, consent or approval shall have been effective or obtained free of any conditions not acceptable to the Committee. 10. Effect of Termination of Employment or Death. A. In the event that the employment of a Grantee with the Company or a Subsidiary shall at any time be terminated for cause, then all rights of any kind under any Option then held by such Grantee shall immediately lapse and terminate. B. In the event that a Grantee shall at any time cease to be employed by the Company for any reason other than the termination of the Grantee's employment for cause or the death of the Grantee, the term of each Option held by such Grantee shall expire on the earlier of the termination date set forth in the Option and a date three (3) months after the date on which employment terminates. During such period, the Option shall be exercisable only to the extent it was exercisable at the time of termination of employment. If, however, the death of the Grantee should occur before the date on which the Option would terminate hereunder, the termination of the Option will be governed by subparagraph C below. C. In the event of the death of any Grantee, any Option then held by such Grantee which shall not have lapsed or terminated prior to the Grantee's death, shall, notwithstanding the termination date stated in such Option, be exercisable by the executors, administrators, legatees or distributees of the Grantee's estate for a period of six (6) months after the -12- Grantee's death as to that number of Shares which were purchasable by the Grantee at the time of his or her death. Provided, however, that in no case shall an Incentive Stock Option granted to an Optionee remain exercisable after a date ten (10) years from the date on which such Incentive Stock Option was granted; nor shall an Incentive Stock Option granted to an Optionee- Shareholder remain exercisable after a date five (5) year from the date on which such Incentive Stock Option was granted. 11. No Special Employment Rights. Nothing contained in the Plan or in any Option shall confer upon any Grantee any right with respect to the continuation of his or her employment by the Company or interfere in any way with the right of the Company, subject to the terms of any separate employment agreement to the contrary, at any time to terminate such employment or to increase or decrease the compensation of the Grantee from the rate in existence at the time of the grant of an Option. Whether an authorized leave of absence, or absence in military or government service, shall constitute a termination of employment shall be determined by the Committee at the time. 12. Rights as a Shareholder. The Grantee of an Option shall have no rights as a shareholder with respect to any Shares covered by the Option until the date such Option is exercised. Except as otherwise expressly provided in the Plan no adjustment shall be made for -13- dividends or other rights for which the record date occurs prior to the date of exercise. 13. Anti-dilution Provision. Except as otherwise expressly provided herein, the following provisions shall apply to all Shares authorized for issuance and optioned, granted or awarded under the Plan: A. In case the Company shall (i) declare a dividend or dividends on its Shares payable in shares of its capital stock, (ii) subdivide its outstanding Shares, (iii) combine its outstanding Shares into a smaller number of shares, or (iv) issue any shares of capital stock by reclassification of its Shares (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing corporation), the number of shares of capital stock authorized under the Plan will be adjusted proportionately. Similarly, in any such event, there will be a proportionate adjustment in the number of shares of capital stock subject to unexercised Options (but without adjustment to the aggregate option price). B. In the event that the outstanding common stock of the Company is changed or converted into, or exchanged for, a different number or kind of shares or other securities of the Company or of another corporation, by reason of reorganization, merger, consolidation or combination, appropriate adjustment will be made by the Committee in the number and kind of Shares for which Options may or may have been awarded under the Plan, to the end that the proportionate interests of Grantees shall be -14- maintained as before the occurrence of such event; provided, however, that in the event of any kind of delayed transaction which may constitute a change in control of the Company, the Committee, with the approval of the majority of the members of the Board who are not then holding Options, may modify any and all outstanding Options so as to accelerate, as a consequence of or in connection with such transaction, a Grantee's right to exercise any such Option. 14. Withholding Taxes Whenever an Option is to be exercised under the Plan, the Company shall have the right to require the Grantee, as a condition of exercise of the Option, to remit to the Company an amount sufficient to satisfy the Company's (or a Subsidiary's) Federal, state and local withholding tax obligation, if any, that will, in the sole opinion of the Committee, result from the exercise. 15. Amendment of the Plan. The Plan may at any time or from time to time be terminated, modified or amended by a majority of the shareholders of the Company. The Board may at any time and from time to time modify or amend the Plan in any respect, except that, without shareholder approval, the Board may not (a) materially increase the benefits accruing to participants under the Plan, (b) materially increase the number of Shares which may be issued under the Plan, or (c) materially modify the requirements as to eligibility for participation under the Plan. The termination or -15- modification or amendment of the Plan shall not, without the consent of a Grantee affect his rights under an Option previously granted to him or her. With the consent of the Grantee, the Board may amend outstanding Options in a manner not inconsistent with the Plan. 16. Miscellaneous. A. It is expressly understood that this Plan grants powers to the Committee but does not require their exercise; nor shall any person, by reason of the adoption of this Plan, be deemed to be entitled to the grant of any Option; nor shall any rights begin to accrue under the Plan except as Options may be granted hereunder. B. All expenses of the Plan, including the cost of maintaining records, shall be borne by Company. -16- Exhibit A FORM OF AMENDMENT TO THE 1987 STOCK OPTION PLAN Section 6A of the Company's 1987 Stock option Plan will be amended to read in full as follows: 6. Options A. Subject to adjustment as provided in paragraph 13 hereof, Options may be issued pursuant to the Plan for the purchase of not more than 2,000,000 Shares; provided, however, that if prior to the termination of the Plan, an Option shall expire or terminate for any reason without having been exercised in full, the unpurchased Shares subject thereto shall again be available for the purposes of the Plan. EX-10.8 10 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT dated as of June 26, 1995, between MEDIQ Incorporated, a Delaware corporation ("MEDIQ"), and Michael F. Sandler (the "Executive"). BACKGROUND WHEREAS, Executive is currently the Senior Vice President of Finance and Chief Financial Officer of MEDIQ; and WHEREAS, MEDIQ recognizes, in addition to Executive's other duties, the significant responsibility of Executive with respect to assisting in the possible sale of MEDIQ; and WHEREAS, MEDIQ acknowledges and recognizes that it would serve the best interests of MEDIQ to assure itself of the continued employment of the Executive as its Senior Vice President of Finance and Chief Financial Officer and the assistance of Executive in maximizing the value received for MEDIQ in any potential sale and that the compensation provided for herein represents the fair value of the services to be provided by Executive with respect to maximizing such value and with respect to the other services to be provided hereunder; and WHEREAS, MEDIQ acknowledges and recognizes that it will receive significant benefit from Executive continuing his employment with MEDIQ; and WHEREAS, Executive desires to continue his employment with MEDIQ on the terms and conditions provided in this Agreement. NOW THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein and intending to be legally bound hereby, the parties hereto agree as follows: SECTION 1. CAPACITY AND DUTIES 1.1 Employment; Acceptance of Employment. MEDIQ hereby employs Executive and Executive hereby accepts employment by MEDIQ for the period and upon the terms and conditions hereinafter set forth. 1.2 Capacity and Duties. (a) Executive shall be employed by MEDIQ as Senior Vice President of Finance and Chief Financial Officer and shall perform such other executive duties and shall have such executive authority, consistent with his position as may from time to time be specified by the Board of Directors of MEDIQ (the "Board"). From the date hereof until a Sale Event (as hereinafter defined) occurs or any such sale or divestiture is finally abandoned by the Board, Executive shall report directly to the Board or any duly authorized committee thereof having authority over such proposed sale or divestiture. Following any Sale Event or abandonment of such sale or divestiture by the Board, Executive shall report as to all matters hereunder to the Chief Executive Officer of MEDIQ. In the event that this Agreement is assigned to a liquidating trust (the "Trust") by MEDIQ as contemplated under Section 6.4, Executive shall agree to serve as an executive employee of the Trust with, to the fullest extent possible, executive duties and authority consistent with his position at MEDIQ and, in such capacity, shall report directly to the trustees of the Trust. (b) Executive shall devote his full working time, energy, skill and best efforts to the performance of his duties hereunder, in a manner which will faithfully and diligently further the business and interests of MEDIQ, and shall not be employed by or participate or engage in or be a part of in any manner the management or operation of any business enterprise other than MEDIQ (and the other subsidiaries or affiliates of MEDIQ on whose boards of directors Executive currently sits) without the prior written consent of the Board, which consent may be granted or withheld in its sole discretion. SECTION 2. TERM OF EMPLOYMENT 2.1 Term. The initial term of Executive's employment hereunder shall commence on the date hereof, shall continue until June 30, 1997 and shall thereafter automatically be renewed from year to year unless and until either party shall give notice of his or its election to terminate Executive's employment at least 60 days prior to the end of the then-current term, unless earlier terminated as hereinafter provided. Such initial term, and each renewal term are hereafter referred to collectively as the "Contract Period." SECTION 3. COMPENSATION 3.1 Basic Compensation. As compensation for Executive's services hereunder, MEDIQ shall pay to Executive a salary at the annual rate of $250,000 (the "Base Salary"). Such Base Salary shall be payable in accordance with MEDIQ's regular payroll practices in effect from time to time. Such Base Salary shall be subject to increase based on normal periodic merit review by the Compensation Committee of the Board of Directors of MEDIQ (the "Compensation Committee") or the appropriate governing body of -2- the Trust, as applicable in accordance with the corporate policies of MEDIQ (such annual base salary, including the foregoing adjustments, if any, is hereinafter referred to as the "annual base salary"). 3.2 Performance Bonus. During the Contract Period, Executive may receive an annual performance bonus at the sole discretion of the Compensation Committee or the appropriate governing body of the Trust, as applicable in accordance with the corporate policies of MEDIQ. 3.3 Employee Benefits. In addition to the compensation provided for in Section 3.1, Executive shall be entitled during the term of his employment to participate in all of MEDIQ's employee benefit plans and benefit programs as may from, time to time be provided for other employees of MEDIQ whose duties, responsibilities, and compensation are reasonably comparable to those of Executive including without limitation (a) Executive shall be entitled to thirty (30) business days vacation per year, (b) MEDIQ shall provide Executive with an automobile in accordance with the terms of MEDIQ's executive benefits plan (the reasonable expenses of which automobile shall be borne by MEDIQ), (c) MEDIQ shall cause Executive to be included at "Level A" in its Incentive Compensation Plan, a copy of which is attached hereto as Exhibit A, and (d) Executive shall be covered as an insured under such Directors' and Officers' Liability insurance as MEDIQ maintains generally for its Officers and Directors. If Executive becomes a participant in any employee benefit plan, practice or policy of MEDIQ or its affiliates, Executive shall be given credit under such plan for all service in the employ of MEDIQ and any predecessors thereto or affiliates thereof prior to the date hereof for purposes of eligibility and vesting, benefit accrual and for all other purposes for which such service is either taken into account or recognized under the terms of such plan, practice or policy. 3.4 Expense Reimbursement. During the term of his employment, MEDIQ shall reimburse Executive for all reasonable expenses incurred by him in accordance with its regular reimbursement policies as in effect from time to time and upon receipt of itemized vouchers therefor and such other supporting information as MEDIQ may reasonably require. 3.5 Transaction Compensation. (a) If, during the Applicable Period (as herein defined), a Sale Event (as hereafter defined) occurs, Executive shall be entitled to receive a one-time bonus calculated as provided in paragraph (b) below. For the purposes of this Agreement, a "Sale Event" means any sale or divestiture of, by or involving MEDIQ including a sale of substantially all of MEDIQ's stock or assets (including through merger, tender, exchange or -3- otherwise, including distributions of MEDIQ's assets to its stockholders or into a liquidating trust and including, without limitation, a sale or divestiture to the Management Group (as defined in Section 6.10 hereof)), in either case in one or more transactions. Executive's bonus shall be paid in cash within 10 days after the consummation of a Sale Event. The term "Applicable Period" shall mean (a) the Contract Period and (b) the one-year period thereafter in the event Section 4.1, 4.2 or 4.4 hereof is applicable. (b) Executive's bonus payable upon a Sale Event shall be based on the fair market value per share ("Share Value") received by MEDIQ's stockholders in the transaction. In the event that MEDIQ's stockholders receive a Share Value of $6.50 or more, Executive's bonus shall equal $500,000 plus an additional $1,000 for each additional $.01 by which the Share Value received by MEDIQ's stockholders exceeds $6.50. In the event that the stockholders receive Share Value of less than $6.50 upon a Sale Event, Executive shall receive a bonus in the amount of $200,000 plus any additional bonus at the sole discretion of the Board. If the Sale Event includes or consists of a distribution of MEDIQ's assets to its stockholders or into the Trust, for purposes of calculating Executive's bonus hereunder, MEDIQ's stockholders will be deemed to have received Share Value equal to the fair market value of Such assets, net of liabilities assumed (the "Net Proceeds"), at the time they are distributed. If the distribution is into the Trust, such Share Value will be deemed to be increased by any increase in the Net Proceeds from the date of distribution into the Trust until the date of distribution from the Trust to MEDIQ's Shareholders, whether or not such subsequent distribution occurs during the Applicable Period. In the event of such deemed increase in the Share Value, Executive's bonus will be recalculated hereunder and any additional amounts payable to him shall be paid to him within ten days of each such distribution from the Trust. With respect to any distribution of non-cash assets, if the parties are unable to agree on the value of the Net Proceeds upon which Executive's bonus shall be based, the Board of Directors and Executive shall select an investment banking firm, reasonably acceptable to each of them, to make such determination. The expenses of the investment banking firm shall be borne by MEDIQ, unless the investment banking firm shall determine that the Executive's position regarding the value of the Net Proceeds was unreasonable under the circumstances, in which case such fees and expenses shall be shared equally between MEDIQ and Executive. (c) Executive acknowledges that a Sale Event may not occur, that the Board may determine not to pursue a Sale Event, that such a transaction can occur only upon proper authorization of the Board, or a duly constituted committee thereof, and accordingly there can be no assurance that any bonus will become payable to Executive under this Section. -4- SECTION 4. TERMINATION OF EMPLOYMENT 4.1 Death of Executive. Executive's employment hereunder shall immediately terminate upon his death, upon which MEDIQ shall not thereafter be obligated to make any further payments hereunder other than amounts (including salary, bonuses, expense reimbursement, etc.) earned or accrued as of the date of Executive's death in accordance with generally accepted accounting principles ("GAAP") and except as otherwise provided in Section 3.5 hereof. 4.2 Disability of Executive. If Executive, in the reasonable opinion of a physician selected by the Board, is unable, for any reason, to perform his duties hereunder for a period of 180 consecutive days then the Board shall have the right to terminate Executive's employment upon 30 days' prior written notice to Executive at any time during the continuation of such inability, in which event MEDIQ shall not thereafter be obligated to make any further payments hereunder other than amounts (including salary, bonuses, expense reimbursement, etc.) earned or accrued under this Agreement as of the date of such termination in accordance with GAAP and except as otherwise provided in Section 3.5 hereof. 4.3 Termination for Cause. Executive's employment hereunder shall terminate immediately upon notice that MEDIQ is terminating Executive for "cause" (as defined herein), in which event MEDIQ shall not thereafter be obligated to make any further payments hereunder other than amounts (including salary, bonuses, expense reimbursement, etc.) earned or accrued under this Agreement as of the date of such termination in accordance with GAAP. As used herein, "cause" shall mean the following, which for purposes of subsections (v) through (ix) shall not have been corrected after notice and a reasonable opportunity to cure: (i) misconduct involving dishonesty which adversely affects MEDIQ; (ii) fraud, theft or misappropriation or embezzlement of MEDIQ's funds; (iii) conviction of any felony, crime involving fraud or misrepresentation, or of any other crime (whether or not connected with his employment) the effect of which is likely to adversely affect MEDIQ or its affiliates; (iv) illegal possession or use of any controlled substance; (v) Executive's failure to materially Perform his duties under this Agreement; -5- (vi) repeated and consistent failure of Executive to be present at work during normal business hours unless the absence is because of a disability determined pursuant to Section 4.2; (vii) willful violation of any reasonable express direction or any reasonable rule or regulation established by the Board; (viii) repeated insubordination, gross incompetence, or misconduct in the performance of, or gross neglect of, Executive's duties hereunder; or (ix) use of alcohol or other drugs which interferes with the performance by Executive of his duties. 4.4 Termination Without Cause. (a) In the event: (i) Executive's employment is terminated by MEDIQ for any reason other than cause or the death or disability of Executive; or (ii) this Agreement is not renewed by MEDIQ at the end of any Contract Period on terms and conditions no less favorable to Executive than those in effect at such time, or Executive's employment is terminated by Executive for "Good Reason" (as defined herein): MEDIQ shall within 10 days thereafter pay Executive all amounts due under Sections 3.1, 3.2 (if such bonus has been agreed to) 3.3, 3.4 and 3.5 (including Base Salary, benefits, expense reimbursements and compensation for unused vacation time) earned or accrued as of the date of such termination in accordance with GAAP and a lump sum payment equal to Executive's then current Base Salary for the then- remaining Contract Period and a period of one year thereafter, discounted to present value at the Prime Rate, not to exceed 12% in effect on the date of non-renewal or termination as published in the Wall Street Journal. Executive shall continue to receive from MEDIQ until the expiration of the period of one year after the end of the Contract Period then in effect his then current incentive compensation and employee benefits Executive would have received had he continued employment and such event had not occurred. Upon making such payments, MEDIQ shall have no further obligation to Executive hereunder except as otherwise provided in Section 3.5. (b) As used herein, the term "Good Reason" shall mean the following: -6- (i) material breach of MEDIQ's material obligations under this Agreement, not corrected after notice and a reasonable opportunity to cure; (ii) any change in Executive's Base Salary, title, any material change in Executive's duties or authority (except solely to accommodate the reasonable requirements of the Trust), and any material change in Executive's employee benefits; or (iii) MEDIQ's requiring Executive to be based at a location outside a 35-mile radius of Pennsauken, New Jersey, except for reasonably required travel on MEDIQ's business. (c) There shall be no requirement on the part of Executive to seek other employment in order to be entitled to the full amount of any payments or benefits to be made pursuant to this Agreement or any other agreement between Executive and MEDIQ, and no compensation or other benefits from any such other employment shall reduce the payment obligations of MEDIQ under this Section 4.4. SECTION 5. RESTRICTIVE COVENANTS 5.1 Confidentiality. Executive acknowledges a duty of confidentiality owed to MEDIQ and shall not, at any time during or after his employment by MEDIQ, retain in writing, use, divulge, furnish, or make accessible to anyone, without the express authorization of the Board, any trade secret, private or confidential information or knowledge of MEDIQ or any of its affiliates obtained or acquired by him while so employed. All computer software, telephone lists, customer lists, price lists, contract forms, catalogs, books, records, and files acquired while an employee of MEDIQ, are acknowledged to be the property of MEDIQ and shall not be duplicated, removed from MEDIQ's possession or made use of other than in pursuit of MEDIQ's business and, upon termination of employment for any reason, Executive shall deliver to MEDIQ, without further demand, all copies thereof which are then in his possession or under his control. 5.2 Inventions and Improvements. During the term of his employment, Executive shall promptly communicate to MEDIQ all ideas, discoveries and inventions which are or may be useful to MEDIQ or its business. Executive acknowledges that all ideas, discoveries, inventions, and improvements which are made, conceived, or reduced to practice by him and every item of knowledge relating to MEDIQ's business interests (including potential business interests) gained by him during his employment hereunder are the property of MEDIQ, and Executive hereby -7- irrevocably assigns all such ideas, discoveries, inventions, improvements, and knowledge to MEDIQ for its sole use and benefit, without additional compensation. The provisions of this Section shall apply whether such ideas, discoveries, inventions, improvements or knowledge are conceived, made or gained by him alone or with others, whether during or after usual working hours, whether on or off the job, whether applicable to matters directly or indirectly related to MEDIQ's business interests (including potential business interests), and whether or not within the specific realm of his duties. Executive shall, upon request of MEDIQ, at any time during or after his employment with MEDIQ, sign all instruments and documents requested by MEDIQ arid otherwise cooperate with MEDIQ to protect its right to such ideas, discoveries, inventions, improvements, and knowledge, including applying for, obtaining, and enforcing patents and copyrights thereon in any and all countries. 5.3 Injunctive and Other Relief. (a) Executive acknowledges and agrees that the covenants contained herein are fair and reasonable in light of the consideration paid hereunder, and that damages alone may not be an adequate remedy for any breach by Executive of his covenants contained herein and accordingly expressly agrees that, in addition to any other remedies which MEDIQ may have, MEDIQ shall be entitled to injunctive relief in any court of competent jurisdiction for any breach or threatened breach of any such covenants by Executive. Nothing contained herein shall prevent or delay MEDIQ from seeking, in any court of competent jurisdiction, specific performance or other equitable remedies in the event of any breach or intended breach by Executive of any of its obligations hereunder. (b) Notwithstanding the equitable relief available to MEDIQ, the Executive, in the event of a breach of his covenants contained in Section 5 hereof, understands and agrees that the uncertainties and delay inherent in the legal process could result in a continuing breach for some period of time, and therefore, continuing injury to MEDIQ until and unless MEDIQ can obtain such equitable relief. Therefore, in addition to such equitable relief, MEDIQ shall be entitled to monetary damages for any such period of breach until the termination of such breach, in an amount deemed reasonable to cover all actual losses, plus all monies received by Executive as a result of said breach and all reasonable costs and attorneys' fees incurred by MEDIQ in enforcing this Agreement. If Executive should use or reveal to any other person or entity any confidential information, this will be considered a continuing violation on a daily basis for so long a period of time as such confidential information is made use of by Executive or any such other person or entity. -8- SECTION 6. MISCELLANEOUS 6.1 Arbitration. (a) All disputes arising out of or relating to this Agreement which cannot be settled by the parties shall promptly be submitted to and determined by a single arbitrator in Philadelphia, Pennsylvania, pursuant to the rules and regulations then obtaining of the American Arbitration Association; provided that nothing herein shall preclude MEDIQ from seeking, in any court of competent jurisdiction, damages, specific performance or other equitable remedies in the case of any breach or threatened breach by Executive of Section 5 hereof. The decision of the arbitrator shall be final and binding upon the parties, and judgement upon such decision may be entered in any court of competent jurisdiction. (b) Discovery shall be allowed pursuant to the intendment of the United States Federal Rules of Civil Procedure and as the arbitrators determine appropriate under the circumstances. (c) Such arbitrator shall be required to apply the contractual provisions hereof in deciding any matter submitted to it and shall not have any authority, by reason of this Agreement or otherwise, to render a decision that is contrary to the mutual intent of the parties as set forth in this Agreement. 6.2 Prior Employment. Executive represents and warrants that he is not a party to any other employment, non-competition or other agreement or restriction which could interfere with his employment with MEDIQ or his rights and obligations hereunder; and that his execution of this Agreement and the performance of his duties hereunder will not breach the provisions of any contract, agreement, or understanding to which he is party or any duty owed by him to any other person. 6.3 Severability. The invalidity or inenforceability of any particular provision or part of any provision of this Agreement shall not affect the other provisions or parts hereof. If any provision hereof is determined to be invalid or unenforceable by a court of competent jurisdiction, Executive shall negotiate in good faith to provide MEDIQ with protection as nearly equivalent to that found to be invalid or unenforceable and if any such provision shall be so determined to be invalid or unenforceable by reason of the duration or geographical scope of the covenants contained therein, such duration or geographical scope, or both, shall be considered to be reduced to a duration or geographical scope to the extent necessary to cure such invalidity. -9- 6.4 Assignment. This Agreement shall not be assignable by Executive, and shall be assignable by MEDIQ only to any person or entity which becomes a successor in interest (by purchase of assets or stock, or by merger, or otherwise) to MEDIQ in the business or substantially all of the business presently operated by it or to any liquidating trust into which substantially all of the assets of MEDIQ are transferred. Subject to the foregoing, this Agreement and the rights and obligations set forth herein shall inure to the benefit of, and be binding upon, the parties hereto and each of their respective permitted successors, assigns, heirs, executors and administrators. 6.5 Notices. All notices hereunder shall be in writing and shall be sufficiently given if hand-delivered, sent by documented overnight delivery service or registered or certified mail, postage prepaid, return receipt requested or by telegram, fax or telecopy (confirmed by U.S. mail), receipt acknowledged, addressed as set forth below or to such other person and/or at such other address as may be furnished in writing by any party hereto to the other. Any such notice shall be deemed to have been given as of the date received, in the case of personal delivery, or on the date shown on the receipt or confirmation therefor, in all other cases. Any and all service of process and any other notice in any such action, suit or proceeding shall be effective against any party if given as provided in this Agreement; provided that nothing herein shall be deemed to affect the right of any party to serve process in any other manner permitted by law. (a) If to MEDIQ: MEDIQ Incorporated One MEDIQ Plaza Pennsauken, NJ 08110-1460 Tel: (609) 665-9300 Fax: (609) 486-4725 Attention: Michael J. Rotko, Esq. With a copy to: Drinker Biddle & Reath 1100 Philadelphia National Bank Building Broad and Chestnut Streets Philadelphia, PA 19107 Tel: (215) 988-2700 Fax: (215) 988-2757 Attention: William M. Goldstein, Esq. -10- (b) If to Executive: Michael F. Sandler 13 Christopher Avenue Kendall Park, NJ 08824 With a copy to: Barry M. Abelson, Esq. Pepper, Hamilton & Scheetz 3000 Two Logan Square, 18th and Arch Streets Philadelphia, PA 19103-2799 6.6 Entire Agreement and Modification. This Agreement constitutes the entire agreement between the parties hereto with respect to the matters contemplated herein and supersedes all prior agreements and understandings with respect thereto, including, without limitation, the Employment Agreement dated November 14, 1988, as amended (except the provision thereof regarding stock options). Any amendment, modification, or waiver of this Agreement shall not be effective unless in writing. Neither the failure nor any delay on the part of any party to exercise any right, remedy, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any other right, remedy, power, or privilege with respect to any occurrence be construed as a waiver of any right, remedy, power, or privilege with respect to any other occurrence. 6.7 Governing Law. This Agreement is made pursuant to, and shall be construed and enforced in accordance with, the internal laws of the State of New Jersey (and United States federal law, to the extent applicable), without giving effect to otherwise applicable principles of conflicts of law. 6.8 Headings; Counterparts. The headings of paragraphs in this Agreement are for convenience only and shall not affect its interpretation. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original and all of which, when taken together, shall be deemed to constitute but one and the same Agreement. 6.9 Further Assurances. Each of the parties hereto shall execute such further instruments and take such other actions as any other party shall reasonably request in order to effectuate the purposes of this Agreement. 6.10 MEDIQ Acknowledgements. MEDIQ acknowledges that as of the date hereof it has no claims of any kind against Executive arising out of or relating in any manner to Executive's participation in the management-led buy-out group including -11- Bernard Korman (the "Management Group"). Except as set forth in the letter between MEDIQ Acquisition Corporation ("MAC") and Dillon, Read & Co., Inc. dated January 18, 1995 (the "Dillon, Read Letter"), recognizing the importance of Executive's fiduciary obligations to MEDIQ with respect to the sale of MEDIQ, Executive shall not, from the date hereof, during the term of his employment hereunder, enter into any agreement or discussions to acquire an equity interest in any potential purchaser of MEDIQ, including the Management Group, nor shall Executive disclose to the Management Group any information relating to a Sale Event, until such time as a definitive agreement for a Sale Event is executed or Sale Event occurs, whichever first occurs. After the first to occur of a Sale Event or the execution of a definitive agreement for a Sale Event, Executive may negotiate and agree with potential purchasers of MEDIQ, including the Management Group, to obtain an equity interest in and an executive and board position with such purchaser. 6.11 Executive's Acknowledgements. Executive represents and warrants that, except for the Dillon Read Letter described in Section 6.10, he has no agreement or relationship with the Management Group requiring him to render to or perform services on behalf of such Group or that imposes any fiduciary obligation on Executive with respect to such Management Group. Executive further represents and warrants that he is not an officer or director of any entity controlled by the Management Group. 6.12 Legal Fees. MEDIQ shall pay all reasonable legal fees at the normal hourly rates of Pepper, Hamilton & Scheetz incurred by Executive in connection with the preparation, negotiation and execution of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. MEDIQ Incorporated By:/s/ Michael J. Rotko ------------------------------- Michael J. Rotko, Esq. /s/ Michael F. Sandler ------------------------------- Michael F. Sandler -12- EX-10.9 11 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT dated as of April 27, 1995, between MEDIQ Incorporated, a Delaware corporation ("MEDIQ"), and MEDIQ/PRN Life Support Services, Inc., a Delaware corporation ("MEDIQ/PRN"), and Thomas Carroll (the "Executive"). Background WHEREAS, Executive is currently the President and Chief Operating Officer of MEDIQ/PRN, a wholly-owned subsidiary of MEDIQ; and WHEREAS, MEDIQ recognizes, in addition to Executive's other duties, the significant responsibility of Executive with respect to assisting in the possible sale of MEDIQ/PRN; and WHEREAS, MEDIQ acknowledges and recognizes that it would serve the best interests of MEDIQ to assure itself of the continued employment of the Executive as President and Chief Operating Officer of MEDIQ/PRN and the assistance of the Executive in maximizing the value received for MEDIQ/PRN in any potential sale and that the compensation provided for herein represents the fair value of the services to be provided by Executive with respect to maximizing such value and with respect to the other services to be provided hereunder; and WHEREAS, MEDIQ/PRN acknowledges and recognizes it will receive significant benefit from Executive continuing his employment with MEDIQ/PRN; and WHEREAS, Executive desires to continue his employment with MEDIQ/PRN and to render services to MEDIQ (while it owns MEDIQ/PRN) and MEDIQ/PRN on the terms and conditions provided in this Agreement. NOW THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein and intending to be legally bound hereby, the parties hereto agree as follows: SECTION 1. CAPACITY AND DUTIES 1.1 Employment. MEDIQ/PRN hereby employs Executive, and Executive hereby accepts employment by MEDIQ/PRN, for the Contract Period (as defined below) and upon the terms and conditions hereinafter set forth. 1.2 Capacity and Duties. (a) Executive shall be employed by MEDIQ/PRN generally as the President and Chief Operating Officer of MEDIQ/PRN and shall perform such other executive duties, and shall have such executive authority, consistent with such position, as may from time to time be specified by the Board of Directors of MEDIQ or any duly authorized committee thereof (the "Board"). From the date hereof until a Sale Event (as hereinafter defined) occurs or any such sale or divestiture is finally abandoned by the Board, Executive shall report directly and exclusively to the Board of Directors of MEDIQ, or any duly authorized committee thereof having authority over such proposed sale or divestiture. Following any Sale Event or abandonment of such sale or divestiture by the Board, the Executive shall report as to all matters hereunder to the Chief Executive Officer of MEDIQ. During the Contract Period, Executive's position (including status, office, titles, authority, duties and responsibilities) shall be at least commensurate in all respects with those held, exercised and assigned immediately preceding the effective time of this Agreement. There shall be no material diminution in the position of Executive with MEDIQ or MEDIQ/PRN other than as provided herein unless the parties otherwise agree in writing. As long as Executive is President and Chief Operating Officer of MEDIQ/PRN, MEDIQ shall cause Executive to be elected and reelected as a director of MEDIQ/PRN. (b) Executive shall devote his full working time, energy, skill and best efforts to the performance of his duties hereunder, in a manner which will faithfully and diligently serve the business and interests of MEDIQ/PRN and its affiliates (as defined below), provided that Executive may devote such time as is reasonably required for charitable and other personal activities in accordance with MEDIQ's practices and policies. Executive's duties shall include using all reasonable efforts to maximize the value received for MEDIQ/PRN in any Sale Event. (c) For purposes of this Agreement, an "affiliate" means any person or entity which controls MEDIQ/PRN, is controlled by MEDIQ/PRN, or which is under common control with MEDIQ/PRN. For the purposes of this definition of "affiliate," "control" means the power to direct the management and policies of a person or entity, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" shall have correlative meanings; provided that, any person or entity who owns beneficially, either directly or through one or more intermediaries, more than 20% of the ownership interests in a specified entity shall be presumed to control such entity for the purposes of the definition of "affiliate." For the purposes of this Agreement, neither Bessie G. Rotko, Lionel Felzer nor their lineal descendants, children, spouses or any trust for the benefit of any of them (collectively, the "Rotko Group") shall be "affiliates" of MEDIQ or MEDIQ/PRN. -2- SECTION 2. TERM OF EMPLOYMENT 2.1 Term. The initial term of Executive's employment hereunder shall be for a period of two years, commencing on the date hereof, and shall thereafter automatically be renewed from year to year unless and until either party shall give notice of his or its election to terminate Executive's employment at least 60 days prior to the end of the then current term, unless earlier terminated as hereinafter provided. Such initial term, and each renewal term are hereafter referred to collectively as the "Contract Period." SECTION 3. COMPENSATION 3.1 Basic Compensation. As compensation for Executive's services hereunder, MEDIQ/PRN shall pay Executive a salary at the annual rate of $265,000. Such base salary shall be payable in installments in accordance with MEDIQ's regular payroll practices in effect from time to time. Such base salary shall be subject to increase based on normal periodic merit review by the Compensation Committee of the Board of Directors of MEDIQ (the "Compensation Committee") in accordance with he corporate policies of MEDIQ (such annual base salary, including the foregoing adjustments, if any, is hereinafter referred to as "annual base salary"); provided, however, that the amount of such increase shall not be less than the percentage amount, if any, by which the CPI (as hereafter defined) for the calendar month immediately preceding such anniversary date exceeds the CPI for same month of the immediately preceding year. For purposes of this Section 3.1, the term "CPI" shall mean the Consumer Price Index for All Urban Consumers for all items for New Jersey, as published by the Bureau of Labor Statistics of the United States Department of Labor, or of any revised or successor index hereafter published by the Bureau of Labor Statistics of other agency of the United States government succeeding to its functions. The annual base salary of Executive shall not be decreased at any time during the Contract Period from the amount then in effect, unless Executive otherwise agrees in writing. Participation in deferred compensation, discretionary bonus, retirement and other employee benefit plans and in fringe benefits shall not reduce the annual base salary payable to Executive under this Section 3.1. 3.2 Signing Bonus. Contemporaneously with signing this Agreement, the Executive will be paid a one time cash bonus in the amount of $100,000. 3.3 Benefits. (a) During the Contract Period, Executive (and Executive's family, if applicable) shall be entitled to participate in all incentive, savings, retirement, welfare and -3- other employee benefit plans, practices, policies and programs that MEDIQ/PRN or MEDIQ may provide for the benefit of its executive employees generally (together with the fringe benefits described below, "Employee Benefits"). Executive shall also be entitled to participate in any other fringe benefits which may be or become applicable to MEDIQ's or MEDIQ/PRN's executive employees, including the payment of reasonable expenses for attending annual and periodic meetings of trade associations and any other benefits that are commensurate with the duties and responsibilities to be performed by Executive under this Agreement. In no event shall the Employee Benefits provided to Executive be less favorable, in the aggregate, than the employee benefits plans, practices, policies and programs provided to Executive immediately preceding the effective date of this Agreement. (b) If Executive becomes a participant in any employee benefit plan, practice or policy of MEDIQ/PRN or its affiliates, Executive shall be given credit under such plan for all service in the employ of MEDIQ/PRN and any predecessors thereto or affiliates thereof prior to the date hereof, for purposes of eligibility and vesting, benefit accrual and for all other purposes for which such service is either taken into account or recognized under the terms of such plan, practice or policy. (c) During the Contract Period, Executive shall be entitled to a private office, and such secretarial services as have been previously provided to Executive, and such other assistance and accommodations as shall be suitable to the character of Executive's position with MEDIQ/PRN and adequate for the performance of Executive's duties hereunder. (d) MEDIQ/PRN shall pay or reimburse Executive for all reasonable expenses (including expenses of travel and accommodations) incurred or paid by Executive in connection with the performance of Executive's duties hereunder upon receipt of itemized vouchers therefor and such other supporting information as MEDIQ/PRN shall reasonably require. (e) During the Contract Period, MEDIQ/PRN shall continue to provide Executive with a leased automobile for use by Executive consistent with past practices and shall continue to pay or reimburse Executive for expenses reasonably incurred by Executive for the maintenance and operation of such automobile upon receipt of itemized vouchers therefor and such other supporting information as MEDIQ/PRN shall reasonably require. (f) During the Contract Period, MEDIQ/PRN shall continue to provide Executive with a cellular telephone and related telephone service or a cellular telephone allowance consistent with past practices. -4- (g) During the Contract Period, Executive shall be entitled to paid vacations in a manner commensurate with Executive's status as the President and Chief Operating Officer of MEDIQ/PRN, which shall not be less than the annual vacation period to which Executive is presently entitled. 3.4 Transaction Compensation. (a) If, during the term o this Agreement, a Sale Event (as hereafter defined) occurs, Executive shall be entitled to receive a one-time bonus calculated as provided in paragraph (b) below. For the purposes of this Agreement, a "Sale Event" means any sale or divestiture of MEDIQ/PRN, including (i) a sale of substantially all of its stock (including through merger, tender, exchange or otherwise) or assets, in either case in one or more related transactions, (ii) a Change in Control (as defined below) and (iii) any sale or distribution of the stock of MEDIQ/PRN which results in a Change in Control at the time of such sale or distribution or at any time within the immediately succeeding twelve (12) months. Executive's bonus shall be paid in cash within 30 days after the consummation of a Sale Event. (b) Executive's bonus payable upon a Sale Event shall equal the sum of (i) .25% of the aggregate purchase price paid for MEDIQ/PRN up to a maximum aggregate purchase price of $375,000,000, plus (ii) if the aggregate purchase price paid for MEDIQ/PRN exceeds $375,000,000, 1.5% of any purchase price in excess of $375,000,000. For purposes of calculating the bonus, the aggregate purchase price shall equal the sum of (x) the total cash consideration paid for MEDIQ/PRN (including, without limitation, in respect of any warrants or other security of MEDIQ or MEDIQ/PRN), plus (y) the fair market value of any securities or other property received as consideration for MEDIQ/PRN (including, without limitation, in respect of any warrants or other security of MEDIQ or MEDIQ/PRN), plus (z) the aggregate amount (including, without limitation, accrued but unpaid interest and the unpaid amount of any capital leases) of any aggregate liabilities of MEDIQ/PRN assumed or refinanced by the purchaser in connection with the completion of the acquisition, other than current liabilities taken into account in computing the working capital of MEDIQ/PRN (except for current liabilities for indebtedness for money borrowed (including accrued but unpaid interest or capital leases)). The aggregate purchase price on which Executive's bonus is to be calculated is hereafter called "Enterprise Value" of MEDIQ/PRN. In the event of any dispute between Executive and MEDIQ regarding the Enterprise Value of MEDIQ/PRN on which Executive's bonus shall be calculated, the Board of Directors and Executive shall select an investment banking firm, reasonably acceptable to each of them, to make the determination of the Enterprise Value of MEDIQ/PRN. The fees and expenses of the investment banking firm incurred in making such -5- determination shall be borne by MEDIQ, unless the investment banking firm shall determine that the Executive's position regarding the calculation of Enterprise Value was unreasonable under the circumstances, in which case such fees and expenses shall be shared equally between MEDIQ and Executive. (c) Executive acknowledges that a Sale Event may not occur, that the Board of Directors may determine not to pursue a Sale Event, that such a transaction can occur only upon proper authorization of the Board of Directors, or a duly constituted committee thereof, and accordingly there can be no assurance that any bonus will become payable to Executive under this Section. (d) In the event that MEDIQ/PRN is sold or deemed sold as part of an overall transaction involving the sale or other divestiture of all of MEDIQ and/or its other partly or wholly owned subsidiaries, or in connection with a Change in Control of MEDIQ, Executive's bonus shall be paid based on the Enterprise Value of MEDIQ/PRN implicit in such transaction if such Enterprise Value is readily ascertainable. If the Enterprise Value of MEDIQ/PRN is not readily ascertainable in such transaction, and the parties are unable to agree on the portion of the purchase price representing the Enterprise Value of MEDIQ/PRN on which Executive's bonus shall be calculated, the Board of Directors and Executive shall select an investment banking firm, reasonably acceptable to each of them, to make such determination. The expenses of the investment banking firm incurred in making such determination shall be borne by MEDIQ, unless the investment banking firm shall determine that the Executive's position regarding the calculation of Enterprise Value was unreasonable under the circumstances, in which case such fees and expenses shall be shared equally between MEDIQ and Executive. (e) For the purposes of Section 3.4 of this Agreement a "Change in Control" shall mean the earlier of such time as (i) the Rotko Group collectively ceases to beneficially own more than 35% of the voting securities of MEDIQ (or MEDIQ/PRN, as the case may be) or (ii) the Rotko Group collectively ceases to beneficially own more than 50% of the voting securities of MEDIQ (or MEDIQ/PRN, as the case may be) and none of MEDIQ's securities are registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended. 3.5 Performance Bonus. During the Contract Period, Executive shall receive, commencing with fiscal year 1995, an annual performance bonus of 0 to 60% of his base salary in effect for such year ("incentive compensation"), calculated in such fashion and based on the achievement of certain performance criteria to be established by the Chief Executive Officer and approved by the Board of Directors of MEDIQ or the Compensation -6- Committee prior to the beginning of such year. Executive's incentive compensation in respect of any fiscal year in which Executive's employment terminates shall be prorated for the number of days that he was employed during such year. For the 1995 fiscal year (i.e., the twelve (12) month period ending September 30, 1995) incentive compensation shall be paid, calculated and based upon the performance criteria approved by MEDIQ prior to the date hereof, a description of which is contained on Exhibit 1 to this Agreement). For successive fiscal years, Executive's incentive compensation shall be paid, calculated and based upon performance criteria as set forth above. The Board of Directors, although under no obligation to do so, may determine from time to time to pay to Executive compensation in addition to the annual base salary and incentive compensation required to be paid above. If a Sale Event occurs prior to March 31, 1996, Executive shall not be entitled to receive an incentive bonus with respect to the fiscal year ending September 30, 1996. 3.6 Options and SARS Granted if Company is Not Sold. (a) Upon the earlier of the (i) abandonment of a Sale Event by the Board of Directors of MEDIQ or (ii) March 31, 1995 if no Sale Event has occurred prior to such date, MEDIQ shall immediately, and with no further action, award, or cause to be awarded to Executive, the stock options and stock appreciation rights described in paragraphs (b) through (c) below in lieu of the transaction compensation set forth in Section 3.4. In such event, Executive shall no longer be entitled to the incentive compensation provided under Section 3.4. (b) Upon satisfaction of the conditions set forth in Section 3.6(a) above ("Grant Date"), MEDIQ shall immediately, and with no further action, grant Executive options to purchase 100,000 common shares of MEDIQ at a cash purchase price per share equal to the fair market value of a share of common stock of MEDIQ on the date such grant is made. For these purposes, fair market value shall mean the last sale price of MEDIQ stock on the American Stock Exchange as reported in the Wall Street Journal. The options will be immediately exercisable, in whole or in part, upon grant for a period of ten years from the date of this Agreement. Upon termination of Executive's employment for Cause or termination of Executive's employment other than for Good Reason, in either case prior to the Grant Date, Executive shall no longer be eligible to receive any options pursuant to this Section 3.6. The effect of such termination on any options granted or earned by Executive on or after such Grant Date shall be determined by the terms and conditions of the options. The options shall be set forth in a written stock option agreement containing the terms set forth in this Section and containing such other terms, not inconsistent herewith, that are consistent with the terms of MEDIQ's standard employee options and related -7- plans in effect on the date hereof ("Standard Option Terms") and as are set forth in the plan, or as the parties may otherwise agree. Within 90 days after such grant, MEDIQ shall prepare and file a Registration Statement on Form S-8, if it is then eligible for the use of such form, with respect to the common stock issuable upon exercise of such options. The number of common shares of MEDIQ contemplated by this Section 3.6(b) as being possibly granted to Executive (and any consideration payable in respect thereof) shall be subject to adjustment and treatment from and after the date hereof until actually granted to Executive in the same manner that is provided in the Standard Option Terms as if such options were actually granted on the date hereof but remain unexercised until their actual grant. (c) (i) Upon satisfaction of the conditions set forth in Section 3.6(a) above, the Executive shall also be granted, immediately and with no further action, stock appreciation rights, the value of which shall be settled in cash as provided in subparagraph (ii) below, with respect to that number of shares of common stock of MEDIQ/PRN equal to 2% of MEDIQ/PRN's common stock then outstanding after giving pro forma effect to the SAR. (ii) Except as provided in clause (iv) below, upon the termination of Executive's employment for any reason, Executive shall be entitled to be paid the value of his SARs in cash. Payment of the value of Executive's SARs shall be made within 120 days of the termination of his employment; provided, however, that if Executive's employment with MEDIQ/PRN is terminated prior to the second anniversary of the date of this Agreement, payment shall be made within 120 days of such anniversary based upon the value of his SARs on such second anniversary. In addition, Executive may, at his option, request payment of the value of his SARs at the time of such request, in whole or in part, on each fifth anniversary of the date of this Agreement (or upon the occurrence of any event that would constitute a "Sale Event") regardless of when it occurs) and such request(s) shall not result in cancellation of such SARs ("Payment Request"). The value of Executive's SARs to be paid to him (or his estate) upon the termination of his employment (or any earlier request as provided above) shall be the amount obtained by solving the following formula: Value of SARS = 2% [(Terminal Value of MEDIQ/PRN) - (Base Value of MEDIQ/PRN)] - all amounts previously paid on account of the SARs granted hereunder Where: (A) Terminal Value of MEDIQ/PRN meansthe amount calculated by multiplying 6 times the EBITDA of MEDIQ/PRN for the 12 month period ending on the last day of -8- MEDIQ/PRN's fiscal year preceding the year in which termination of Executive's employment or the applicable Payment Request or a Payment Request occurs, except that if the termination of Executive's employment or a Payment Request occurs more than 210 days after the close of such fiscal year, EBITDA shall be calculated for the 12 month period ending on the last day of the second fiscal quarter of the fiscal year in which the termination of Executive's employment or the applicable Payment Request occurs. (B) Base Value of MEDIQ/PRN means the amount equal to 6 times (i) $60,000,000 (assumed EBITDA of MEDIQ/PRN for the 12 month period ended September 30, 1995, which amount will not be changed based on actual EBITDA for such period) and (ii) increased at a compound annual rate of 2.50% during the period beginning September 30, 1995, and ending on the last day of the 12 month period for which EBITDA is calculated in computing the Terminal Value of MEDIQ/PRN. (C) EBITDA of MEDIQ/PRN for any period means MEDIQ/PRN's income before interest, taxes, depreciation and amortization expense during such period, calculated in accordance with general accepted accounting principles, consistent with those used in the preparation of MEDIQ/PRN's annual financial statements. In calculating EBITDA of MEDIQ/PRN: (I) except as contemplated in subclause (II) hereof, no allocation, charge or deduction will be made for overhead costs of any other person or affiliate (including without limitation MEDIQ); (II) no allocation, charge or deduction will be made for services rendered by any affiliate other than the costs (including reasonable overhead costs) that would be charged to MEDIQ/PRN for such services by an unrelated third party in an arm's length transaction; (III) no allocation, charge or deduction will be made for any extraordinary or non-recurring expense or income items; and (IV) no charge or deduction will be made for any expense attributable to any SARs or options granted hereunder. In the event of any dispute relating to calculation of EBITDA, the dispute shall be resolved by the Company's regular outside accountants. (iii) Executive's SARS shall not be transferrable to any person (except as provided in Section 6.4). (iv) Executive's SARS shall terminate and be of no force or effect in the event Executive is discharged for Cause prior to the second anniversary of the date of this Agreement, thereafter, the SARs shall not be forfeitable and shall be paid as herein provided. (v) A hypothetical example of the computation of the value of Executive's SARS is attached hereto as Exhibit 2. -9- SECTION 4. TERMINATION OF EMPLOYMENT 4.1 Death of Executive. (a) Executive's employment hereunder shall immediately terminate upon his death, upon which MEDIQ/PRN shall pay amounts due under Sections 3.1 and 3.3 (including salary, Employee Benefits, expense reimbursements and compensation for unused vacation time) accrued as of the date of Executive's death in accordance with generally accepted accounting principles ("GAAP). (b) If Executive, in the reasonable opinion of MEDIQ is Disabled (as defined below), MEDIQ/PRN shall have the right to terminate Executive's employment upon thirty days prior written notice to Executive at any time after the expiration of the 180 day period referred to below, in which event MEDIQ/PRN shall pay amounts due under Sections 3.1 and 3.3 (including salary, Employee Benefits, expense reimbursements and compensation for unused vacation time) accrued as of the date of Executive's termination because of Disability in accordance with GAAP. As used in this Agreement, the term "Disabled" or "Disability" shall mean the inability of Executive to perform substantially Executive's duties and responsibilities to MEDIQ/PRN by reason of a physical or mental disability or infirmity for a continuous period of at least 180 days. The date of disability shall be on the last day of such 180 day period. The determination of whether the Disability has occurred shall be made by a licensed physician chosen by the Board of Directors of MEDIQ. The benefits payable under Sections 4.1, 4.2 or otherwise under this Agreement shall be reduced by the amount of any benefits to which Executive may be entitled under the benefit plans and programs of MEDIQ/PRN, including the disability plan, any supplementary retirement plan or agreement or insurance policies maintained by MEDIQ/PRN for the benefit of Executive. 4.2 Continuing Benefits Following Death or Disability. In addition to any payments or benefits contemplated by Section 4.1, if Executive's employment is terminated for death or Disability, Executive (and, as applicable, his family and estate) shall continue to receive all base salary, incentive compensation and all Employee Benefits Executive (and, as applicable, his family) would have received for the balance of the Contract Period had his employment not been so terminated. In such event, (a) Executive (or his estate if applicable) shall, on the Grant Date, receive options and SARs under Section 3.6 with the same effect and benefit as if Executive were employed at such date and his employment immediately terminated after the grant of the option and SARs for death or Disability, and (b) Executive (or, as applicable, his estate) shall not thereafter be entitled to any transaction compensation under Section 3.4, unless a Sale Event occurred prior to the date Executive's employment was -10- terminated for death or Disability, in which case Executive (or, as applicable, his estate) shall receive transaction compensation under Section 3.4 but shall not receive options or SARs under Section 3.6. 4.3 Termination for Cause. (a) Except as otherwise provided in this Agreement, the employment of Executive hereunder shall terminate upon the earliest to occur of the dates specified below: (i) the end of the Contract Period; (ii) the close of business on the date of Executive's death; (iii) the close of business on the date which is 30 days after the date on which MEDIQ/PRN delivers to Executive a written notice of MEDIQ/PRN's election to terminate Executive's employment for "Cause" (as hereinafter defined); (iv) the close of business on,the date which is 30 days after the date on which Executive delivers to MEDIQ/PRN a notice of Executive's election to terminate Executive's employment under this Agreement for "Good Reason" (as hereinafter defined); provided, however, that Executive's notice of election to terminate his employment for Good Reason shall provide MEDIQ/PRN with a reasonable opportunity to cure the behavior that constitutes Good Reason, which reasonable opportunity shall in no event be less than 15 or more than 30 days; (v) the close of business on the date which is 30 days after the date on which MEDIQ/PRN shall have delivered to Executive a written notice of MEDIQ/PRN's election to terminate Executive's employment because of Disability; or (vi) the close of business on the date which is 60 days after the date on which MEDIQ/PRN shall have delivered to Executive a written notice that the Board of Directors of MEDIQ has adopted a resolution terminating the employment of Executive hereunder and such termination is not for death, Cause or Disability. Provided, however, that in no event shall termination of Executive's employment hereunder be effective until all amounts, then due Executive hereunder are paid in full. (b) Any purported termination by MEDIQ or MEDIQ/PRN or by Executive shall be communicated by written Notice of Termination (as hereinafter defined) to the other. For purposes of this Agreement, a "Notice of Termination" shall mean -11- a notice which indicates the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. For purposes of this Agreement, no such purported termination shall be effective without delivery of such Notice of Termination. Termination of employment will not cause a termination of this Agreement, the terms of which shall survive any termination of employment in accordance with the express terms hereof. (c) For the purposes of this Agreement, the term "Cause" shall mean (i) fraud, theft, misappropriation or embezzlement of MEDIQ's or MEDIQ/PRN's funds; (ii) conviction of any felony, crime involving fraud or misrepresentation, or of any other crime (whether or not connected with his employment) the effect of which is likely to adversely affect MEDIQ or MEDIQ/PRN, except if Executive's actions which result in such a conviction were taken in good faith and in a manner Executive reasonably believed not to be adverse to the interests of MEDIQ or MEDIQ/PRN; (iii) after a written demand for substantial performance to Executive from the Boards of Directors of MEDIQ and MEDIQ/PRN (the mailing of such written demand having been authorized by at least sixty percent (60%) of the directors then in office) which specifically identifies the manner in which the Boards of Directors believe that Executive has intentionally materially breached Executive's duties and provides Executive with a 30 day period in which to cure such breach, the willful and continuing intentional material breach by Executive substantially to perform Executive's duties with MEDIQ and MEDIQ/PRN (other than any such failure resulting from Disability); (iv) abuse of alcohol or other drugs which interferes with the performance by Executive of his duties, provided that Executive has been given 30 days notice by MEDIQ/PRN of its intent to terminate Executive pursuant to this provision during which time Executive has not demonstrated the cessation of such abuse to the reasonable satisfaction of the Board of Directors. Notwithstanding the foregoing or any other provision hereof, Executive shall not be deemed to have been terminated for Cause unless there shall have been delivered to Executive a copy of a resolution duly adopted by the affirmative vote of not less than sixty percent (60%) of the entire membership or the Boards of Directors of MEDIQ and MEDIQ/PRN at a meeting of such Boards of -12- Directors called and held for that purpose (after at least 15 days prior written notice to Executive and an opportunity for Executive, together with Executive's counsel, to be heard before such Boards), finding that, in the good faith option of the Boards of Directors of MEDIQ and MEDIQ/PRN, Executive was guilty of conduct set forth above and specifying the particulars thereof in reasonable detail. (d) For the purposes of this Agreement, the term "Good Reason" shall mean the occurrence of any of the events or conditions described in subparagraphs (i) through (vi) hereof without Executive's express written consent: (i) a material diminution of Executive's status, title, position, scope of authority or responsibilities (including reporting responsibilities); the assignment to Executive of any duties or responsibilities which, in Executive's reasonable judgment, are inconsistent with such status, title, position, authorities or responsibilities; or any removal of Executive from or failure to reappoint or reelect Executive to any of such positions, except in connection with the termination of Executive's employment for Disability, Cause, as a result of Executive's death or by Executive other than for Good Reason; (ii) a reduction by MEDIQ/PRN in Executive's compensation (other than the transaction compensation payable pursuant to Section 3.4 hereof) following a Sale Event and any payment to Executive resulting therefrom) or benefits as in effect on the date hereof or as the same may be increased from time to time; (iii) the relocation of MEDIQ/PRN's principal executive offices to a location outside a 25-mile radius of Philadelphia, Pennsylvania or MEDIQ/PRN's requiring Executive to be based at any place other than Pennsauken, New Jersey, except for reasonably required travel on MEDIQ/PRN's business; (iv) the materially adverse and substantial alteration in the nature and quality of the office space within which Executive performs Executive's duties, including the size and location thereof, as well as the secretarial and administrative support provided to Executive; (v) any material breach by MEDIQ or MEDIQ/PRN of any material provision of this Agreement; and (vi) the failure of MEDIQ to obtain a satisfactory agreement from any purchaser of MEDIQ/PRN or successor or permitted assignee of MEDIQ to assume and agree to perform this Agreement. -13- 4.4 Termination Without Cause. (a) In the event (i) Executive's employment is terminated (x) by MEDIQ/PRN for any reason other than Cause, or the death or Disability of Executive or (y) by Executive for Good Reason; or (ii) this Agreement is not renewed by MEDIQ/PRN at the end of any Contract Period on terms and conditions no less favorable to Executive than those in effect at such time, MEDIQ/PRN shall immediately pay Executive all amounts due under Sections 3.1 and 3.3 (including base salary, Employee Benefits, expense reimbursements and compensation for unused vacation time) accrued as of the date of such termination in accordance with GAAP. In such event, Executive (and, as applicable, his family) shall also continue to receive from MEDIQ/PRN until two years after the end of the Contract Period then in effect, all base salary, incentive compensation and Employee Benefits that Executive (and, as applicable, his family) would have received had he continued employment and such event had not occurred. In addition, Executive shall also be paid transaction compensation under Section 3.4 if a Sale Event occurs following any such event and prior to the second anniversary of this Agreement. If Executive does not receive transaction compensation under the preceding sentence, he shall be entitled to receive options and SARs under Section 3.6 with the same effect and benefit as if Executive were employed at such date and his employment was terminated immediately after the grant of the options and SARs by MEDIQ/PRN without Cause. (b) There shall be no requirement on the part of Executive to seek other employment or otherwise mitigate damages in order to be entitled to the full amount of any payments or benefits to be made pursuant to this Agreement or any other agreement between Executive and MEDIQ, MEDIQ/PRN or any of their affiliates; provided, however, if Executive's employment is terminated by MEDIQ/PRN other than for Cause or the death or Disability of Executive, or by Executive for Good Reason, Executive shall, for so long as he is being paid amounts in respect of base salary hereunder, use reasonable efforts following twelve (12) months after his employment has been so terminated, to find alternative employment; provided, however, such reasonable efforts shall not require Executive to move, commute more than 35 miles to his office or accept employment of a stature materially less than the executive position Executive had with MEDIQ/PRN. No payment or benefit under any portion of this Agreement shall be subject to offset; provided, however, that any employment earnings of Executive (including self-employed earnings) earned by Executive after the twelve (12) months following a termination described in Section 4.4(a) shall reduce the compensation and benefits payable to Executive under -14- this Section 4.4 on a dollar for dollar basis during the period for which they were earned. SECTION 5. RESTRICTIVE COVENANTS 5.1 Confidentiality. Executive acknowledges a duty of confidentiality owed to MEDIQ and MEDIQ/PRN and shall not, directly or indirectly, at any time during or after his employment by MEDIQ/PRN, divulge, furnish, or make accessible to anyone, without the express authorization of the Board, any trade secret, private or confidential or proprietary information or know-how of MEDIQ or MEDIQ/PRN or any of its affiliates obtained or acquired by him while so employed. All computer software and books paid for by MEDIQ or MEDIQ/PRN, and all records and files generated or acquired while an employee of MEDIQ and in the capacity as an employee of MEDIQ are acknowledged to be the property of MEDIQ and shall not be removed from MEDIQ or MEDIQ/PRN's possession or made use of other than in pursuit of MEDIQ or MEDIQ/PRN's business and, upon termination of employment for any reason, Executive shall deliver to MEDIQ, without further demand, all copies thereof which are then in his possession or under his control. The provisions of this Section 5.1 shall not apply to information which (i) is or becomes generally available to the public other than as a result of a disclosure by Executive, (ii) was available to Executive on a non-confidential basis prior to its disclosure to Executive, (iii) becomes available to Executive on a non-confidential basis from a source other than the MEDIQ or MEDIQ/PRN, (iv) must be disclosed by law or by order of a court or governmental authority, or (v) is used to enforce Executive's rights with MEDIQ or MEDIQ/PRN. This Section 5.1 shall terminate on the date that a sale or other transfer of MEDIQ/PRN is completed. 5.2 Noncompetition. (a) At any time while employed hereunder and, except as provided in the last sentence of this paragraph (a), for a period of one year following termination of Executive's employment for any reason, Executive shall not, directly or indirectly: (i) engage, anywhere in the Territory (as defined in Section 5.2(b) below), in the renting of any product or equipment substantially similar to and in competition with any product or equipment which at any time during the period of twelve months prior to the date of this Agreement has been rented by MEDIQ/PRN or any product or equipment which MEDIQ/PRN was developing during such period for future rental, or the provision of any service substantially similar to and in competition with any service offered by MEDIQ/PRN at any time during the period of twelve months prior to the date of this Agreement; (ii) be or become a stockholder, partner, owner, officer, director or employee or agent of, or a consultant to or give financial or other assistance to, any person or entity engaging in any such -15- activities; (iii) seek in competition with the business of MEDIQ/PRN to procure orders from or do business with any customer of MEDIQ/PRN; or (iv) solicit or contact with a view to the engagement or employment by any person or entity of any person who is an employee of MEDIQ/PRN as of the date of this Agreement, provided this will not preclude hiring any person who contacts Executive for employment and who has not been employed by MEDIQ or MEDIQ/PRN at any time during the preceding six months. Nothing herein shall prohibit Executive from owning, as a passive investor, in the aggregate not more than 5% of the outstanding publicly traded stock of any corporation so engaged. The duration of Executive's covenants set forth in this Section shall be extended by a period of time equal to the number of days, if any, during which Executive is in violation of the provisions hereof. Executive shall not be bound by this paragraph (a) in the event that (1) Executive's employment is terminated by MEDIQ/PRN without Cause or (2) Executive terminates his employment for Good Reason or (3) Executive's employment ceases on or after the expiration of the Contract Period, and MEDIQ/PRN shall have failed to offer to renew Executive's employment on terms no less favorable to Executive than those in effect at such time. (b) For the purposes of this Agreement, "Territory" means the United States. (c) If any party hereto learns of any breach or potential breach of this Agreement such party shall immediately notify the other party hereto of such event, specifying the basis therefor in reasonable detail. MEDIQ may, in its sole discretion, afford Executive an opportunity to remedy or otherwise cure such breach or potential breach before seeking legal redress, provided that Executive is actively seeking to cure or remedy such breach or potential breach; but such opportunity to remedy shall be without prejudice to the right of MEDIQ to seek and obtain injunctive or other relief. 5.3 Injunctive and Other Relief. (a) Executive acknowledges and agrees that the covenants contained in Sections 5.1 and 5.2 above are fair and reasonable in light of the consideration paid hereunder, and that damages alone shall not be an adequate remedy for any breach by Executive of his covenants contained herein and accordingly expressly agrees that, in addition to any other remedies which MEDIQ may have, MEDIQ shall be entitled to injunctive relief in any court of competent jurisdiction for any breach or threatened breach of any such covenants by Executive. Nothing contained herein shall prevent or delay MEDIQ from seeking, in any court of competent jurisdiction, specific performance or other equitable remedies in the event of any breach or intended breach by Executive of any of his obligations hereunder. In the event -16- MEDIQ prevails in an action en enforce its rights under Sections 5.1 and 5.2, it shall be entitled to be reimbursed for its costs and reasonable attorneys' fees associated with so enforcing its rights. SECTION 6. MISCELLANEOUS 6.1 MEDIQ. MEDIQ shall be jointly and severally liable for all obligations and liabilities of MEDIQ/PRN to Executive arising under this Agreement at any time during which MEDIQ owns in excess of 50% of the voting securities of MEDIQ/PRN. 6.2 Reimbursement of Counsel Fees; Arbitration. MEDIQ shall pay all reasonable legal fees at the normal hourly rates of Dechert Price & Rhoads, accounting fees and related expenses incurred by Executive in connection with the preparation, negotiation and execution of this Agreement. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Philadelphia, Pennsylvania, in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. The prevailing party, shall be entitled to recover form the other party all of its legal fees, accounting fees and related expenses incurred in any such arbitration including, without limitation, all expenses of arbitration, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees and all other disbursements or expenditures of the types customarily incurred in connection with prosecuting, defending or investigating any arbitration, action or suit. 6.3 Severability. The invalidity or unenforceability of any particular provision or part of any provision of this Agreement shall not affect the other provisions or parts hereof. If any provision hereof is determined to be invalid or unenforceable by a court of competent jurisdiction, Executive shall negotiate in good faith to provide MEDIQ with protection as nearly equivalent to that found to be invalid or unenforceable and if any such provision shall be so determined to be invalid or unenforceable by reason of the duration or geographical scope of the covenants contained therein, such duration or geographical scope, or both, shall be considered to be reduced to a duration or geographical scope to the extent necessary to cure such invalidity. 6.4 Assignment. Neither this Agreement nor any right or interest hereunder shall be assignable by Executive, Executive's beneficiaries, or legal representatives without MEDIQ's prior written consent; provided, however, that nothing -17- herein shall preclude (i) Executive from designating a beneficiary to receive any benefit payable hereunder upon Executive's death, or (ii) the executors, administrators, or other legal representatives of Executive or Executive's estate from assigning any rights hereunder to devisees, legatees, beneficiaries, testamentary trustees or other legal heirs of Executive (each a "Distributee"). If Executive should die while any amounts would still be payable to Executive if Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Executive's Distributee or, if there is no such Distributee, to Executive's estate. 6.5 Notices. All notices hereunder shall be in writing and shall be sufficiently given if hand-delivered, sent by documented overnight delivery service or registered or certified mail, postage prepaid, return receipt requested or by telegram, fax or telecopy (confirmed by U.S. mail), receipt acknowledged, addressed as set forth below or to such other person and/or at such other address as may be furnished in writing by any party hereto to the other. Any such notice shall be deemed to have been given as of the date received, in the case of personal delivery, or on the date shown on the receipt or confirmation therefor, in all other cases. Any and all service of process and any other notice in any such action, suit or proceeding shall be effective against any party if given as provided in this Agreement; provided that nothing herein shall be deemed to affect the right of any party to serve process in any other manner permitted by law. If to MEDIQ or MEDIQ/PRN: MEDIQ Incorporated One MEDIQ Plaza Pennsauken, NJ 08110-1460 Tel: (609) 665-9300 Fax: (609) 486-4725 Attention: Michael J. Rotko With a copy to: Drinker Biddle & Reath 1100 Philadelphia National Bank Building Broad and Chestnut Streets Philadelphia, PA 19107 Tel: (215) 988-2700 Fax: (215) 988-2757 Attention: William M. Goldstein, Esq. -18- If to Executive: Thomas Carroll 118 Jaffey Road Malvern, PA 19355 With a copy to: Dechert Price & Rhoads 4000 Bell Atlantic Tower 1717 Arch Street Philadelphia, PA 19103-2793 Tel: (215) 994-2138 Fax: (215) 994-2222 Attention: Henry N. Nassau, Esq. 6.6 Entire Agreement and Modification. This Agreement (and any Employee Benefit plan or agreement contemplated hereby) constitutes the entire agreement between the parties hereto with respect to the matters contemplated herein and supersedes all prior agreements and understandings with respect thereto. Any amendment, modification, or waiver of this Agreement shall not be effective unless in writing. Neither the failure nor any delay on the part of any party to exercise any right, remedy, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any other right, remedy, power, or privilege with respect to any occurrence be construed as a waiver of any right, remedy, power, or privilege with respect to any other occurrence. 6.7 Governing Law. This Agreement is made pursuant to, and shall be construed and enforced in accordance with, the internal laws of the State of New Jersey (and United States federal law, to the extent applicable), without giving effect to otherwise applicable principles of conflicts of law. 6.8 Headings; Counterparts. The headings of sections in this Agreement are for convenience only and shall not affect its interpretation. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original and all of which, when taken together, shall be deemed to constitute but one and the same Agreement. 6.9 Further Assurances. Each of the parties hereto shall execute such further instruments and take such other actions as any other party shall reasonably request in order to effectuate the purposes of this Agreement. 6.10 Indemnification. MEDIQ/PRN shall pay, as additional compensation under this Agreement, an amount equal to -19- Executive's liability (including all taxes on such amount). If any, under Internal Revenue Code ss.4998 (or any successor provisions by reason or payments under any provision of this Agreement or otherwise. Throughout the Contract period and for a period of five (5) years thereafter, MEDIQ and MEDIQ/PRN shall indemnify and defend executive against all claims arising out of Executive's activities as an officer of, director of or employee of MEDIQ and MEDIQ/PRN to the fullest extent permitted under the law of the applicable state or incorporation. MEDIQ and MEDIQ/PRN shall indemnify Executive from any claims arising out of the letter agreement between Executive and Dillon Read & Co. dated January 18, 1995 (the "Dillon Read Letter"). Neither MEDIQ nor MEDIQ/PRN shall assert any claims against Executive arising out of the Dillon Read Letter. In addition to the foregoing, Executive shall, upon reasonable notice, furnish such information and proper assistance to MEDIQ or MEDIQ/PRN as may reasonably be required by MEDIQ or MEDIQ/PRN in connection with any litigation in which it is, or may become, a party. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. MEDIQ INCORPORATED By:/s/ Michael J. Rotko -------------------------------- MEDIQ/PRN LIFE SUPPORT SERVICES, INC. By:/s/ Jay M. Kaplan -------------------------------- /s/ Thomas E. Carroll -------------------------------- Thomas Carroll -20- AWARD AS A % OF BASE SALARY USING TWO ADDITIVE PERFORMANCE MEASURES
- ----------------------------------------------------------------------------------------------------------------------------------- I. DIVISION NET PROFIT AS % OF BUDGETED PRE-TAX INCOME - ----------------------------------------------------------------------------------------------------------------------------------- PARTICIPANT BELOW CATEGORY 90% 90% 100% 110% 120+% -------- --- --- ---- ---- ----- A 0 20 40 53 60 B 0 10 20 27 30 C 0 5 10 13 15 D 0 2 4 6 7 - ----------------------------------------------------------------------------------------------------------------------------------- II. INDIVIDUAL PERFORMANCE VERSUS OBJECTIVES AND POSITION STANDARDS - ----------------------------------------------------------------------------------------------------------------------------------- PARTICIPANT BELOW ALMOST AT MEETS EXCEEDS FAR EXCEEDS CATEGORY OBJECTIVES OBJECTIVES OBJECTIVES OBJECTIVES OBJECTIVES - -------- ---------- ---------- ---------- ---------- ---------- A -- -- -- -- -- B 0 6 12 16 18 C 0 5 10 13 15 D 0 4 8 10 11
NOTE: Division Net Profit as percentage of Budgeted Pre-Tax Income has always been interrupted as Division Pre-Tax Income as a percentage of Budgeted Pre-Tax Income. EXHIBIT 2 Facts: 1) EBITDA used in calculating base value is $60,000,000 2) Termination of Executive's employment occurs on 1/1/98 3) EBITDA used in calculating terminal value for the 12 months ended 9/30/97 is $70,000,000 Calculation of Base Value 1) $60,000,000 x 1.025 = $61,500,000 2) $61,500,000 x 1.025 = $63,037,500 3) Base value = 6 x $63,037,500 4) 6 x $63,037,500 = $378,225,000 Calculation of Terminal Value Terminal value - 6 x (9/30/97 EBITDA) = $420,000,000 Calculation of SAR Payment Value of SARS - 2% (Terminal Value - Base Value) = $835,500 EX-10.10 12 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT dated as of June 20, 1995, between MEDIQ Incorporated, a Delaware corporation ("MEDIQ"), MEDIQ/PRN Life Support Services, Inc., a Delaware corporation, and PRN Holdings, Inc., a Delaware corporation (together "MEDIQ/PRN"), and Jay M. Kaplan (the "Executive"). BACKGROUND WHEREAS, Executive is currently the Senior Vice President and Chief Financial Officer of MEDIQ/PRN; and WHEREAS, MEDIQ recognizes, in addition to Executive's other duties, the significant responsibility of Executive with respect to assisting in the possible sale MEDIQ/PRN; and WHEREAS, MEDIQ acknowledges and recognizes that it would serve the best interests of MEDIQ to assure itself of the continued employment of the Executive as Senior Vice President and Chief Financial Officer of MEDIQ/PRN and the assistance of Executive in maximizing the value received for MEDIQ/PRN in any potential sale and that the compensation provided for herein represents the fair value of the services to be provided by Executive with respect to maximizing such value and with respect to the other services to be provided hereunder; and WHEREAS, MEDIQ/PRN acknowledges and recognizes that it will receive significant benefit from Executive continuing his employment with MEDIQ/PRN; and WHEREAS, Executive desires to continue his employment with MEDIQ/PRN and to render services to MEDIQ (while it owns MEDIQ/PRN) and MEDIQ/PRN on the terms and conditions provided in this Agreement. NOW THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein and intending, to be legally bound hereby, the parties hereto agree as follows: SECTION 1. CAPACITY AND DUTIES 1.1 Employment; Acceptance of Employment. MEDIQ/PRN hereby employs Executive and Executive hereby accepts employment by MEDIQ/PRN for the period and upon the terms and conditions hereinafter set forth. 1.2 Capacity and Duties. (a) Executive shall be employed by MEDIQ/PRN as the Senior Vice President and Chief Financial Officer of MEDIQ/PRN and shall perform such other executive duties and shall have such executive authority, consistent with his position as may from time to time be specified by the President of MEDIQ/PRN. From the date hereof until a Sale Event (as hereinafter defined) occurs or any such sale or divestiture is finally abandoned by the Board, Executive shall report directly and exclusively to the Board of Directors of MEDIQ or any duly authorized committee thereof having authority over such proposed sale or divestiture. Following any Sale Event or abandonment of such sale or divestiture by the Board, Executive shall report as to all matters hereunder to the President of MEDIQ/PRN. (b) Executive shall devote his full working time, energy, skill and best efforts to the performance of his duties hereunder, in a manner which will faithfully and diligently further the business and interests of MEDIQ and MEDIQ/PRN, and shall not be employed by or participate or engage in or be a part of in any manner the management or operation of any business enterprise other than MEDIQ or MEDIQ/PRN without the prior written consent of the Board, which consent may be granted or withheld in its sole discretion. SECTION 2. TERM OF EMPLOYMENT 2.1 Term. The initial term of Executive's employment hereunder shall be eighteen months commencing on the date hereof and shall thereafter automatically be renewed from year to year unless and until either party shall give notice of his or its election to terminate Executive's employment at least 60 days prior to the end of the then-current term, unless earlier terminated as hereinafter provided. Such initial term, and each renewal term are hereafter referred to collectively as the "Contract Period." SECTION 3. COMPENSATION 3.1 Basic Compensation. As compensation for Executive's services hereunder, MEDIQ/PRN shall pay to Executive a salary at the annual rate of $165,000 (the "Base Salary"). Such Base Salary shall be payable in accordance with MEDIQ/PRN's regular payroll practices in effect from time to time. Such Base Salary shall be subject to increase based on normal periodic merit review by the Compensation Committee of the Board of Directors of MEDIQ (the "Compensation Committee") in accordance with the corporate -2- policies of MEDIQ and MEDIQ/PRN (such annual base salary, including the foregoing adjustments, if any, is hereinafter referred to as the "annual base salary"). 3.2 Performance Bonus. During the Contract Period, Executive shall be entitled to receive an annual performance bonus in accordance with the corporate bonus plan and policies of MEDIQ/PRN as approved by the Compensation Committee. 3.3 Employee Benefits. In addition to the compensation provided for in Section 3.1, Executive shall be entitled during the term of his employment to participate in all of MEDIQ/PRN's employee benefit plans and benefit programs as may from time to time be provided for other employees of MEDIQ/PRN whose duties, responsibilities, and compensation are reasonably comparable to those of Executive. If Executive becomes a participant in any employee benefit plan, practice or policy of MEDIQ/PRN or its affiliates, Executive shall be given credit under such plan for all service in the employ of MEDIQ/PRN and any predecessors thereto or affiliates thereof prior to the date hereof, for purposes of eligibility and vesting, benefit accrual and for all other purposes for which such service is either taken into account or recognized under the terms of such plan, practice or policy. 3.4 Vacation. Executive shall be entitled to vacations which shall not be less than the annual vacation period to which Executive is presently entitled. 3.5 Expense Reimbursement. During the term of his employment, MEDIQ/PRN shall reimburse Executive for all reasonable expenses incurred by him in accordance with its regular reimbursement policies as in effect from time to time and upon receipt of itemized vouchers therefor and such other supporting information as MEDIQ/PRN may reasonably require. 3.6 Transaction Compensation. (a) If, during the term of this Agreement, a Sale Event (as hereafter defined) occurs, Executive shall be entitled to receive a one-time bonus calculated as provided in paragraph (b) below. For the purposes of this Agreement, a "Sale Event" means any sale or divestiture of MEDIQ/PRN, including a sale of substantially all of its stock (including through merger, tender, exchange or otherwise) or assets, in either case in one or more related transactions. Executive's bonus shall be paid in cash within 30 days after the consummation of a Sale Event. (b) Executive's bonus payable upon a Sale Event shall equal the sum of (i) .025% of the aggregate purchase price paid for MEDIQ/PRN up to a maximum aggregate purchase price of $375,000,000 plus (ii) if the aggregate purchase price paid for -3- MEDIQ/PRN exceeds $375,000,000, .15% of any purchase price in excess of $375,000,000. For purposes of calculating the bonus, the aggregate purchase price shall equal the sum of (x) the total cash consideration paid for MEDIQ/PRN (including, without limitation, in respect of any warrants or other security of MEDIQ or MEDIQ/PRN), plus (y) the fair market value of any securities or other property received as consideration for MEDIQ/PRN (including, without limitation, in respect of any warrants or other security of MEDIQ or MEDIQ/PRN), plus (z) the aggregate amount (including without limitation, accrued but unpaid interest and the unpaid amount of any capital leases) of any aggregate liabilities of MEDIQ/PRN assumed or refinanced by the purchaser in connection with the completion of the acquisition, other than current liabilities taken into account in computing the working capital of MEDIQ/PRN (except for current liabilities for indebtedness for money borrowed (including accrued but unpaid interest or capital leases)). The aggregate purchase price on which Executive's bonus is to be calculated is hereafter called "Enterprise Value" of MEDIQ/PRN. In the event of any dispute between Executive and MEDIQ regarding the Enterprise Value of MEDIQ/PRN on which Executive's bonus shall be calculated, the Board and Executive shall select an investment banking firm, reasonably acceptable to each of them, to make the determination of the Enterprise Value of MEDIQ/PRN. The fees and expenses of the investment banking firm incurred in making such determination shall be borne by MEDIQ, unless the investment banking firm shall determine that the Executive's position regarding the calculation of Enterprise Value was unreasonable under the circumstances, in which case such fees and expenses shall be shared equally between MEDIQ and Executive. (c) Executive acknowledges that a Sale Event may not occur, that the Board may determine not to pursue a Sale Event, that such a transaction can occur only upon proper authorization of the Board, or a duly constituted committee thereof, and accordingly there can be no assurance that any bonus will become payable to Executive under this Section. (d) In the event that MEDIQ/PRN is sold or deemed sold as part of an overall transaction involving the sale or other divestiture of all of MEDIQ and/or its other partly or wholly owned subsidiaries, Executive's bonus shall be paid based on the Enterprise Value of MEDIQ/PRN implicit in such transaction if such Enterprise Value is readily ascertainable. If the Enterprise Value of MEDIQ/PRN is not readily ascertainable in such transaction, and the parties are unable to agree on the portion of the purchase price representing the Enterprise Value of MEDIQ/PRN on which Executive's bonus shall be calculated, the Board and Executive shall select an investment banking firm reasonably acceptable to each of them, to make such determination. The expenses of the investment banking firm incurred in making such determination shall be borne by MEDIQ, -4- unless the investment banking firm shall determine that the Executive's position regarding the calculation of Enterprise Value was unreasonable under the circumstances, in which case such fees and expenses shall be shared equally between MEDIQ and Executive. SECTION 4. TERMINATION OF EMPLOYMENT 4.1 Death of Executive. Executive's employment hereunder shall immediately terminate upon his death, upon which MEDIQ/PRN shall not thereafter be obligated to make any further payments hereunder other than amounts (including salary, bonuses, expense reimbursement, etc.) earned or accrued as of the date of Executive's death in accordance with generally accepted accounting principles ("GAAP"). 4.2 Disability of Executive. If Executive, in the reasonable opinion of a physician selected by the Board, is unable, for any reason, to perform his duties hereunder for a period of 180 consecutive days then the Board shall have the right to terminate Executive's employment upon 30 days' prior written notice to Executive at any time during the continuation of such inability, in which event MEDIQ/PRN shall not thereafter be obligated to make any further payments hereunder other than amounts (including salary, bonuses, expense reimbursement, etc.) earned or accrued under this Agreement as of the date of such termination in accordance with GAAP. 4.3 Termination for Cause. Executive's employment shall terminate immediately upon notice that MEDIQ/PRN is terminating Executive for "cause" (as defined herein), in which event MEDIQ/PRN shall not thereafter be obligated to make any further payments hereunder other than amounts (including salary, bonuses, expense reimbursement, etc.) earned or accrued under this Agreement as of the date of such termination in accordance with GAAP. As used herein "cause" shall include, without limitation the following, not corrected after notice and a reasonable opportunity to cure: (i) dishonestly; (ii) fraud, theft or misappropriation or, embezzlement of MEDIQ or MEDIQ/PRN's funds; (iii) conviction of any felony, crime involving fraud or misrepresentation, or of any other crime (whether or not connected with his employment) the effect of which is likely to adversely affect MEDIQ, MEDIQ/PRN or their affiliates; -5- (iv) material breach of Executive's obligations under this Agreement; (v) repeated and consistent failure of Executive to be present at work during normal business hours unless the absence is because of a disability determined pursuant to Section 4.2; (vi) willful violation of any express direction or any rule or regulation established by the Board; (vii) gross incompetence in the performance of, or gross neglect of, Executive's duties hereunder; (viii) illegal possession or use of any controlled substance; or (ix) use of alcohol or other drugs which interferes with the performance by Executive of his duties. 4.4 Termination Without Cause. (a) In the event (i) Executive's employment is terminated by MEDIQ/PRN for any reason other than cause or the death or disability of Executive; or (ii) this Agreement is not renewed by MEDIQ/PRN at the end of any Contract Period on terms and conditions no less favorable to Executive than those in effect at such time, MEDIQ/PRN shall immediately pay Executive all amounts due under Section 3.1, 3.2, 3.3 and 3.4 (including Base Salary, Executive Benefits, expense reimbursements and compensation for unused vacation time) earned or accrued as of the date of such termination in accordance with GAAP. In such event, Executive shall also continue to receive his then current Base Salary and employee benefits from MEDIQ/PRN for eighteen months following the date of termination. Upon making such payments, MEDIQ and MEDIQ/PRN shall have no further obligation to Executive hereunder. SECTION 5. RESTRICTIVE COVENANTS 5.1 Confidentiality. Executive acknowledges a duty of confidentiality owed to MEDIQ and MEDIQ/PRN and shall not, at any time during or after his employment by MEDIQ/PRN, retain in writing, use, divulge, furnish, or make accessible to anyone, without the express authorization of the Board, any trade secret, private or confidential information or knowledge of MEDIQ, MEDIQ/PRN or any of their affiliates obtained or acquired by him -6- while so employed. All computer software, telephone lists, customer lists, price lists, contract forms, catalogs, books, records, and files acquired while an employee of MEDIQ/PRN, are acknowledged to be the property of MEDIQ/PRN and shall not be duplicated, removed from MEDIQ/PRN's possession or made use of other than in pursuit of MEDIQ/PRN's business and, upon termination of employment for any reason, Executive shall deliver to MEDIQ/PRN, without further demand, all copies thereof which are then in his possession or his control. 5.2 Inventions and Improvements. During the term of his employment, Executive shall promptly communicate to MEDIQ/PRN all ideas, discoveries and inventions which are or may be useful to MEDIQ/PRN or its business. Executive acknowledges that all ideas, discoveries, inventions, and improvements which are made, conceived, or reduced to practice by him and every item of knowledge relating to MEDIQ/PRN's business interests (including potential business interests) gained by him during his employment hereunder are the property of MEDIQ/PRN, and Executive hereby irrevocably assigns all such ideas, discoveries, inventions, improvements, and knowledge to MEDIQ/PRN for its sole use and benefit, without additional compensation. The provisions of this Section shall apply whether such ideas, discoveries, inventions, improvements or knowledge are conceived, made or gained by him alone or with others, whether during or after usual working hours, whether on or off the job, whether applicable to matters directly or indirectly related to MEDIQ/PRN's business interests (including potential business interests), and whether or not within the specific realm of his duties. Executive shall, upon request of MEDIQ/PRN, at any time during or after his employment with MEDIQ/PRN, sign all instruments and documents requested by MEDIQ/PRN and otherwise cooperate with MEDIQ/PRN to protect its right to such ideas, discoveries, inventions, improvements, and knowledge, including applying for, obtaining, and enforcing patents and copyrights thereon in any and all countries. 5.3 Injunctive and Other Relief. (a) Executive acknowledges and agrees that the covenants contained herein are fair and reasonable in light of the consideration paid hereunder, and that damages alone shall not be an adequate remedy for any breach by Executive of his covenants contained herein and accordingly expressly agrees that, in addition to any other remedies which MEDIQ/PRN may have, MEDIQ/PRN shall be entitled to injunctive relief in any court of competent jurisdiction for any breach or threatened breach of any such covenants by Executive. Nothing contained herein shall prevent or delay MEDIQ/PRN from seeking, in any court of competent jurisdiction, specific performance or other equitable remedies in the event of any breach or intended breach by Executive of any of its obligations hereunder. -7- (b) Notwithstanding the equitable relief available to MEDIQ/PRN, the Executive, in the event of a breach of his covenants contained in Section 5 hereof, understands and agrees that the uncertainties and delay inherent in the legal process would result in a continuing breach for some period of time, and therefore, continuing injury to MEDIQ/PRN until and unless MEDIQ/PRN can obtain such equitable relief. Therefore, in addition to such equitable relief, MEDIQ/PRN shall be entitled to monetary damages for any such period of breach until the termination of such breach, in an amount deemed reasonable to cover all actual and consequential losses, plus all monies received by Executive as a result of said breach and all costs and attorneys' fees incurred by MEDIQ/PRN in enforcing this Agreement. If Executive should use or reveal to any other person or entity any confidential information, this will be considered a continuing violation on a daily basis for so long a period of time as such confidential information is made use of by Executive or any such other person or entity. SECTION 6. MISCELLANEOUS 6.1 Arbitration. (a) All disputes arising out of or relating to this Agreement which cannot be settled by the parties shall promptly be submitted to and determined by a single arbitrator in Philadelphia, Pennsylvania, pursuant to the rules and regulations then obtaining of the American Arbitration Association; provided that nothing herein shall preclude MEDIQ or MEDIQ/PRN from seeking, in any court of competent jurisdiction, damages, specific performance or other equitable remedies in the case of any breach or threatened breach by Executive of Section 5 hereof. The decision of the arbitrator shall be final and binding upon the parties, and judgement upon such decision may be entered in any court of competent jurisdiction. (b) Discovery shall be allowed pursuant to the intendment of the United States Federal Rules of Civil Procedure and as the arbitrators determine appropriate under the circumstances. (c) Such arbitrator shall be required to apply the contractual provisions hereof in deciding any matter submitted to it and shall not have any authority, by reason of this Agreement or otherwise, to render a decision that is contrary to the mutual intent of the parties as set forth in this Agreement. 6.2 Prior Employment. Executive represents and warrants that he is not a party to any other employment, non- competition or other agreement or restriction which could -8- interfere with his employment with MEDIQ/PRN or his or MEDIQ/PRN's rights and obligations hereunder; and that his execution of this Agreement and the performance of his duties hereunder will not breach the provisions of any contract, agreement, or understanding to which is party or any duty owed by him to any other person. 6.3 Severability. The invalidity or unenforceability of any particular provision or part of any provision of this Agreement shall not affect the other provisions or parts hereof. If any provision hereof is determined to be invalid or unenforceable by a court of competent jurisdiction, Executive shall negotiate in good faith to provide MEDIQ and MEDIQ/PRN with protection as nearly equivalent to that found to be invalid or unenforceable and if any such provision shall be so determined to be invalid or unenforceable by reason of the duration or geographical scope of the covenants contained therein, such duration or geographical scope, or both, shall be considered to be reduced to a duration or geographical scope to the extent necessary to cure such invalidity. 6.4 Assignment. This Agreement shall not be assignable by Executive, and shall be assignable by MEDIQ or MEDIQ/PRN only to any person or entity which may become a successor in interest (by purchase of assets or stock, or by merger, or otherwise) to MEDIQ or MEDIQ/PRN in the business or a portion of the business presently operated by it. Subject to the foregoing, this Agreement and the rights and obligations set forth herein shall inure to the benefit of, and be binding upon, the parties hereto and each of their respective permitted successors, assigns, heirs, executors and administrators. 6.5 Notices. All notices hereunder shall be in writing and shall be sufficiently given if hand-delivered, sent by documented overnight delivery service or registered or certified mail, postage prepaid, return receipt requested or by telegram, fax or telecopy (confirmed by U.S. mail), receipt acknowledged, addressed as set forth below or to such other person and/or at such other address as may be furnished in writing by any party hereto to the other. Any such notice shall be deemed to have been given as of the date received, in the case of personal delivery, or on the date shown on the receipt or confirmation therefor, in all other cases. Any and all service of process and any other notice in any such action, suit or proceeding shall be effective against any party if given as provided in this Agreement; provided that nothing herein shall be deemed to affect the right of any party to serve process in (any other manner permitted by law. -9- (a) If to MEDIQ or MEDIQ/PRN: MEDIQ Incorporated One MEDIQ Plaza Pennsauken, NJ 08110-1460 Tel: (609) 665-9300 Fax: (609) 486-4725 Attention: Michael J. Rotko, Esq. With a copy to: Drinker Biddle & Reath 1100 Philadelphia National Bank Building Broad and Chestnut Streets Philadelphia, PA 19107 Tel: (215) 988-2700 Fax: (215) 988-2757 Attention: William M. Goldstein, Esq. (b) If to Executive: Jay M. Kaplan 1372 Indian Creek Dr. Wynnewood, PA 19096 With a copy to: ------------------------------- ------------------------------- ------------------------------- 6.6 Entire Agreement and Modification. This Agreement constitutes the entire agreement between the parties hereto with respect to the matters contemplated herein and supersedes all prior agreements and understandings with respect thereto. Any amendment, modification, or waiver of this Agreement shall not be effective unless in writing. Neither the failure nor any delay on the part of any party to exercise any right, remedy, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any other right, remedy, power, or privilege with respect to any occurrence be construed as a waiver of any right, remedy, power, or privilege with respect to any other occurrence. 6.7 Governing Law. This Agreement is made pursuant to, and shall be construed and enforced in accordance with, the internal laws of the State of New Jersey (and United States -10- federal law, to the extent applicable), without giving effect to otherwise applicable principles of conflicts of law. 6.8 Headings; Counterparts. The headings of paragraphs in this Agreement are for convenience only and shall not affect its interpretation. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original and all of which, when taken together, shall be deemed to constitute but one and the same Agreement. 6.9 Further Assurances. Each of the parties hereto shall execute such further instruments and take such other actions as any other party shall reasonably request in order to effectuate the purposes of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. MEDIQ Incorporated By:/s/ Michael J. Rotko -------------------------------- Michael J. Rotko, Esq. MEDIQ/PRN Life Support Services, Inc. By:/s/ Thomas Carroll --------------------------------- Thomas Carroll PRN Holdings, Inc. By:/s/ Thomas Carroll --------------------------------- Thomas Carroll /s/ Jay M. Kaplan --------------------------------- Jay M. Kaplan -11- EX-11 13 COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11 MEDIQ INCORPORATED AND SUBSIDIARIES Computation of Net Income Per Common Share (in thousands except per share amounts)
Year Ended September 30, ------------------------------ 1995 1994 1993 ---- ---- ---- Computation of Primary Earnings Per Share: Net Income (Loss) $ (4,947) $ (7,318) $ 3,296 ======== ======== ======== Weighted Average Number of Primary Shares: Beginning Balance 24,174 24,034 23,766 Assumed Conversion of Options 430 371 600 -------- -------- -------- Total 24,604 24,405 24,366 ======== ======== ======== Primary Earnings (Loss) Per Share $ (.20) $ (.30) $ .14 ======== ======== ======== Computation of Fully Diluted Earnings Per Share: Net Income (Loss) $ (4,947) $ (7,318) 3,296 Interest and Amortization on Convertible Subordinated Debentures - Net of Tax 2,317 2,317 2,762 -------- -------- -------- Total $ (2,630) $ (5,001) $ 6,058 ======== ======== ======== Weighted Average Number of Fully Diluted Shares: Beginning Balance 24,174 24,034 23,766 Assumed Conversion of Options 445 371 631 Assumed Conversion of Debentures 6,897 6,897 6,380 -------- -------- -------- Total 31,516 31,302 30,777 ======== ======== ======== Fully Diluted Earnings (Loss) Per Share $ (.08) $ (.16) $.20 ======== ======== ========
EX-21 14 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 Set forth below is a list of MEDIQ's subsidiaries, as of December 13, 1995, with their respective states of incorporation, names under which they do business and the percentage of their voting securities owned by the Company as of such date.
State of Percentage Name Incorporation of Ownership ---- ------------- ------------ Alpha Health Consultants, Inc.(1) DE 100 ATS Medical Services, Inc.(2) PA 100 Health Examinetics, Inc. DE 100 Healthquest, Inc.(3) DE 67 Jersey Kidney Specialists, Inc.(4) NJ 100 MCHC, Inc. DE 100 MDTC Haddon, Inc.(5) DE 100 MEDIQ Diagnostic Centers Inc. DE 100 MEDIQ Diagnostic Centers-I Inc.(5) DE 100 MEDIQ Healthcare, Inc. DE 100 MEDIQ Investment Services, Inc. DE 100 MEDIQ Management Services, Inc. DE 100 MEDIQ Marin, Inc. DE 100 MEDIQ Mobile X-Ray Services, Inc. DE 100 MEDIQ/PRN Life Support Services, Inc.(6) DE 100 MEDIQ/PRN Life Support Services - I, Inc.(6) DE 100 MEDIQ Services, Inc. DE 100 P. I. Corporation (3) DE 100 PRN Holdings, Inc. DE 100 Thera-Kinetics Acquisition Corporation NJ 100 MEDIQ Surgical Equipment Services, Inc. DE 100
- ---------- (1) Subsidiary of MEDIQ Management Services, Inc. (2) Subsidiary of MEDIQ Mobile X-Ray Services, Inc. (3) Subsidiary of MEDIQ Investment Services, Inc. (4) Subsidiary of MICD, Inc. (5) Subsidiary of MEDIQ Diagnostic Centers Inc. (6) Subsidiary of PRN Holdings, Inc. EX-23 15 CONSENT OF DELOITTE, TOUCHE, INDEPENDENT AUDITORS EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference, in the Registration Statements listed below of our report, dated December 28, 1995 appearing in this Annual Report on Form 10-K of MEDIQ Incorporated and subsidiaries for the year ended September 30, 1995. Registration Statement No. 33-13122 on Form S-8 Registration Statement No. 33-11042 on Form S-8 Registration Statement No. 33-16802 on Form S-8 Registration Statement No. 33-5089 on Form S-2 Registration Statement No. 33-47416 on Form S-8 Registration Statement No. 33-59126 on Form S-3 Registration Statement No. 33-61724 on Form S-2 DELOITTE & TOUCHE LLP Philadelphia, Pennsylvania January 11, 1996 EX-27 16 ART. 5 FDS FOR FISCAL 1995 10-K
5 EXHIBIT 27 MEDIQ INCORPORATED AND SUBSIDIARIES Financial Data Schedule (Unaudited) 1,000 YEAR SEP-30-1995 SEP-30-1995 2,966 0 30,091 2,207 4,181 63,445 223,510 90,687 334,170 64,685 218,856 19,127 0 3,376 9,014 0 0 132,241 0 108,303 0 0 28,977 1,095 1,304 (209) (4,738) 0 0 (4,947) (.20) (.20)
EX-99.1 17 PCI FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------------------- 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, 1995 Commission File Number: 0-19795 PCI SERVICES, INC. (Exact name of registrant as specified in its charter) Delaware 51-0336586 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1403 Foulk Road, Suite 102 Wilmington, Delaware 19803 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (302) 479-0281 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.001 per share 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 filing requirements for the past 90 days. Yes _X_ No ___ The aggregate market value of the registrant's voting stock held by nonaffiliates (based upon the closing price of $9.875) on December 1, 1995, was approximately $33,900,000. As of December 1, 1995, there were 6,126,250 shares of Common Stock, par value $.001 per share, outstanding. 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_ Documents Incorporated by Reference Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held in 1996 are incorporated by reference into Part III. The index to Exhibits begins on page 27. PART I ITEM 1. BUSINESS General PCI Services, Inc. (the "Company") provides integrated packaging services to meet the diverse and changing packaging needs of its pharmaceutical customers in the United States and Europe. The packaging of a pharmaceutical product is an integral part of its efficacy, safety and consumer acceptance. While many pharmaceutical companies package certain products at their own facilities, many regularly utilize independent packagers for other products and special circumstances. Some manufacturers also use independent packagers to provide additional packaging capacity for peaks in demand, and some manufacturers do not package their products, using independent packagers for all of their packaging needs. The pharmaceutical industry is affected by global concerns relating to health care reform, the regulatory climate, environmental protection and general economic conditions. The Company is unable to determine the effect, if any, changes in the pharmaceutical industry may have on pharmaceutical packagers. The market for pharmaceutical packaging services has benefited from increased competition in the pharmaceutical industry, particularly for over-the-counter products, increased use of "unit-dose" packaging and changes in regulatory practices. The Company's Packaging Services The Company provides a wide range of packaging services to its pharmaceutical customers. By offering a single source of integrated packaging services, the Company can assist a pharmaceutical manufacturer in enhancing quality and uniformity, reducing waste through increased production efficiency, and obtaining faster delivery by reducing multiple vendor involvement. The customer can select the full range of packaging services or may select only those which meet its needs for a particular product. The Company packages pharmaceutical products in the form of tablets, capsules, powders, ointments, lotions and liquids. The packaging services offered by the Company include blister packaging, bottle filling, strip packaging, pouching, capsule filling and cold-forming, as well as tamper-evident and child-resistant features. Blister packaging consists of a blister affixed to a rigid or semi-rigid backing material, through which an individual dose is expelled. Bottle filling uses high speed equipment which fills glass or plastic bottles with pharmaceutical products, and then adds cotton, safety seals, caps and labels in one production line. Strip packaging is often used for products that require extra protection from moisture, light and tampering and generally consists of higher density materials produced in a perforated strip of packages. Pouching, which is similar to strip packaging, is often used for larger volume packages filled with powders or liquids, but can also be used as a unit-dose package for tablets or capsules, and consists of a flexible packaging material (plastic, foil, paper or synthetic materials) which is formed, filled and sealed. Capsule filling consists of hard gelatin capsules which are filled with pharmaceutical products in the form of powders, granules, pellets or tablets. Cold-forming uses laminated foil, which is formed, filled and heat-sealed, and is generally used for products requiring extra protection from moisture. Tamper-evident and child-resistant features may take the form of blister, shrink-wrap, over-wrap or other packaging. Additional packaging services provided by the Company include the production of folding cartons, thermoformed components, and the printing of product inserts. Folding cartons are printed, die cut and glued boxes ready for machine or hand filling with blisters, bottles or other pharmaceutical packages. Thermoformed components consist of vacuum formed plastic trays and display components. The Company provides production services from layout and design through full color printing, die cutting, folding and gluing. The Company's services include the design, printing and folding of inserts, containing important dosage and other information, for the customer to add to its pharmaceutical packages or for the Company to include as part of its other packaging services. Marketing The Company markets its services primarily through the development of relationships with senior managers within the purchasing, manufacturing, quality assurance, marketing and package development departments of pharmaceutical companies. These relationships are fostered and maintained by the Company's senior management and sales force, as well as by representatives from the Company's manufacturing and quality assurance operations. The Company's existing customers, as well as potential new accounts, are contacted on a regular basis by the Company's senior management and sales force. In general, pharmaceutical packaging services are provided by the Company to its customers on an as-needed basis. The Company also has single source relationships, in which the pharmaceutical manufacturer relies principally on the Company to fulfill particular needs. A single source relationship can increase volume predictability and decrease production setup time and costs, resulting in increased operating efficiencies for the Company. In addition, single sourcing can help streamline the customer's purchasing operations, reduce its inventory, warehousing and personnel expenses and increase vendor reliability, quality assurance and responsiveness. Customers For the fiscal years ended September 30, 1995, 1994 and 1993, divisions or affiliates of Johnson & Johnson accounted for an aggregate of 24%, 21% and 22%, respectively, of net revenue. The Company maintains separate relationships with each of these divisions or affiliates and believes that purchasing decisions are made on an independent basis. Competition The Company believes that competition for pharmaceutical packaging services is based primarily on quality, the variety of packaging services available, customer service, responsiveness and price. The Company competes with several companies that provide many types of packaging services, and a large number of companies that provide one or a few types of packaging services. The Company currently competes with companies that are larger and have greater financial and other resources. The Company believes that while there are a large number of independent providers of one or more pharmaceutical packaging services, only a few, such as the Company, offer a broad range of services. In order to compete successfully, the Company believes an independent packager must have expertise in the packaging services required, satisfy the high quality standards of pharmaceutical companies and the U.S. Food and Drug Administration ("FDA"), and respond to the diverse and changing needs of the pharmaceutical industry, all at competitive prices. Government Regulation and Quality Assurance The Company's domestic pharmaceutical packaging operations are required to be, and the Company believes that such operations are, conducted pursuant to the current Good Manufacturing Practices standards of the FDA. The Company is registered with the FDA as a pharmaceutical packager and its pharmaceutical packaging facilities undergo general FDA inspections every two years. In addition, certain of the Company's facilities are subject to limited inspections from time to time in connection with the Company being designated in new drug applications by pharmaceutical companies as a potential independent packager. The purpose of the inspections is to review the Company's capability to package the new drug in question. Only those companies designated in an approved new drug application may provide packaging services with respect to such new drug. While the Company does not conduct an independent analysis of the products provided by its customers for packaging, rigorous controls are maintained to account for product utilization. The Company is also subject to various rules and regulations administered by the Drug Enforcement Administration division of the United States Department of Health and Human Services and other federal, state and local agencies. In addition, the Company's facilities are inspected periodically by the Company's customers as part of their quality assurance process, with the frequency of inspections varying by customer and packaging service. The Company's operations in Germany are subject to state and local certification requirements, including compliance with the current Good Manufacturing Practices adopted by the European Community. The Company's facility in Germany is also subject to periodic regulatory and customer inspections. Employees The Company has approximately 1,300 employees engaged in executive, sales, technical and administrative functions and production. Certain of the Company's employees at certain of the domestic facilities are represented by unions pursuant to contracts expiring in 2000. As is customary in Germany, certain terms and conditions of employment for the Company's employees in that country are regulated by national union contracts. The number of persons employed by the Company fluctuates depending upon the volume of business. Company History The Company was incorporated on September 20, 1991 under the laws of the State of Delaware. Prior to its initial public offering in January 1992, the Company had been a wholly-owned subsidiary of MEDIQ Incorporated ("MEDIQ"). MEDIQ, a 47% owner of the Company, is currently exploring alternative ways to maximize MEDIQ's shareholder value. MEDIQ has announced its intention to pursue the realization of the value of its investment in the Company. Financial Information About Foreign and Domestic Operations Financial information about foreign and domestic operations is discussed in Note J to the Consolidated Financial Statements included elsewhere herein. ITEM 2. PROPERTIES The Company operates the following principal facilities (which are leased unless otherwise indicated):
Approximate Location Type of Facility Square Feet - -------- ---------------- ----------- Philadelphia, Pennsylvania (1) Executive Offices and Manufacturing 293,000 Philadelphia, Pennsylvania (1) Manufacturing 165,000 Ivyland, Pennsylvania Manufacturing 22,000 Pennsauken, New Jersey (1) Manufacturing 120,000 Moorestown, New Jersey Manufacturing 20,000 Gurabo, Puerto Rico Manufacturing 65,000 Manati, Puerto Rico Manufacturing 51,000 Richmond, Virginia (1) Manufacturing 62,000 Waiblingen, Germany (see below) Manufacturing 70,000 Schorndorf, Germany (1)(2) Manufacturing 105,000
- --------------- (1) Owned (2) Anticipated to be operational early 1996. The Company's facilities in New Jersey, Germany, Puerto Rico and Virginia also contain regional administrative and sales offices. The Company is constructing a new pharmaceutical packaging facility in Schorndorf, Germany to replace the Company's facility in Waiblingen, Germany, the lease on which expires in April 1996. The Company believes that its facilities are well maintained and in good operating condition, and that such facilities will be adequate for all of the Company's reasonably foreseeable requirements. ITEM 3. LEGAL PROCEEDINGS The Company may, from time to time, become involved in various legal proceedings incidental to its business, some of which may be covered by insurance. The Company knows of no litigation, either pending or threatened, which is likely to have a material adverse effect on the Company. The Company has never been subject to any product liability claims. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the quarter ended September 30, 1995. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS Market Information The following table sets forth, for the periods indicated, the high and low prices for the common stock as reported by NASDAQ. High Low ---- --- Fiscal year ended September 30, 1995: First Quarter $ 7.000 $ 5.500 Second Quarter 7.875 6.250 Third Quarter 9.500 6.750 Fourth Quarter 10.125 8.625 Fiscal year ended September 30, 1994: First Quarter $11.750 $ 8.750 Second Quarter 12.750 9.750 Third Quarter 10.750 8.750 Fourth Quarter 9.500 6.250 Common Stock Holders The Company believes there are approximately 1,500 holders of common stock, including shares held in street name by brokers. Dividends The Company did not declare any dividends on its common stock in the fiscal years ended September 30, 1995, 1994 and 1993. Pursuant to a lending arrangement, there are restrictions on the amount of dividends which may be paid, the most restrictive of which limits cash dividends to no more than 50% of net income during any year. Any future determination to pay cash dividends will be at the discretion of the Board of Directors, and will be dependent upon the Company's financial condition, results of operations, capital requirements and such other factors as the Board of Directors deem relevant. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data presented below has been derived from the audited financial statements of the Company. This data is qualified in its entirety by reference to, and should be read in conjunction with, Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements included elsewhere herein.
Year Ended September 30, ----------------------------------------------------- 1995 1994 1993(1) 1992 1991 ---- ---- ------- ---- ---- (in thousands, except per share data) Statement of Operations Data: Net revenue $129,785 $ 121,177 $ 111,272 $ 75,430 $ 67,825 Cost of goods sold 101,586 96,092 86,932 58,097 55,452 -------- --------- --------- -------- -------- Gross profit 28,199 25,085 24,340 17,333 12,373 Selling, general and administrative expenses 16,613 16,249 14,334 8,377 6,961 Interest expense 1,838 1,527 1,269 632 1,318 Other (income) expense 103 (215) (259) (106) (107) Management fees - MEDIQ (2) -- -- -- -- 3,400 -------- --------- --------- -------- -------- Income before income tax expense 9,645 7,524 8,996 8,430 801 Income tax expense 4,073 2,168 2,841 3,114 754 -------- --------- --------- -------- -------- Net income $ 5,572 $ 5,356 $ 6,155 $ 5,316 $ 47 ======== ========= ========= ======== ======== Earnings per share $ .91 $ .79 $ .92 $ 1.05 $ .02 ======== ========= ========= ======== ======== Weighted average shares outstanding (3)(4) 6,138 6,787 6,726 5,079 2,875 ======== ========= ========= ======== ======== September 30, ----------------------------------------------------- 1995 1994 1993(1) 1992(4) 1991 ---- ---- ------- ------- ---- (in thousands) Balance Sheet Data: Working capital $ 12,180 $ 11,057 $ 12,817 $ 13,096 $ 8,224 Total assets 108,967 83,427 80,122 49,690 40,694 Long-term debt, less current maturities 27,208 14,760 11,577 6,304 9,104 Due to MEDIQ (4) -- -- -- -- 9,199 Notes payable to MEDIQ (4) -- -- -- -- 12,300 Stockholders' equity (3)(4) 53,536 47,344 48,354 33,513 1,917
See Notes to Selected Consolidated Financial Data on following page. Notes to Selected Consolidated Financial Data (1) In December 1992, the Company issued 660,000 shares of common stock to acquire Allpack Industrielle Lohnverpackung GmbH ("Allpack"). (2) Management fees - MEDIQ represented primarily an allocation of MEDIQ's overhead and its costs to provide senior management, financial, legal, accounting and risk management services to the Company. In connection with the Company's initial public offering, certain relationships with MEDIQ were restructured. Effective October 1, 1991, the Company entered into a services agreement pursuant to which the Company obtains certain legal, accounting, tax and risk management services from MEDIQ. Costs for such services were $100,000 for each of the fiscal years 1995, 1994, 1993 and 1992, and are included in selling, general and administrative expenses. The Company believes that the terms of the services agreement and MEDIQ's charges for such services are on terms no less favorable than those that could be obtained from unaffiliated third parties for comparable services. (3) In August 1994, the Company repurchased the 660,000 shares of common stock which had been issued in connection with the acquisition of Allpack. (4) In February 1992, the Company completed its initial public offering consisting of 3,306,250 shares of common stock at a price of $10 per share. The Company utilized a portion of the proceeds to repay amounts outstanding to MEDIQ, to purchase equipment under capital lease arrangements and to retire certain term loan obligations. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Consolidated Financial Statements and notes thereto, contained elsewhere herein. Results of Operations The Company's pharmaceutical packaging services are generally provided on an as-needed basis. As a result, revenue per customer and profit margins per order can vary significantly from year to year and quarter to quarter. Results for any particular quarter are not necessarily indicative of results for any subsequent quarter or related fiscal year. Effective October 1, 1994, the Company sold its 70% interest in KR-Verpackung GmbH ("KR") of Muggensturm, Germany and its manufacturing facility, to the management of KR for $5,201,000, including the assumption of debt of $4,379,000. The sale of KR and the manufacturing facility resulted in a pretax loss of $23,000. Revenues from KR were $6,700,000 and $5,852,000, for 1994 and 1993, respectively, and net income was $152,000 and $203,000, respectively. The following table sets forth for the periods indicated the percentage relationship that items in the Consolidated Statements of Operations bear to net revenue. Year Ended September 30, -------------------------- 1995 1994 1993 ---- ---- ---- Net revenue 100.0% 100.0% 100.0% Cost of goods sold 78.3 79.3 78.1 ----- ----- ----- Gross profit 21.7 20.7 21.9 Selling, general and administrative expenses 12.8 13.4 12.9 Interest and other (income) expense 1.5 1.1 .9 ----- ----- ----- Income before income tax expense 7.4 6.2 8.1 Income tax expense 3.1 1.8 2.6 ----- ----- ----- Net income 4.3% 4.4% 5.5% ===== ===== ===== Fiscal Year 1995 Compared to Fiscal Year 1994 Net revenue was $129,785,000, an increase of $8,608,000, or 7.1%, over prior year net revenue of $121,177,000, which included revenues from KR of $6,700,000. This increase was primarily attributable to the introduction by customers of several new pharmaceutical products, as well as revenues from the Company's new pharmaceutical insert/outsert manufacturing facility in New Jersey, which commenced production in April 1994, and increased demand for packaging services from the Company's facilities in Puerto Rico. Gross profit was 21.7% of net revenue, as compared to 20.7% in 1994. This increase was attributable to changes in product mix and improved results from the Company's foreign operations, which had been adversely affected in the prior year as a result of a decision by a major European customer to discontinue a packaging contract with the Company in order to perform the packaging in its own facilities. The Company has mitigated this loss by obtaining additional foreign business, including the return of a portion of the discontinued contract. Gross profit for 1995 was also affected by decreased contributions from the Company's facilities in Puerto Rico as a result of competitive pressures. Selling, general and administrative expenses were $16,613,000, as compared to $16,249,000 in 1994. As a percentage of net revenue, selling, general and administrative expenses decreased to 12.8%, as compared to 13.4% in the prior year as a result of the allocation of these costs over higher net revenues. Interest expense was $1,838,000, as compared to $1,527,000 in 1994. This increase was primarily attributable to debt incurred in the fourth quarter of 1994 in connection with the purchase of shares of the Company's common stock, partially offset by the elimination of interest expense related to the mortgage on KR's manufacturing facility. Capitalized interest expense related to new facilities in Philadelphia, Pennsylvania and Schorndorf, Germany was $318,000 in 1995. The Company's effective income tax rate increased to 42.2%, as compared to 28.8% in 1994 principally as a result of lower earnings from operations in Puerto Rico combined with growth of the Company's other operations. The Revenue Reconciliation Act of 1993 limits Section 936 tax credits applicable to operations in Puerto Rico. These limitations did not adversely impact, nor are they anticipated to adversely impact, the Company's effective income tax rate. Fiscal Year 1994 Compared to Fiscal Year 1993 Net revenue was $121,177,000, an increase of $9,905,000, or 8.9%, as compared to 1993. The increase was primarily attributable to increased volume to existing customers and an expanded customer base. Strong demand for contract packaging, carton manufacturing and insert manufacturing services continued to generate new business. Gross profit increased to $25,085,000, representing a gross margin on net revenue of 20.7%, as compared to 21.9% in 1993. The gross margin decrease was caused by domestic product mix and a lower profit contribution from the Company's foreign operations. Foreign gross profit margins were adversely affected in 1994 as a result of a decision by a major European customer to discontinue a packaging contract with the Company in order to perform the packaging in its own facilities. Customer decisions to move packaging into the customers' facilities are a normal occurrence in the pharmaceutical packaging industry. While the Company mitigated this loss by obtaining additional foreign business, including the return of a portion of the discontinued contract, these operations did not return to profitability until the fourth quarter of 1994. Gross margins were also adversely affected by costs associated with the Company's new pharmaceutical insert manufacturing plant in New Jersey, which commenced production in April 1994. Selling, general and administrative expenses were $16,249,000, an increase of $1,915,000, or 13.4%, as compared to 1993 expenses of $14,334,000. As a percentage of net revenue, selling, general and administrative expenses increased to 13.4% from 12.9% in 1993, primarily attributable to costs associated with increased sales and marketing expenses. Interest expense increased to $1,527,000, as compared to $1,269,000 in 1993. This increase resulted primarily from debt assumed in connection with the acquisition of the Company's Virginia facility in January 1993 and debt incurred in connection with the purchase of an operating facility in April 1993 which had previously been leased. The Company's effective income tax rate decreased to 28.8% in 1994 as compared to 31.6% in 1993 as a result of higher earnings from operations in Puerto Rico. Liquidity and Capital Resources At September 30, 1995, the Company had working capital of $12,180,000 including cash and cash equivalents of $3,619,000. Net cash provided by operations was $11,400,000 for 1995, which was comparable to 1994. Net cash provided by operations for 1995 was adversely affected by increased accounts receivable attributable to increased revenues and the elimination of a discount policy. In addition, inventories increased in the fourth quarter of 1995 in anticipation of increased business in the first quarter of fiscal 1996. Investing activities for 1995 consisted principally of capital expenditures of $23,777,000, of which approximately $8,100,000 was attributable to building improvements for the Company's new pharmaceutical packaging facility in Philadelphia, Pennsylvania and $8,500,000 was attributable to the purchase of land and construction costs for a new pharmaceutical packaging facility in Schorndorf, Germany, with the remainder attributable to equipment purchases. The Schorndorf facility, which is scheduled to open in January 1996, will replace the Company's facility in Waiblingen, Germany, which is leased through April 1996. The Company anticipates capital expenditures in 1996 of approximately $8,000,000 for equipment and $7,000,000 for the Schorndorf facility. Investing activities also included proceeds from the sale of assets, including KR, of $1,141,000 and the payment of $533,000 representing the final installment of the contingent consideration related to the 1992 acquisition of a business in Puerto Rico. Financing activities for 1995 included debt repayments of $3,754,000 and borrowings of $16,317,000, of which approximately $8,600,000 related to the new packaging facility in Philadelphia and $5,500,000 related to the new facility in Schorndorf. In addition, the Company purchased an aggregate of 55,000 shares of its common stock for $382,000 pursuant to a stock buy-back program, initiated by the Company's Board of Directors in fiscal 1994. The program allows for the purchase of 245,000 additional shares of common stock from time to time in the open market or through private transactions. During 1995, the Company entered into agreements with a bank and state and municipal authorities to finance building improvements and equipment for the new facility in Philadelphia. The bank financing includes a mortgage of $3,800,000 payable in monthly installments over 15 years with interest at the prime rate plus .25% and state and municipal financing of approximately $5,000,000, including $4,000,000 payable over 15 years with interest at 2%, $500,000 payable over 15 years with interest at 5.25% and $500,000 payable over 7 years with interest at 2%. In addition, the Company entered into a $13,000,000 mortgage with a bank in Germany to finance the construction of the new packaging facility in Schorndorf, Germany. The financing bears interest at the rate of 7.73% for the first five years, and, thereafter, at a rate to be negotiated. Interest only is payable for the first two years, and then principal and interest is payable monthly until maturity in 2014. At September 30, 1995, $5,478,000 was outstanding under this facility. At September 30, 1995, the Company had approximately $2,000,000 available under its lines of credit. Management believes that working capital, anticipated funds to be generated from future operations and available credit facilities will be sufficient to meet anticipated operating and capital needs. Depending upon the future growth of the business, additional financing may be required. Subsequent Event Effective December 1, 1995, the Company exercised its option to repurchase shares of preferred stock of Tri-Line, a subsidiary of the Company, issued in connection with the acquisition in 1992. The purchase price was $900,000, representing the book value of such shares (which were included in other liabilities in the Company's Consolidated Balance Sheets), and was funded out of working capital. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA Independent Auditors' Report 13 Consolidated Statements of Operations - Three Years Ended September 30, 1995 14 Consolidated Balance Sheets - September 30, 1995 and 1994 15 Consolidated Statements of Stockholders' Equity - Three Years Ended September 30, 1995 16 Consolidated Statements of Cash Flows - Three Years Ended September 30, 1995 17 Notes to Consolidated Financial Statements 18 Independent Auditors' Report Board of Directors and Stockholders PCI Services, Inc. Philadelphia, Pennsylvania We have audited the accompanying consolidated balance sheets of PCI Services, Inc. and subsidiaries as of September 30, 1995 and 1994, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended September 30, 1995. Our audits also include the financial statement schedule listed in the index at Item 14. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and 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 PCI Services, Inc. and subsidiaries as of September 30, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1995 in conformity with generally accepted accounting principles. Also, in our opinion, such 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 November 17, 1995 PCI SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended September 30, ---------------------------------------------- 1995 1994 1993 ------------- ------------- -------------- Net revenue $129,785,000 $ 121,177,000 $ 111,272,000 Cost of goods sold 101,586,000 96,092,000 86,932,000 ------------- ------------- -------------- Gross profit 28,199,000 25,085,000 24,340,000 Selling, general and administrative expenses 16,613,000 16,249,000 14,334,000 Interest expense 1,838,000 1,527,000 1,269,000 Other (income) expense 103,000 (215,000) (259,000) ------------- ------------- -------------- Income before income tax expense 9,645,000 7,524,000 8,996,000 Income tax expense 4,073,000 2,168,000 2,841,000 ------------- ------------- -------------- Net income $ 5,572,000 $ 5,356,000 $ 6,155,000 ============= ============= ============== Earnings per share $ .91 $ .79 $ .92 ============= ============= ============== Weighted average shares outstanding 6,138,000 6,787,000 6,726,000 ============= ============= ==============
See notes to consolidated financial statements. PCI SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
September 30, ----------------------------- ASSETS 1995 1994 - ------ ------------- ------------ Current assets: Cash and cash equivalents $ 3,619,000 $ 3,089,000 Accounts receivable, less allowance for doubtful accounts of $211,000 - 1995; $103,000 - 1994 17,940,000 13,858,000 Inventories 11,588,000 8,444,000 Deferred income taxes 1,241,000 621,000 Net assets held for sale -- 683,000 Other current assets 1,826,000 1,606,000 ------------- ------------ Total current assets 36,214,000 28,301,000 Property, plant and equipment, net 61,901,000 44,145,000 Goodwill, net of accumulated amortization of $2,235,000 - 1995; $1,930,000 - 1994 10,182,000 9,857,000 Other assets 670,000 1,124,000 ------------- ------------ $ 108,967,000 $ 83,427,000 ============= ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable to financial institutions $ 2,005,000 $ 1,553,000 Accounts payable 9,746,000 6,241,000 Accrued payroll and related taxes 1,747,000 1,301,000 Accrued insurance 1,649,000 1,332,000 Accrued expenses - other 3,595,000 2,741,000 Federal, state and foreign taxes payable 1,650,000 668,000 Long-term debt - current maturities 3,642,000 3,408,000 ------------- ------------ Total current liabilities 24,034,000 17,244,000 Long-term debt, less current maturities 27,208,000 14,760,000 Deferred income taxes 2,758,000 2,254,000 Other 1,431,000 1,825,000 Stockholders' equity: Preferred stock - $.001 par value: Authorized - 10,000,000 shares Issued and outstanding - none -- -- Common stock - $.001 par value: Authorized - 25,000,000 shares Issued: 6,841,250 - 1995 and 1994 Outstanding: 6,126,250 - 1995; 6,181,250 - 1994 7,000 7,000 Additional paid-in capital 35,461,000 35,461,000 Retained earnings 22,399,000 16,827,000 Foreign currency translation adjustment 1,331,000 329,000 Treasury stock, at cost: 715,000 - 1995; 660,000 - 1994 (5,662,000) (5,280,000) ------------- ------------ 53,536,000 47,344,000 ------------- ------------ $ 108,967,000 $ 83,427,000 ============= ============
See notes to consolidated financial statements. PCI SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Foreign Common Stock Additional Currency ------------ ---------- -------- Shares Paid-In Retained Translation Treasury Issued Amount Capital Earnings Adjustment Stock ------ ------ ------- -------- ---------- ----- Balance at October 1, 1992 6,181,250 $6,000 $ 28,191,000 $ 5,316,000 $ -- $ -- Issuance of common stock - Acquisition of Allpack 660,000 1,000 8,801,000 -- -- -- Contribution of capital -- -- 71,000 -- -- -- Foreign currency translation adjustment -- -- -- -- (187,000) -- Net income -- -- -- 6,155,000 -- -- ---------- ------- ------------ ------------ ----------- ----------- Balance at September 30, 1993 6,841,250 7,000 37,063,000 11,471,000 (187,000) -- Acquisition of treasury stock -- -- (1,602,000) -- -- (5,280,000) Foreign currency translation adjustment -- -- -- -- 516,000 -- Net income -- -- -- 5,356,000 -- -- ---------- ------- ------------ ------------ ----------- ----------- Balance at September 30, 1994 6,841,250 7,000 35,461,000 16,827,000 329,000 (5,280,000) Acquisition of treasury stock -- -- -- -- -- (382,000) Foreign currency translation adjustment -- -- -- -- 1,002,000 -- Net income -- -- -- 5,572,000 -- -- ---------- ------- ------------ ------------ ------------ ----------- Balance at September 30, 1995 6,841,250 $7,000 $ 35,461,000 $22,399,000 $ 1,331,000 $(5,662,000) ========== ======= ============ ============ ============= ===========
See notes to consolidated financial statements. PCI SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended September 30, 1995 1994 1993 ---- ---- ---- Cash flows from operating activities: Net income $ 5,572,000 $ 5,356,000 $ 6,155,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,926,000 5,390,000 4,812,000 Deferred taxes (144,000) (481,000) 638,000 Other 168,000 246,000 139,000 Increase (decrease), net of effect of acquisitions: Accounts receivable (4,080,000) (288,000) (738,000) Inventories (2,976,000) (968,000) 254,000 Other current assets (74,000) (336,000) (498,000) Accounts payable 3,380,000 1,972,000 (649,000) Accrued payroll and related taxes 384,000 17,000 (355,000) Accrued expenses - other 1,152,000 343,000 430,000 Federal, state and foreign taxes payable 1,092,000 107,000 (301,000) ------------ ------------ ----------- Net cash provided by operating activities 11,400,000 11,358,000 9,887,000 Cash flows from investing activities: Proceeds from sale of assets 1,141,000 356,000 -- Acquisition and construction of property, plant and equipment (23,777,000) (11,952,000) (5,740,000) Acquisitions and contingent consideration (533,000) (533,000) (1,227,000) Other 296,000 (763,000) 433,000 ------------ ------------ ----------- Net cash used in investing activities (22,873,000) (12,892,000) (6,534,000) Cash flows from financing activities: Borrowings 16,317,000 14,543,000 2,579,000 Debt repayments (3,754,000) (8,404,000) (4,521,000) Acquisition of treasury stock (382,000) (6,882,000) -- Other (186,000) (162,000) (380,000) ------------ ------------ ----------- Net cash provided by (used in) financing activities 11,995,000 (905,000) (2,322,000) Effect of exchange rate changes on cash 8,000 (98,000) (35,000) ------------ ------------ ----------- Net increase (decrease) in cash and cash equivalents 530,000 (2,537,000) 996,000 Cash and cash equivalents: Beginning of period 3,089,000 5,626,000 4,630,000 ------------ ------------ ----------- End of period $ 3,619,000 $ 3,089,000 $ 5,626,000 =========== =========== ========== Supplemental disclosures of cash flow information: Interest paid $ 1,891,000 $ 1,391,000 $ 1,239,000 =========== =========== ========== Income taxes paid $ 3,302,000 $ 2,385,000 $ 2,527,000 =========== =========== ========== Supplemental disclosures of non-cash investing and financing activities: Plant and equipment financed with long-term debt $ -- $ 1,035,000 $ 4,443,000 =========== =========== ========== Issuance of stock - acquisition of Allpack $ -- $ -- $ 8,802,000 =========== =========== ==========
See notes to consolidated financial statements. Note A - Summary of Significant Accounting Policies Principles of Consolidation - The consolidated financial statements include the accounts of PCI Services, Inc. and its subsidiaries (the "Company"). In consolidation, all significant intercompany transactions and balances have been eliminated. Cash Equivalents - Cash equivalents include all unrestricted, liquid investments purchased with maturities of three months or less. Inventories - Inventories are stated at the lower of cost (first-in, first-out method) or market. Property, Plant and Equipment - Property, plant and equipment are stated at cost. Capital leases are recorded at the lower of fair market value or the present value of future lease payments. The Company provides for depreciation and amortization on a straight-line basis as follows: Buildings 25 to 30 years Building improvements 15 to 30 years Machinery, equipment, furniture and fixtures 5 to 10 years Goodwill - The purchase price in excess of net assets acquired is amortized on a straight-line basis over forty years. Carrying Value of Long-Term Assets - The Company evaluates the carrying value of long-term assets, including goodwill, based upon current and anticipated net income and/or undiscounted cash flows and recognizes an impairment when it is probable that such estimated future net income and/or 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. Foreign Currency Translation - In accordance with Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation," the consolidated financial statements of the Company's German subsidiary, Allpack Industrielle Lohnverpackung GmbH ("Allpack"), are translated from deutschemarks to U.S. dollars using the exchange rate at the balance sheet date for assets and liabilities, and the weighted average exchange rate during the period for results of operations and cash flows. The related translation adjustment is included as a separate component of stockholders' equity. Revenue Recognition - The Company recognizes revenue on specific orders when they are shipped. In certain situations, based on individual agreements with customers, revenue is recognized when the packaging services are completed, and delivery is deferred at the customer's request. Income Taxes - Effective October 1, 1993, the Company adopted the provisions of SFAS No. 109, "Accounting for Income Taxes", which supersedes SFAS No. 96. The Company adopted SFAS No. 96 in fiscal 1990. The effect of the adoption of SFAS No. 109 was not significant for the year ended September 30, 1994. Note A - Summary of Significant Accounting Policies (Continued) Earnings Per Share - Earnings per share computations are based upon the weighted average number of common shares outstanding. Outstanding stock options have been excluded from the calculation of weighted average shares outstanding, since the dilutive effect is less than 3%. Reclassifications - Certain items in the prior years' financial statements have been reclassified to conform with the 1995 presentation. Note B - Sale of KR - Verpackung GmbH Effective October 1, 1994, the Company sold its 70% interest in KR-Verpackung GmbH ("KR") of Muggensturm, Germany and its manufacturing facility, to the management of KR for $5,201,000, including the assumption of debt of $4,379,000. The net assets of KR and the manufacturing facility were classified as "Assets Held For Sale" in the accompanying balance sheet as of September 30, 1994. The sale of KR and the manufacturing facility resulted in a pretax loss of $23,000. Revenues from KR were $6,700,000 and $5,852,000, for 1994 and 1993, respectively, and net income was $152,000 and $203,000, respectively. Note C - Inventories September 30, 1995 1994 ---- ---- Raw materials $ 6,894,000 $5,077,000 Work in process 1,000,000 1,760,000 Finished goods 3,694,000 1,607,000 ----------- ---------- $11,588,000 $8,444,000 =========== ========== Note D - Property, Plant and Equipment September 30, 1995 1994 ---- ---- Land $ 4,161,000 $ 1,388,000 Building and improvements 26,819,000 12,289,000 Machinery, equipment, furniture and fixtures 58,750,000 49,684,000 Equipment under capital lease 1,341,000 3,667,000 ------------ ------------ 91,071,000 67,028,000 Less: accumulated depreciation and amortization 29,170,000 22,883,000 ------------ ------------ $ 61,901,000 $ 44,145,000 ============ ============ Depreciation and amortization expense related to property, plant and equipment for fiscal years 1995, 1994 and 1993 was $6,538,000, $5,037,000 and $4,472,000, respectively. Note E - Notes Payable to Financial Institutions At September 30, 1995, the Company had $1,010,000 available under unsecured lines of credit with a financial institution with $2,005,000 outstanding bearing interest at rates ranging from 3.56% to 5.35%. The average amount outstanding in fiscal year 1995 was $1,624,000 and the weighted average interest rate computed on the monthly outstanding balance was 4.7%. Note F - Long-Term Debt
September 30, 1995 1994 ---- ---- Revolving credit facility, maturing March 31, 1997, with interest at the prime rate (8.75% at September 30, 1995) $ 3,000,000 $ 2,802,000 Term loans with variable interest rates of prime to prime plus 0.25% and fixed rates of 2% to 10% maturing through 2002 14,435,000 12,070,000 Mortgages with interest rates ranging from a fixed rate of 2% to prime plus 0.25% maturing through 2011 13,326,000 2,352,000 Capital lease obligations with interest rates ranging from 8.5% to 13% maturing through 1997 89,000 944,000 ----------- ----------- 30,850,000 18,168,000 Less: current maturities 3,642,000 3,408,000 ----------- ----------- $27,208,000 $14,760,000 =========== ===========
Maturities of long-term debt are as follows: Year Ending September 30, 1996 $ 3,642,000 1997 7,174,000 1998 4,877,000 1999 3,260,000 2000 1,455,000 Thereafter 10,442,000 ----------- $30,850,000 =========== In 1995, the Company entered into agreements with a bank and state and municipal authorities to finance building improvements and equipment for the new packaging facility in Philadelphia, Pennsylvania. The bank financing included a mortgage of $3,800,000 payable over 15 years with interest at the prime rate plus .25% and state and municipal financing of approximately $5,000,000 of term loans and a mortgage, with $4,000,000 payable over 15 years with interest at 2%, $500,000 payable over 15 years with interest at 5.25% and $500,000 payable over 7 years with interest at 2%. In February 1995, the Company entered into a $13,000,000 mortgage with a bank in Germany to finance the construction of the new packaging facility in Schorndorf, Germany. The financing bears interest at the rate of 7.73% for the first five years, and at a rate to be negotiated for the remainder of the term. Interest only is payable for the first two years, and then principal and interest is payable monthly until maturity in 2014. At September 30, 1995, $5,478,000 was outstanding under this facility. Note F - Long-Term Debt (Continued) In August 1994, the Company entered into an agreement with a commercial lender for a revolving credit facility and two term notes of $7,500,000 and $983,000. The revolving credit facility has been extended to March 31, 1997 and bears interest, at the Company's option, at the prime rate or LIBOR plus 2%. Draws under this facility for equipment purchases aggregating $1,000,000 or more are converted to term notes, payable over a maximum of 60 months. At September 30, 1995, $3,000,000 was outstanding under this facility, with $1,000,000 available for additional borrowing. The $7,500,000 term note is payable monthly through August 1999 with interest at the prime rate plus .25%. The $983,000 term note is payable monthly through May 1999 plus interest at the prime rate. The revolving credit facility and certain term loans and mortgages require the maintenance of specific balance sheet and operating ratios and impose other financial and dividend limitations. The most restrictive of these provisions limits cash dividends to no more than 50% of net income in any one year. At September 30, 1995, the Company either complied with or obtained the necessary waivers from its lenders regarding these ratios and limitations. The net carrying value of assets pledged as collateral under long-term debt agreements was approximately $79,000,000 as of September 30, 1995. Note G - Commitments and Contingencies Leases - The Company leases certain manufacturing and warehouse facilities and equipment. Rental expense for operating leases was $1,497,000, $1,452,000 and $1,286,000 for fiscal years 1995, 1994 and 1993, respectively. At September 30, 1995 equipment under capitalized lease obligations was $1,341,000, less accumulated amortization of $787,000. Future minimum payments under capital leases and noncancelable operating leases are as follows: Capital Operating Leases Leases --------- ----------- Year Ending September 30, 1996 $ 86,000 $ 830,000 1997 5,000 372,000 1998 -- 161,000 1999 -- 58,000 2000 and thereafter -- 33,000 --------- ---------- Total minimum lease payments 91,000 $1,454,000 ========== Amount representing interest 2,000 ---------- Present value of minimum lease payments $ 89,000 ========== Letters of Credit - As of September 30, 1995, the Company had outstanding letters of credit of $2,657,000, which secure the Company's obligations under insurance programs. Note H - Income Taxes Income tax expense consisted of the following:
Year Ended September 30, ------------------------------------ 1995 1994 1993 ---- ---- ---- Current: Federal $3,193,000 $1,793,000 $1,799,000 State 925,000 629,000 404,000 Foreign 99,000 227,000 -- ---------- ---------- ---------- 4,217,000 2,649,000 2,203,000 ---------- ---------- ---------- Deferred: Federal (283,000) 10,000 (86,000) State 187,000 (230,000) 12,000 Foreign (48,000) (261,000) 712,000 ---------- ---------- ---------- (144,000) (481,000) 638,000 ---------- ---------- ---------- Total income tax expense $4,073,000 $2,168,000 $2,841,000 ========== ========== ==========
The differences between the provision for income taxes and income taxes computed using the U.S. federal income tax rate were as follows:
Year Ended September 30, ------------------------------------ 1995 1994 1993 ---- ---- ---- Statutory expense $3,279,000 $2,558,000 $3,059,000 Goodwill amortization 110,000 91,000 86,000 State tax, net of federal benefit 833,000 311,000 268,000 Puerto Rico operations (280,000) (813,000) (657,000) Other 131,000 21,000 85,000 ---------- ---------- ---------- Total income tax expense $4,073,000 $2,168,000 $2,841,000 ========== ========== ==========
Note H - Income Taxes (Continued) Significant components of deferred tax assets and liabilities were as follows: September 30, -------------------- 1995 1994 ---- ---- Liabilities Depreciation expense $ 3,293,000 $ 3,079,000 Deferred acquisition costs 194,000 179,000 Amortization of goodwill 375,000 161,000 Other 446,000 231,000 ----------- ----------- 4,308,000 3,650,000 Assets Foreign net operating losses 627,000 770,000 State net operating losses 277,000 317,000 Inventory capitalization 266,000 178,000 Insurance accruals 861,000 534,000 Other 1,037,000 295,000 ----------- ----------- 3,068,000 2,094,000 Valuation allowance (277,000) (77,000) ----------- ----------- 2,791,000 2,017,000 ----------- ----------- Net deferred tax liability $ 1,517,000 $ 1,633,000 =========== =========== Under the provisions of SFAS No. 96, the deferred tax provision for fiscal year 1993 of $638,000 resulted principally from depreciation of $432,000 and the net tax effect of the German net operating loss of $597,000, partially offset by insurance accruals of $271,000. At September 30, 1995, the Company had state net operating loss carryforwards of approximately $5,200,000, expiring through 2009, and German net operating loss carryforwards of $1,600,000, which can be carried forward indefinitely. At September 30, 1995 and 1994, the balance of undistributed earnings of foreign subsidiaries was $587,000 and $747,000, respectively. It is presumed that ultimately these earnings will be distributed to the Company. The tax effect of this presumption was evaluated by assuming that these earning were remitted to the Company in the period in which they were earned and that the Company received the benefit of all available tax planning alternatives and available tax credits and deductions. Note I - Selected Quarterly Financial Data (Unaudited) Selected quarterly financial data for fiscal years 1995 and 1994 is as follows:
First Second Third Fourth 1995 Quarter Quarter Quarter Quarter - ---- ------- ------- ------- ------- Net revenue $28,610,000 $31,912,000 $34,703,000 $34,560,000 Gross profit 6,024,000 6,064,000 8,342,000 7,769,000 Net income 1,041,000 1,121,000 1,698,000 1,712,000 Earnings per share .17 .18 .28 .28 Weighted average shares outstanding 6,173,000 6,127,000 6,126,000 6,126,000 1994 - ---- Net revenue $27,917,000 $30,413,000 $31,427,000 $31,420,000 Gross profit 5,614,000 5,993,000 6,364,000 7,114,000 Net income 1,305,000 1,471,000 1,146,000 1,434,000 Earnings per share .19 .22 .17 .22 Weighted average shares outstanding 6,841,000 6,841,000 6,841,000 6,626,000
Note J - Geographic Segment Data The Company operates in the United States (including Puerto Rico) and Europe. The following table presents operating results for fiscal years 1995 and 1994 and identifiable assets of the Company as of September 30, 1995 and 1994, by geographic area.
Year Ended September 30, ------------------------ 1995 1994 ---- ---- Revenues: United States $107,094,000 $ 96,449,000 Europe 23,177,000 24,728,000 Intersegment eliminations (486,000) -- ------------ ------------ $129,785,000 $121,177,000 ============ ============ Pre-tax income (loss): United States $ 9,175,000 $ 7,630,000 Europe 470,000 (106,000) ------------ ------------ $ 9,645,000 $ 7,524,000 ============ ============ September 30, -------------------- 1995 1994 ---- ---- Identifiable assets: United States $ 90,848,000 $ 72,987,000 Europe 27,108,000 18,696,000 Intersegment eliminations (8,989,000) (8,256,000) ------------ ------------ $108,967,000 $ 83,427,000 ============ ============
Note K - Related Party Transactions MEDIQ - The Board of Directors of MEDIQ Incorporated ("MEDIQ"), a 47% owner of the Company, is currently exploring alternative ways to maximize MEDIQ's shareholder value. MEDIQ has announced its intention to pursue the realization of the value of its investment in the Company. PCI/Virginia - Effective October 1, 1991, the Company transferred by dividend to MEDIQ all of the capital stock of PCI/Virginia, resulting in a reduction of stockholders' equity of $1,996,000. In January 1993, the Company exercised its purchase option and acquired PCI/Virginia from MEDIQ for aggregate consideration equal to MEDIQ's net book value of approximately $2,300,000. In addition, MEDIQ assigned to the Company a purchase option to acquire the real estate leased by PCI/Virginia, in consideration for which the Company reimbursed MEDIQ for a $1,010,000 deposit previously made on the purchase. For the periods in which PCI/Virginia was owned by MEDIQ, the Company provided senior management services to PCI/Virginia and recognized management fee income of $97,000 for 1993. Pennsauken Facility - Effective February 25, 1994, the asset and related mortgage obligation related to the Pennsauken, New Jersey facility were transferred from MEDIQ to the Company. Prior to such date, in anticipation of this transfer, the asset, the related mortgage obligation and all costs related to the ownership and operation of the facility, were reflected in the Company's financial statements. Insurance - The Company obtains certain insurance coverages through insurance programs administered by MEDIQ, including worker's compensation coverage through June 1, 1992. Insurance expense related to such insurance programs was $322,000, $681,000 and $471,000 for fiscal years 1995, 1994 and 1993, respectively. Services Agreement - The Company obtains certain legal, accounting, tax and risk management services from MEDIQ. Costs for such services were $100,000 for each of the fiscal years 1995, 1994 and 1993, and are included in selling, general and administrative expenses. The Company believes that the terms of the services agreement and MEDIQ's charges for such services are on terms no less favorable than those that could be obtained from unaffiliated third parties for comparable services. Inventory Purchases - The Company purchases certain packaging materials from a company owned by one of its directors, totalling $1,782,000, $1,486,000 and $1,073,000 for fiscal years 1995, 1994 and 1993, respectively. Amounts due to this company were $238,000 and $168,000 as of September 30, 1995 and 1994, respectively. Pledge of Stock - A portion of the shares of the Company's stock owned by MEDIQ secures certain MEDIQ indebtedness. Note L - Major Customers Divisions or affiliates of Johnson & Johnson accounted for an aggregate of 24%, 21% and 22%, of net revenue for fiscal years 1995, 1994 and 1993, respectively. Note M - Stock Option Plan In September 1991, the Company's Board of Directors adopted a stock option plan under which 600,000 shares have been reserved for stock options. These options may be granted to directors, officers and key employees of the Company and its subsidiaries. No option may be granted under the plan for a term in excess of ten years from the date of grant. As of September 30, 1995, 408,000 stock options were exercisable under the plan. The stock option prices listed below represent the fair market value at dates of grant. A summary of stock option activity for fiscal years 1995 and 1994 follows: Number of Option Price Shares Per Share ------ --------- September 30, 1993 415,000 $10.00 - 12.25 Granted 45,000 10.00 - 10.75 Terminated (5,000) 12.25 ------- -------------- September 30, 1994 455,000 $10.00 - 10.75 Granted 25,000 6.50 ------- -------------- September 30, 1995 480,000 $ 6.50 - 10.75 ======= ============== Note N - Employee Benefit Plans The Company maintains and administers a money purchase pension plan and a profit sharing plan for substantially all of its employees other than those covered by collective bargaining agreements or compensated solely on a commission basis. The benefits accruing under these plans are funded by contributions made by the Company and earnings thereon. Under the money purchase pension plan, the Company contributes in each year an amount equal to 4% of each participant's earnings up to the Social Security taxable wage tax base for the year and an additional amount equal to 8% of each participant's earnings in excess of the taxable wage base. Under the profit sharing plan, the Company contributes an annual amount determined at the discretion of the Company's Board of Directors. The Company also participates in multi-employer plans which provide defined benefits to employees covered by collective bargaining agreements. Expenses related to these plans were as follows:
Year Ended September 30, ------------------------------------ 1995 1994 1993 ---- ---- ---- Money purchase pension plan $ 529,000 $ 495,000 $ 462,000 Profit sharing plan 367,000 374,000 315,000 Multi-employer plans 451,000 432,000 361,000 ---------- ---------- ---------- $1,347,000 $1,301,000 $1,138,000 ========== ========== ==========
Note O - Subsequent Event Effective December 1, 1995, the Company exercised its option to repurchase shares of preferred stock of Tri-Line, a subsidiary of the Company, issued in connection with the acquisition in 1992. The purchase price was $900,000, representing the book value of such shares (which were included in other liabilities in the Company's Consolidated Balance Sheets). PART III The information required to be included herein has been incorporated herein by reference to the Registrant's proxy statement relating to the Annual Meeting of Stockholders scheduled to be held in 1996. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) The response to this portion of Item 14 is submitted as a separate section of this report commencing on page 12. (a) (2) Financial Statement Schedules Schedule II Valuation and qualifying accounts and reserves Other schedules are omitted because of the absence of conditions under which they are required. (a) (3) Exhibits. The exhibits are listed on the Index to Exhibits appearing below. (b) Reports on Form 8-K: No reports on Form 8-K were filed during the fourth quarter of fiscal 1995. (c) Exhibits (numbered in accordance with Item 601 of Regulation S-K).
Exhibit Number Description and Method of Filing - ------ -------------------------------- 3(a) Certificate of Incorporation of the Registrant (1) 3(b) By-Laws of the Registrant (1) 10(a) Stock Option Plan of the Registrant (1) 10(b) Amendment No. 1 to Stock Option Plan of the Registrant (2) 10(c) Profit Sharing Plan of Packaging Coordinators, Inc. (1) 10(d) Profit Sharing Trust Agreement of Packaging Coordinators, Inc. (1) 10(e) Money Purchase Pension Plan of Packaging Coordinators, Inc. (1) 10(f) Money Purchase Pension Plan Trust of Packaging Coordinators Inc. (1) 10(g) Services Agreement, dated September 20, 1991, between the Registrant and MEDIQ Incorporated (1) 10(h) Tax Allocation/Sharing Agreement, dated September 20, 1991, between the Registrant and MEDIQ Incorporated (1) 10(i) Registration Rights Agreement, dated September 20, 1991, between the Registrant, MEDIQ incorporated and MEDIQ Investment Services, Inc. (1) 10(j) Lease dated November 20, 1990 between Packaging Coordinators, Inc. and D.D. Williamson (PR), Ltd. (1) 10(k) Reimbursement Agreement, dated September 27, 1991, between Packaging Coordinators, Inc. and MEDIQ Incorporated (1) 10(l) Real Estate Agreement, dated September 27, 1991, between Packaging Coordinators, Inc. and MEDIQ Incorporated (1) 10(m) Annual Incentive Compensation Plan (1) 10(n) Employment Agreement dated August 27, 1991 between Packaging Coordinators, Inc. and Daniel F. Gerner (1)
Exhibit Number Description and Method of Filing - ------ -------------------------------- 10(o) Letter Agreement dated July 22, 1992 between Packaging Coordinators, Inc. and McNeil Consumer Products Company (1) 10(p) Insurance Program Agreement dated October 1, 1991 by and between the Registrant and MEDIQ Incorporated (1) 10(q) English translation of Share Purchase Agreement, dated as of November 30, 1993 (3) 10(r) English translation of Letter Agreement, dated December 4, 1992, amending the Share Purchase Agreement (3) 10(s) English translation of Agreement, dated August 1994, between the Company and the Hofliger family (4) 10(t) English translations of Share Transfer Agreement and Real Estate Purchase Agreement, dated October 20, 1994, between Allpack, Raimund Merkel, Renate-Hasenohr-Merkel and KR-Verpackung Gmbh (4) 10(u) Loan Agreement, dated January 23, 1986, between MEDIQ and Fidelity Bank (4) 10(v) Amendment, Assignment, Assumption and Release Agreement, dated as of February 25, 1994, among MEDIQ, Packaging Coordinators, Inc. and First Fidelity Bank, National Association (4) 10(w) Mortgage Modification and Assumption Agreement, dated as of February 25, 1994, among MEDIQ, Packaging Coordinators, Inc. and First Fidelity Bank, National Association (4) 10(x) Amended and Restated Promissory Note, dated February 25, 1994 in the principal amount of $2,490,000(4) 10(y) Loan Agreement, dated as of August 30, 1994, between the Company, Packaging Coordinators, Inc., PCI of Virginia, Inc., PCI/Delvco, Inc., PCI/Tri-Line (USA), Inc. and Meridian Bank (4) 10(z) Revolving Credit Note, dated August 30, 1994, in the principal amount of $5,000,000 (4) 10(aa) First Term Loan Note, dated August 30, 1994, in the principal amount of $7,500,000 (4) 10(bb) Second Term Loan Note, dated August 30, 1994, in the principal amount of $983,250 (4) 10(cc) Agreement of Sale, dated July 28, 1994, between Interco, Incorporated and Packaging Coordinators, Inc., as amended on September 19, 1994 (4) 10(dd) Acquisition Agreement, dated September 19, 1994, between PIDC Financing Corporation and Packaging Coordinators, Inc. (4) 10(ee) English Language Translation of Loan Agreement, dated February 22, 1995, between Allpack Industrielle Lohnverpackung GmbH and Waiblingen District Sparkasse Savings Bank (5) 21 Subsidiaries of the Registrant (5) 23 Consent of Deloitte & Touche LLP, Independent Certified Public Accountants (5) (1) Incorporated by reference to Registration Statement on Form S-1 filed September 25, 1991 as amended. (2) Incorporated by reference to Annual Report on Form 10-K for the fiscal year ended September 30, 1992. (3) Incorporated by reference to Current Report on Form 8-K, dated December 4, 1992. (4) Incorporated by reference to Annual Report on Form 10-K for the fiscal year ended September 30, 1994. (5) Filed herewith.
SIGNATURES Pursuant to requirements of Section 13 of 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: December 11, 1995 PCI SERVICES, INC. By:/s/ Richard S. Sauter ----------------------------------- Richard S. Sauter Chief Executive Officer By:/s/ Michael F. Sandler ----------------------------------- Michael F. Sandler Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons, which include at least a majority of the Board of Directors on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- /s/ Bernard J. Korman Chairman of the Board December 11, 1995 - ------------------------- Bernard J. Korman of Directors /s/ Richard S. Sauter Vice Chairman of the December 11, 1995 - ------------------------- Richard S. Sauter Board of Directors and Chief Executive Officer /s/ Lawrence Chimerine Director December 11, 1995 - ------------------------- Lawrence Chimerine /s/ Herbert Lotman Director December 11, 1995 - ------------------------- Herbert Lotman /s/ Robert Purcell Director December 11, 1995 - ------------------------- Robert Purcell /s/ Theodore H. Seidenberg Director December 11, 1995 - ------------------------- Theodore H. Seidenberg PCI SERVICES, INC. AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993 (in thousands)
- -------------------------------------------------------------------------------------------------------------------------- COL. A COL. B COL. C COL. D COL. E - -------------------------------------------------------------------------------------------------------------------------- Additions Description Balance at Charged to Balance Beginning Costs and (1) at End of Period Expenses Deductions of Period - -------------------------------------------------------------------------------------------------------------------------- Year ended September 30, 1995 - ----------------------------- Allowance for doubtful accounts $103 $121 $(13) $211 ==== ==== ==== ==== Year ended September 30, 1994 - ----------------------------- Allowance for doubtful accounts $ 76 $ 27 $ -- $103 ==== ==== ==== ==== Year ended September 30, 1993 - ----------------------------- Allowance for doubtful accounts $139 $ 30 $(93) $ 76 ==== ==== ==== ====
- ---------- (1) Represents accounts directly written-off net of recoveries EX-99.2 18 NUTRAMAX FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------------------- 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, 1995 Commission File Number: 0-18671 NUTRAMAX PRODUCTS, INC. (Exact name of registrant as specified in its charter) Delaware 061200464 (State or other jurisdiction of (I.R.S.Employer incorporation or organization) Identification No.) 9 Blackburn Drive, Gloucester, Massachusetts 01930 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (508) 283-1800 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.001 per share 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 filing requirements for the past 90 days. Yes X No -- -- The aggregate market value of the registrant's voting stock held by nonaffiliates (based upon the closing price of $9.50) on December 1, 1995 was approximately $36,700,000. As of December 1, 1995, there were 8,519,952 shares of Common Stock, par value $.001 per share, outstanding. 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 --- Documents Incorporated by Reference Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held in 1996 are incorporated by reference into Part III. The Index to Exhibits begins on page 25. PART I ITEM 1. BUSINESS General NutraMax Products, Inc. (the "Company") is a private label health and personal care products company. The Company's strategy is to offer a line of quality products equivalent to national brands at lower cost to consumers while providing greater profit potential to retailers than the national brands. National brands dominate health and personal care product categories. However, in recent years private label products have captured increased market share by appealing to value conscious consumers seeking lower cost products of comparable quality. The Company received the 1993 Retail Excellence Award as the Private Label Company of the Year, with the selection based on a survey conducted by a major trade journal. The Company was incorporated on April 20, 1987 under the laws of the State of Delaware. Products Feminine Needs -- The Company manufactures disposable douches for sale under its value brands Sweet*n FreshR and Sweet LoveR and on a private label basis. As a result of the growth of the Company's other product lines, sales of douche products in fiscal 1995 were 24% of net sales, as compared to 25% in 1994 and 56% in 1993. The Company also markets private label feminine yeast infection medication products containing the active ingredient clotrimazole. Cough/Cold Products -- In December 1993, the Company acquired the leading manufacturer and distributor of private label cough drops and throat lozenges, which also manufactures cough drops on a contract basis for national branded companies. The acquisition enabled the Company to offer an extensive line of solid dosage cough/cold products, including cough drops, throat lozenges, sugar-free products, vitamin C drops and liquid center items. Sales of cough/cold products represented 34% and 33% of net sales in fiscal 1995 and 1994, respectively. Baby Care -- The Company manufactures disposable baby bottle liners on a private label basis and under its value brand Fresh*n EasyR. The Company manufactures pediatric electrolyte oral maintenance solution, a product which is used to replace minerals lost by children who suffer from diarrhea and vomiting, for sale under its value brand NutraMax Baby Care Pediatric Electrolyte and on a private label basis. During fiscal years 1995, 1994 and 1993, sales of baby care products represented 19%, 21% and 28% of net sales, respectively. Ophthalmics -- In June 1993, the Company acquired a manufacturer of private label over-the-counter and prescription ophthalmic products for retail and industrial customers, enabling the Company to offer a broad line of eye care products, including over-the-counter contact lens solutions, artificial tears and eye drops, as well as generic prescription eye care products. Sales of ophthalmic products represented 10% and 11% of net sales in fiscal 1995 and 1994, respectively. Adult Nutrition Products -- In March 1995, the Company introduced a new line of adult high calorie liquid nutrition products which are sold under its value brand NutraMax Plus High Calorie Liquid Nutrition and on a private label basis. This product is the Company's entry into the growing adult nutrition category. The products are manufactured by a third party and marketed by the Company through its distribution channels. Personal Care -- The Company manufactures ready-to-use disposable enemas for sale under its value brand Pure & Gentle, on a private label basis and for the institutional market. 2 Other Products -- The Company's other products consist principally of a patented line of sterile, prefilled, disposable dilution bottles used in laboratory testing of water, waste water, foods, drug products, pharmaceuticals and cosmetics. New Product Strategy The Company's growth strategy includes the acquisition and development of new products, and the extension or modification of existing product lines to correspond with national branded products and product variations. The Company expects to add new product lines through internal development, acquisition and joint venture or partnership agreements. The Company contemplates that product line expansion will enable the Company to capitalize on its established distribution channels and manufacturing and marketing expertise. New products will most likely focus on consumer packaged goods, including health and personal care products. The Company has recently expanded its product lines to include the following: Oral Care -- In October 1995, the Company acquired the assets and assumed certain liabilities of Mi-Lor Corporation, Professional Brushes, Inc. and Codent Dental Products, Inc., companies engaged in the manufacturing and marketing of toothbrushes, dental floss and related products for the store brand market. The acquisition is the Company's entry into the private label oral care segment. These products are manufactured in an 88,000 square foot manufacturing facility located in Florence, Massachusetts which was acquired by the Company as part of the transaction. Oral care products are being marketed by the Company through its existing distribution channels. Marketing and Distribution The Company utilizes national brand marketing methods to meet the specific needs of its customers. Such marketing methods include designing contemporary packaging to improve point-of-purchase impact and increase consumer appeal. The Company also uses price, display, packaging, bonus and multi-pack promotions to increase sales and retailer support. Sales are made through the Company's sales representatives and independent brokers. Customers For fiscal years 1995 and 1994, American Home Products, Inc. accounted for 14% and 17% of net sales, respectively. For fiscal year 1993, no individual customer represented in excess of 10% of the Company's net sales. While the Company is continually expanding its distribution and customer base, the loss of one or more of its largest customers, if not replaced with other comparable business, could have a material adverse effect on the Company's results of operations. Competition The markets in which the Company competes are dominated by nationally advertised brand name products marketed by established consumer packaged goods companies, most of which have greater marketing, financial and human resources than the Company. The Company also competes with several other private label manufacturers and marketers. Competition for consumer health and personal care products is based primarily on product reliability, price, customer service, and the ability to provide tamper resistant/evident packaging. Growth in sales of private label products is also dependent on increasing the amount of shelf space available at retail stores in order to maximize brand awareness and consumer trial. The Company experiences aggressive price competition from time to time from branded and other private label competitors. There can be no assurance that such price competition will not have a material adverse effect on the Company's results of operations. 3 Governmental Regulation and Health Issues The Company is registered with the Food & Drug Administration ("FDA") as a manufacturer for certain of its products. The primary forms of governmental regulation are the current "good manufacturing practices" and "good laboratory practices" guidelines administered by the FDA, which set forth the protocols to be followed in the manufacture, storage, packaging and distribution of medical products for human use. Certain of the Company's ophthalmic products are subject to additional FDA regulations relating to pre-market approval of products. The Company's operations are also subject to periodic inspections by the FDA. Promotional claims made with respect to health and personal care products are also subject to regulation by the FDA, and by the Federal Trade Commission. The use of health and personal care products may result in allergic or other adverse reactions in users. Since 1952, a number of studies have been published in medical journals concerning the relationship of douching to the incidence of pelvic inflammatory disease. These studies provide no conclusive results on the issue of whether douching causes this disease. A 1990 study showed an association between douching and the disease and concluded that further studies were needed. A 1993 study stated that the results of the study lend support to the hypothesis that douching can predispose a woman to pelvic inflammatory disease. Although the Company believes its douche products are safe when used in accordance with instructions accompanying the product package, negative publicity resulting from such studies and any future studies may affect sales of douche products. In such event there could be a material adverse impact on the Company's results of operations. Employees The Company has approximately 580 full-time employees engaged in quality control, marketing and sales, general corporate and administrative positions and manufacturing operations. The Company believes that relations with its employees are satisfactory. ITEM 2. PROPERTIES The Company currently operates the following facilities (which are owned unless otherwise indicated):
Approximate Location Type of Facility Square Feet - -------- ---------------- ----------- Gloucester, Massachusetts (1) Corporate and Administrative Offices, 111,000 Manufacturing Facilities Fairton, New Jersey Manufacturing 48,000 Brockton, Massachusetts Manufacturing 66,000 Florence, Massachusetts (2) Manufacturing 88,000
- ----------------- (1) Consists of four facilities, of which three are leased. (2) Acquired in October 1995. The Company believes that its present facilities will be adequate for all of its reasonably foreseeable manufacturing, warehousing and distribution requirements, or that alternative facilities can be obtained at a reasonable cost. 4 ITEM 3. LEGAL PROCEEDINGS The Company, like other companies in the store brand industry, has been the subject of claims and litigation brought by national brand name companies based on packaging alleged to be similar to competing brand name products. The Company is also subject to certain claims and informal complaints relating to its products which are incidental and routine to its business and for which the Company maintains insurance coverage. The Company knows of no litigation, either pending or threatened, which is likely to have a material adverse effect on the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of fiscal 1995. 5 PART II ITEM 5. Market for the Registrant's Common Stock and Related Security Holder Matters Market Information The following table sets forth, for the periods indicated, the high and low prices for the common stock as reported by The Nasdaq Stock Market. The Company's common stock is traded on The Nasdaq Stock Market's National Market System under the symbol "NMPC".
Fiscal 1995: High Low ----------- ---- ---- First Quarter $10.375 $ 8.750 Second Quarter 9.750 7.750 Third Quarter 9.375 5.750 Fourth Quarter 10.000 7.750 Fiscal 1994: ------------ First Quarter $16.125 $10.500 Second Quarter 12.750 10.750 Third Quarter 11.625 7.875 Fourth Quarter 10.750 8.250
Common Stock Holders The Company believes there are approximately 2,500 holders of common stock, including shares held in street name by brokers. Dividends The Company has never declared or paid any cash dividends. The declaration of dividends by the Company in the future will at all times be subject to the sole discretion of the Company's Board of Directors, and will depend upon operating results, capital requirements and financial position. See notes to the consolidated financial statements included elsewhere herein. 6 ITEM 6. Selected Consolidated Financial Data The selected consolidated financial data presented below has been derived from the audited financial statements of the Company. This data is qualified in its entirety by reference to, and should be read in conjunction with, Management's Discussion and Analysis of Financial Condition and Results of Operations and the Company's Consolidated Financial Statements included elsewhere herein.
Year Ended ------------------------------------------------------------- Sept. 30, Oct. 1, Oct. 2, Sept. 30, Sept. 30, 1995 1994(1) 1993(2) 1992 1991 --------- ------- ------ -------- --------- (in thousands, except per share data) Income Statement Data: - ---------------------- Net sales $ 63,111 $ 55,958 $ 31,144 $ 25,151 $ 20,115 Cost of sales 45,916 38,752 19,598 13,908 11,330 -------- -------- -------- -------- ------- Gross profit 17,195 17,206 11,546 11,243 8,785 Selling, general and administrative expenses 8,694 9,281 5,928 5,715 4,639 -------- -------- -------- -------- ------- Operating income 8,501 7,925 5,618 5,528 4,146 Other credits (charges): Interest expense (1,427) (928) -- -- (650) Other 316 95 251 338 244 -------- -------- -------- -------- ------- Income before income tax expense 7,390 7,092 5,869 5,866 3,740 Income tax expense 2,916 2,832 2,350 2,397 1,605 -------- -------- -------- -------- ------- Net income $ 4,474 $ 4,260 $ 3,519 $ 3,469 $ 2,135 ======== ======== ======== ======== ======= Earnings per share $ .53 $ .50 $ .43 $ .43 $ .35 ======== ======== ======== ======== ======= Weighted average shares outstanding (3) 8,520 8,480 8,235 8,090 6,143 ======== ======== ======== ======== =======
Sept. 30, Oct. 1, Oct. 2, Sept. 30, Sept. 30, 1995 1994(1) 1993(2) 1992 1991 ---------- ------- ------- --------- --------- (in thousands) Balance Sheet Data: - ------------------- Working capital $ 14,152 $ 13,172 $ 9,703 $ 10,235 $ 8,559 Total assets 63,074 60,450 33,207 25,925 22,416 Long-term debt, less current maturities 12,550 16,183 -- -- -- Stockholders' equity 39,233 34,757 29,953 22,549 19,026
- ------------------ (1) In December 1993, the Company acquired a manufacturer and distributor of private label cough/cold products for $13,500,000 which was financed with proceeds from a revolving credit facility. (2) In June 1993, the Company acquired a manufacturer of private label over-the-counter and prescription ophthalmic products, for approximately 202,000 shares of the Company's common stock with a market value of $2,846,000. (3) In August 1991, the Company completed a public stock offering consisting of 2,150,000 shares of common stock. 7 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the Consolidated Financial Statements and notes thereto, contained elsewhere herein. Results of Operations The Consolidated Statements of Operations include the results of operations of acquired companies from the dates acquired: Optopics Laboratories Corporation ("Optopics") (June 1993) and Powers Pharmaceutical Corporation ("Powers") (December 1993). The following table sets forth, for all periods indicated, the percentage relationship that items in the Consolidated Statements of Operations bear to net sales.
Year Ended -------------------------------------- Sept. 30, Oct. 1, Oct. 2, 1995 1994 1993 -------- ------ ------ Net sales 100% 100% 100% Cost of sales 73 69 63 --- --- --- Gross profit 27 31 37 Selling, general and administrative expenses 14 17 19 --- --- --- Operating income 13 14 18 Other credits (charges) (1) (1) 1 --- --- --- Income before income tax expense 12 13 19 Income tax expense 5 5 8 --- --- --- Net income 7% 8% 11% === === ===
Fiscal Year 1995 Compared to Fiscal Year 1994 Net sales for 1995 were $63,111,000, an increase of $7,153,000, or 13%, over 1994 net sales of $55,958,000. The increase in net sales was primarily attributable to sales of Cough/Cold products resulting from the acquisition of Powers in December 1993 and the introduction of the Adult Nutrition product line in March 1995, in addition to increased volume in other product categories. Gross profit for 1995 was $17,195,000, or 27% of net sales, as compared to $17,206,000, or 31% in 1994. The decrease in the gross margin reflects the impact of lower production levels for Cough/Cold products, competitive pressure on the Company's Feminine Needs and Personal Care products and changes in product mix. In addition, the Company experienced higher raw material costs in 1995, which are not expected to continue through 1996. Selling, general and administrative expenses for 1995 were $8,694,000 or 14% of net sales, as compared to $9,281,000, or 17% of net sales in 1994. The decrease in selling, general and administrative expenses was primarily attributable to a decrease in bad debt expense and professional fees partially offset by commissions and freight expenses associated with the increase in sales. The decrease, as a percentage of net sales, resulted from decreased costs allocated over higher net sales. Interest expense for 1995 was $1,427,000, as compared to $928,000 in the prior year. This increase was primarily attributable to debt incurred in connection with the acquisition of Powers and increases in interest rates. 8 Fiscal Year 1994 Compared to Fiscal Year 1993 Net sales for 1994 were $55,958,000, an increase of $24,814,000, or 80%, over 1993 net sales of $31,144,000. The increase in net sales was primarily attributable to sales of cough/cold products which represented 33% of net sales in 1994. The increase in net sales was also attributable to increased unit sales of ophthalmics and baby care products, partially offset by a decrease in sales of certain feminine needs products. Sales of certain feminine needs products decreased as a result of lower average sale prices in response to continued competitive pressure, while unit sales for the year stabilized. The timing, frequency and nature of promotional activities in this category by brand manufacturers and other private label companies have had the effect of decreasing sale prices. Gross profit for 1994 increased to $17,206,000, or 31% of net sales, as compared to $11,546,000, or 37% in 1993. The decrease in the gross margin reflected changes in product mix and the impact of competitive pricing pressure relating to certain of the Company's feminine needs products. The Company also incurred an increase in manufacturing overhead expenses in connection with anticipated higher sales of ophthalmics products. Selling, general and administrative expenses for 1994 were $9,281,000, or 17% of net sales, as compared to $5,928,000, or 19% of net sales in 1993. Fiscal 1994 included ten months of Powers' operations which accounted for a significant portion of the increase in selling, general and administrative expenses. As a percentage of net sales, selling, general and administrative expenses decreased as a result of the allocation of these costs over substantially higher net sales. Interest expense of $928,000 for 1994 was attributable to debt incurred in connection with the acquisition of Powers. Other income for 1994 was $95,000, as compared to $251,000 in 1993. The decrease was primarily attributable to lower interest income as a result of the use of investments to fund, in part, acquisitions. Seasonality During the last four months of the calendar year, retailers focus their merchandising efforts on and devote more shelf space to seasonal and holiday merchandise. As a result, sales of certain of the Company's products tend to be weaker in the Company's first quarter (ending in December), and normally strengthen in the second quarter as retailers replenish their shelves with health and personal care products. Sales of pediatric electrolyte and cough/cold products may help mitigate weaker sales in the Company's first quarter, as the Company's customers purchase such products to stock inventories in anticipation of the winter months. Consequently, the results of any one quarter may not necessarily be indicative of results of future quarters. Liquidity and Capital Resources As of September 30, 1995, the Company's working capital increased to $14,152,000, as compared to $13,172,000 on October 1, 1994. Net cash provided by operating activities increased to $7,605,000 in 1995 from $5,400,000 in the prior year. This increase was primarily attributable to improved operating results and changes in working capital. The change in working capital was primarily attributable to increased collections of accounts receivable and stabilization of inventory levels partially offset by increased payments for income taxes. Net cash used in investing activities was $4,306,000 in 1995 and consisted primarily of capital expenditures for additional capacity. The Company anticipates capital expenditures of approximately $5,800,000 in fiscal 1996 for additional manufacturing capacity at the Company's existing facilities and the facility acquired in October 1995. See "Recent Developments". 9 Net cash used in financing activities for 1995 consisted primarily of debt repayments of $3,174,000. In December 1994, the Company converted its $20,000,000 credit facility into an $8,000,000 revolving credit facility, two term loans aggregating $9,000,000 and a mortgage of $1,000,000, all of which are secured by substantially all of the Company's assets. The revolving credit facility bears interest at prime and/or, at the Company's option, LIBOR plus 2%, and expires in January 1997. The average amount outstanding under this facility during the year amounted to $6,452,000, and the weighted average interest rate computed on the monthly outstanding balance was 8.14%. At September 30, 1995, $5,118,000 was outstanding under this facility. The amount of available credit fluctuates based upon the amount of eligible accounts receivable and inventory. As of September 30, 1995, $2,800,000 of credit was available. The term loans bear interest at prime plus .5% and/or, at the Company's option, LIBOR plus 2.5%, and are payable in quarterly principal installments of $450,000 through November 1999. The mortgage bears interest at prime plus .5% and/or, at the Company's option, LIBOR plus 2.5%, and is payable in quarterly principal installments of $17,000, with a final payment of approximately $680,000 in November 1999. The interest rates on the term loans and the mortgage ranged from 8.25% to 9% during 1995. The Company believes that its existing working capital, anticipated funds to be generated from future operations and funds available under the revolving credit facility will be sufficient to meet all of the Company's operating and capital needs for the foreseeable future. However, depending upon future growth of the business, additional financing may be required. Recent Developments In October 1995, the Company acquired substantially all of the assets and assumed certain liabilities of Mi-Lor Corporation, Professional Brushes, Inc. and Codent Dental Products, Inc., which manufacture and market toothbrushes, dental floss and related products for the store brand market. The purchase price consisted of $1,800,000 in cash, obtained under the Company's revolving credit facility, liabilities assumed of $225,000 and related expenses of approximately $375,000. Other Information The Board of Directors of MEDIQ Incorporated ("MEDIQ"), a 47% owner of the Company, is currently in the process of exploring alternative ways to maximize MEDIQ's shareholder value, which could include the disposition of its holdings in the Company. In connection with MEDIQ's activities, the Company formed a Special Committee of its Board of Directors to explore strategic alternatives for the Company. The Committee has retained Wasserstein Perella & Co. as financial advisors to seek opportunities for the Company to enhance shareholder value. However there can be no assurances that a transaction will occur. 10 Item 8. Financial Statements And Supplemental Data Independent Auditors' Report 12 Consolidated Statements of Operations - Three Years Ended September 30, 1995 13 Consolidated Balance Sheets - September 30, 1995 and October 1, 1994 14 Consolidated Statements of Stockholders' Equity - Three Years Ended September 30, 1995 15 Consolidated Statements of Cash Flows - Three Years Ended September 30, 1995 16 Notes to Consolidated Financial Statements 17-24
11 Independent Auditors' Report Board of Directors and Stockholders NutraMax Products, Inc. Gloucester, Massachusetts We have audited the accompanying consolidated balance sheets of NutraMax Products, Inc. and subsidiaries as of September 30, 1995 and October 1, 1994, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three fiscal years in the period ended September 30, 1995. Our audits also included the financial statement schedule listed in the Index at Item 14. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the 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 NutraMax Products, Inc. and subsidiaries as of September 30, 1995 and October 1, 1994, and the results of their operations and their cash flows for each of the three fiscal years in the period ended September 30, 1995 in conformity with generally accepted accounting principles. Also, in our opinion, such 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 Boston, Massachusetts November 3, 1995 12 NUTRAMAX PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended ----------------------------------------------- Sept. 30, Oct. 1, Oct. 2, 1995 1994 1993 -------- ------- ------- Net Sales $63,111,000 $55,958,000 $31,144,000 Cost of Sales 45,916,000 38,752,000 19,598,000 ----------- ----------- ----------- Gross Profit 17,195,000 17,206,000 11,546,000 Selling, General and Administrative Expenses 8,694,000 9,281,000 5,928,000 ----------- ----------- ----------- Operating Income 8,501,000 7,925,000 5,618,000 Other Credits (charges): Interest expense (1,427,000) (928,000) -- Interest income 13,000 60,000 235,000 Other 303,000 35,000 16,000 ----------- ----------- ----------- Income Before Income Tax Expense 7,390,000 7,092,000 5,869,000 Income Tax Expense 2,916,000 2,832,000 2,350,000 ----------- ----------- ----------- Net Income $ 4,474,000 $ 4,260,000 $ 3,519,000 =========== =========== =========== Earnings Per Share $ .53 $ .50 $ .43 =========== =========== =========== Weighted Average Shares Outstanding 8,520,000 8,480,000 8,235,000 =========== =========== ===========
See notes to consolidated financial statements. 13 NUTRAMAX PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
September 30, October 1, 1995 1994 ----------- ----------- Current Assets: Cash $ 503,000 $ 376,000 Accounts receivable, less allowance for doubtful accounts of $601,000 in 1995 and $738,000 in 1994 9,050,000 8,074,000 Inventories 12,497,000 11,238,000 Deferred income taxes 977,000 1,050,000 Prepaid expenses and other 525,000 729,000 ----------- ----------- Total Current Assets 23,552,000 21,467,000 Property, Plant and Equipment, net 23,714,000 22,499,000 Goodwill, net of accumulated amortization of $2,609,000 in 1995 and $2,046,000 in 1994 13,978,000 14,541,000 Other Assets 1,830,000 1,943,000 ----------- ----------- $63,074,000 $60,450,000 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 6,191,000 $ 4,865,000 Accrued payroll and related taxes 366,000 608,000 Accrued expenses - other 939,000 1,378,000 Current maturities of long-term debt 1,904,000 1,444,000 ----------- ----------- Total Current Liabilities 9,400,000 8,295,000 Long-Term Debt, less current maturities 12,550,000 16,183,000 Other Long Term Liabilities 312,000 312,000 Deferred Income Taxes 1,579,000 903,000 Stockholders' Equity: Common stock - $.001 par value: Authorized - 20,000,000 shares Issued and outstanding: 8,520,000 shares in 1995 and 1994 9,000 9,000 Additional paid-in capital 22,567,000 22,565,000 Retained earnings 16,657,000 12,183,000 ----------- ----------- Total Stockholders' Equity 39,233,000 34,757,000 ----------- ----------- $63,074,000 $60,450,000 =========== ===========
See notes to consolidated financial statements. 14 NUTRAMAX PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock ------------------------ Shares Additional Retained Issued Amount Paid-In Capital Earnings Total ---------- --------- -------------- ----------- ----------- Balance at October 1, 1992 8,094,000 $ 8,000 $18,137,000 $ 4,404,000 $22,549,000 Issuance of stock - management compensation 53,000 -- 212,000 -- 212,000 Exercise of stock options and warrants 90,000 -- 827,000 -- 827,000 Issuance of stock - acquisition of Optopics 202,000 -- 2,846,000 -- 2,846,000 Net income -- -- -- 3,519,000 3,519,000 --------- --------- ----------- ----------- ----------- Balance at October 2, 1993 8,439,000 8,000 22,022,000 7,923,000 29,953,000 Issuance of stock - management compensation 53,000 -- 318,000 -- 318,000 Exercise of stock options 28,000 1,000 225,000 -- 226,000 Net income -- -- -- 4,260,000 4,260,000 --------- --------- ----------- ----------- ----------- Balance at October 1, 1994 8,520,000 9,000 22,565,000 12,183,000 34,757,000 Exercise of stock options (1) -- -- 2,000 -- 2,000 Net income -- -- -- 4,474,000 4,474,000 --------- --------- ----------- ----------- ----------- Balance at September 30, 1995 8,520,000 $ 9,000 $22,567,000 $16,657,000 $39,233,000 ========= ========= =========== =========== ===========
- ------------------ (1) 180 stock options were exercised in 1995. See notes to consolidated financial statements. 15 NUTRAMAX PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended ------------------------------------------------ Sept. 30, Oct. 1, Oct. 2, 1995 1994 1993 ----------- ----------- ----------- Cash Flows from Operating Activities: Net income $ 4,474,000 $ 4,260,000 $ 3,519,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,857,000 3,527,000 1,948,000 Deferred taxes 732,000 419,000 545,000 Other (227,000) 286,000 82,000 Increase (decrease), net of effect of acquisitions: Accounts receivable (838,000) (1,471,000) (1,851,000) Inventories (1,259,000) (4,647,000) (2,112,000) Prepaid expenses and other 379,000 (94,000) (251,000) Accounts payable 1,326,000 1,433,000 (226,000) Accrued payroll and related taxes (242,000) (71,000) 16,000 Accrued expenses - other (386,000) 721,000 (352,000) Income taxes (211,000) 1,037,000 (752,000) ----------- ---------- ---------- Net cash provided by operating activities 7,605,000 5,400,000 566,000 Cash Flows from Investing Activities: Acquisitions, net of cash acquired -- (13,541,000) (245,000) Purchases of property, plant and equipment (3,937,000) (3,929,000 (3,420,000) Maturities of short-term investments -- -- 4,940,000 Deferred costs (527,000) (532,000) (620,000) Other 158,000 74,000 (270,000) ----------- ---------- ---------- Net cash provided by (used in) investing activities (4,306,000) (17,928,000) 385,000 Cash Flows from Financing Activities: Borrowings -- 19,166,000 -- Proceeds from exercise of stock options and warrants 2,000 177,000 613,000 Debt repayments (3,174,000) (7,838,000) (3,167,000) ----------- ---------- ---------- Net cash provided by (used in) financing activities (3,172,000) 11,505,000 (2,554,000) ----------- ---------- ---------- Net Increase (Decrease) in Cash 127,000 (1,023,000) (1,603,000) Cash: Beginning of year 376,000 1,399,000 3,002,000 ----------- ---------- ---------- End of year $ 503,000 $ 376,000 $ 1,399,000 =========== =========== =========== Supplemental Disclosures of Cash Flow Information: Income taxes paid $ 2,384,000 $ 1,534,000 $ 2,458,000 =========== =========== =========== Interest paid $ 1,297,000 $ 831,000 $ -- =========== =========== =========== Supplemental Disclosure of Non-Cash Financing and Investing Activities: Issuance of stock - acquisition of Optopics $ -- $ -- $2,846,000 =========== =========== =========== Issuance of stock - non-cash compensation $ -- $ 318,000 $ 212,000 =========== =========== =========== Plant and equipment financed with long-term debt and capital lease obligations $ -- $ 794,000 $ -- =========== =========== ===========
See notes to consolidated financial statements. 16 NUTRAMAX PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note A - Summary of Significant Accounting Policies Principles of Consolidation -- The consolidated financial statements include the accounts of NutraMax Products, Inc. and its subsidiaries (the "Company"). In consolidation, all significant intercompany transactions and balances have been eliminated. Inventories -- Inventories are stated at the lower of cost (first-in, first-out method) or market. Property, Plant and Equipment -- Property, plant and equipment are stated at cost. The Company's policy of providing for depreciation and amortization is as follows: Buildings 20 years on a straight-line basis Liquid packaging machines 32,000 to 48,000 machine hours which approximate a five to eight and one-half year life Machinery, equipment, molds 5 to 10 years on a straight-line and furniture and fixtures basis Leasehold improvements The terms of the related lease on a straight-line basis Vehicles 3 to 5 years on a straight-line basis Goodwill -- The purchase price in excess of net assets acquired is amortized on a straight-line basis over periods from thirty to forty years. The Company evaluates the carrying value of goodwill based upon current and anticipated net income and undiscounted cash flows, and recognizes an impairment when it is probable that such estimated future net income and/or cash flows will be less than the carrying value of goodwill. Measurement of the amount of impairment, if any, is based upon the difference between carrying value and fair value. Other Assets -- Other assets include intangible assets which are amortized on a straight-line basis over the estimated periods of related benefit, ranging from three to fifteen years. Accumulated amortization was $213,000 and $187,000 as of September 30, 1995 and October 1, 1994, respectively. Other assets also include external costs deferred in connection with tools, dies and the design of packaging materials for the Company's products which are amortized on a straight-line basis over four years. Income Taxes -- Effective October 3, 1993, the Company adopted on a prospective basis the provisions of Statement of Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes", which supersedes SFAS No. 96. The effect of adopting SFAS No. 109 was not significant. Earnings Per Share -- Earnings per share computations are based upon the weighted average number of common shares outstanding. Stock options have been excluded from the calculation of weighted average shares outstanding since the dilutive effect is less than 3%. Reclassification of Accounts -- Certain reclassifications have been made to conform prior years' balances to the current year presentation. 17 NUTRAMAX PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note B - Acquisitions Powers Pharmaceutical Corporation -- In December 1993, the Company acquired all of the outstanding common stock of Certified Corporation, parent of Powers Pharmaceutical Corporation ("Powers"), for $13,500,000 in cash and related expenses of $236,000. Powers, based in Brockton, Massachusetts, is the nation's leading manufacturer and distributor of private label cough drops and throat lozenges, and also manufactures cough drops on a contract basis. The transaction was accounted for by the purchase method of accounting. The excess of the purchase price over the fair values of the net assets acquired of $6,206,000 is amortized over thirty years. Optopics Laboratories Corporation -- In June 1993, the Company acquired all of the assets and assumed all of the liabilities of Optopics Laboratories Corporation ("Optopics") for approximately 202,000 shares of the Company's common stock, with a market value of $2,846,000, and related transaction costs of $245,000. Additionally, the Company acquired Optopics' manufacturing facility for $800,000 in cash, which was previously leased from the former stockholders of Optopics. Optopics is a manufacturer of private label over-the-counter and prescription ophthalmics products. The acquisition was accounted for by the purchase method of accounting. The excess of the purchase price over the estimated fair value of the net assets acquired of $4,325,000 is amortized over thirty years. Note C - Inventories
Sept. 30, Oct. 1, 1995 1994 ----------- ----------- Raw materials $ 5,278,000 $ 4,799,000 Finished goods 6,088,000 5,600,000 Work in process 417,000 355,000 Machinery parts and factory supplies 714,000 484,000 ----------- ----------- $12,497,000 $11,238,000 =========== ===========
Note D - Property, Plant and Equipment
Sept. 30, Oct. 1, 1995 1994 ----------- ----------- Machinery and equipment $21,211,000 $18,684,000 Land, buildings and improvements 8,131,000 7,392,000 Molds 2,611,000 2,268,000 Furniture and fixtures 1,496,000 1,253,000 Vehicles 25,000 41,000 ----------- ----------- 33,474,000 29,638,000 Less: Accumulated depreciation and amortization 9,760,000 7,139,000 ----------- ----------- $23,714,000 $22,499,000 =========== ===========
Depreciation and amortization expense for property, plant and equipment for 1995, 1994 and 1993 was $2,725,000, $2,390,000 and $1,177,000, respectively. 18 NUTRAMAX PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note E - Long-Term Debt
Sept. 30, Oct. 1, 1995 1994 ----------- ----------- Revolving credit facility $ 5,118,000 $ 7,850,000 Term loans 7,650,000 9,000,000 Mortgages 1,654,000 733,000 Capital lease obligation 32,000 44,000 ----------- ----------- 14,454,000 17,627,000 Less: Current maturities of long-term debt 1,904,000 1,444,000 ----------- ----------- $12,550,000 $16,183,000 =========== ===========
Maturities of long-term debt are as follows:
Fiscal Year ----------- 1996 $ 1,904,000 1997 7,668,000 1998 1,876,000 1999 1,871,000 2000 1,135,000 ----------- $14,454,000 ===========
The revolving credit facility bears interest at prime (8.75% at September 30, 1995) and/or, at the Company's option, LIBOR plus 2% (7.875% at September 30, 1995), and expires in January 1997. The average amount outstanding under this facility during the year amounted to $6,452,000, and the weighted average interest rate computed on the monthly outstanding balance was 8.14%. The amount of available credit fluctuates based upon eligible accounts receivable and inventory. As of September 30, 1995, $2,800,000 of credit was available. The term loans bear interest at prime plus .5% (9.25% at September 30, 1995) and/or, at the Company's option, LIBOR plus 2.5% (8.375% at September 30, 1995), and are payable in quarterly principal installments of $450,000 through November 1999. The mortgage bears interest at prime plus .5% and/or, at the Company's option, LIBOR plus 2.5%, and is payable in quarterly principal installments of $17,000, with a final payment of approximately $680,000 in November 1999. The interest rates on the term loans and the mortgage ranged from 8.25% to 9% during 1995 and were 8.375% at September 30, 1995. The Company has an additional mortgage which bears interest at 7% and is payable in monthly installments of $7,000 including interest, with a final payment of approximately $670,000 due in February 1997. The revolving credit facility and term loans, which are collateralized by substantially all of the Company's assets, require the maintenance of certain balance sheet and operating ratios and impose certain dividend limitations. The most restrictive of these provisions limits the payment of cash dividends to approximately $8,900,000 as of September 30, 1995. 19 NUTRAMAX PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note F - Commitments and Contingencies Leases -- The Company leases certain of its administrative, manufacturing, distribution and warehouse facilities under operating leases. The Company also leases certain equipment under operating and capital leases. Future minimum payments under noncancelable operating and capital leases are as follows:
Operating Capital Fiscal Year Leases Leases ----------- -------- -------- 1996 $387,000 $ 11,000 1997 93,000 11,000 1998 1,000 11,000 1999 -- 2,000 -------- -------- Total minimum lease payments $481,000 35,000 ======== Amount representing interest 3,000 -------- Present value of minimum lease payments $ 32,000 ========
Rental expense for operating leases was $387,000, $413,000 and $456,000 for 1995, 1994 and 1993, respectively. Litigation -- The Company has pending certain legal actions and claims incurred in the normal course of business and is actively pursuing the defense thereof. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's financial statements. Note G - Income Taxes Income tax expense consisted of the following:
Year Ended -------------------------------------------- Sept. 30, Oct. 1, Oct. 2, 1995 1994 1993 ---------- ---------- ---------- Current: Federal $1,769,000 $2,014,000 $1,368,000 State 415,000 399,000 437,000 ---------- ---------- ---------- 2,184,000 2,413,000 1,805,000 Deferred: Federal 696,000 395,000 511,000 State 36,000 24,000 34,000 ---------- ---------- ---------- 732,000 419,000 545,000 ---------- ---------- ---------- $2,916,000 $2,832,000 $2,350,000 ========== ========== ==========
20 NUTRAMAX PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note G - Income Taxes (Continued) The difference between the Company's income tax and the statutory federal tax is reconciled below:
Year Ended ---------------------------------------- Sept. 30, Oct. 1, Oct. 2, 1995 1994 1993 ---------- ---------- ---------- Statutory federal tax $2,513,000 $2,411,000 $1,996,000 Nondeductible goodwill amortization 189,000 179,000 87,000 State tax, net of federal benefit 298,000 279,000 311,000 Other (84,000) (37,000) (44,000) ---------- ---------- ---------- Income tax expense $2,916,000 $2,832,000 $2,350,000 ========== ========== ==========
As of September 30, 1995, the Company had Federal net operating loss carryforwards of $2,418,000 which are available to offset future taxable income. The Company also has investment tax credit carryforwards of $208,000. Utilization of the operating loss carryforwards, which expire in fiscal years 1997 to 2007, is limited to $1,049,000 annually. Significant components of the Company's deferred tax assets and liabilities are as follows:
Sept. 30, Oct. 1, 1995 1994 ---------- ---------- Assets: Net operating loss carryforwards $ 822,000 $1,311,000 Allowance for bad debts 236,000 291,000 Inventory 234,000 302,000 Investment tax credits 208,000 156,000 Other 331,000 309,000 ---------- ---------- 1,831,000 2,369,000 Valuation allowance -- (58,000) ---------- ---------- Deferred tax assets 1,831,000 2,311,000 ---------- ---------- Liabilities: Depreciation and amortization 2,387,000 1,965,000 Other 46,000 199,000 ---------- ---------- Deferred tax liabilities 2,433,000 2,164,000 ---------- ---------- Net deferred tax liability (asset) $ 602,000 $ (147,000) ========== ==========
Under the provisions of SFAS No. 96, the deferred tax provision for fiscal year 1993 of $545,000 resulted principally from utilization of acquired net operating loss carryforwards of $436,000 and depreciation of $189,000, partially offset by the allowance for doubtful accounts of $58,000. 21 NUTRAMAX PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note H - Selected Quarterly Financial Data (Unaudited) Selected quarterly financial data for fiscal years 1995 and 1994 is as follows:
First Second Third Fourth 1995 Quarter Quarter Quarter Quarter - ---- ----------- ----------- ----------- ----------- Net sales $15,123,000 $15,055,000 $15,184,000 $17,749,000 Gross profit 4,602,000 4,279,000 3,863,000 4,451,000 Net income 1,238,000 1,111,000 857,000 1,268,000 Earnings per share .15 .13 .10 .15 Weighted average shares outstanding 8,520,000 8,520,000 8,520,000 8,520,000
First Second Third Fourth 1994 (1) Quarter Quarter Quarter Quarter - ---- ----------- ----------- ----------- ----------- Net sales $10,201,000 $14,977,000 $15,399,000 $15,381,000 Gross profit 3,260,000 4,628,000 4,808,000 4,510,000 Net income 662,000 1,110,000 1,185,000 1,303,000 Earnings per share .08 .13 .14 .15 Weighted average shares outstanding 8,440,000 8,455,000 8,506,000 8,520,000
- ----------- (1) Includes the results of operations of Powers from the date of acquisition. Note I - Related Party Transactions Services Agreement -- The Company obtains certain legal, accounting, tax, insurance and human resource services from MEDIQ Incorporated ("MEDIQ"), the owner of approximately 47% of the outstanding common stock. Costs for such services were $100,000 for each of the three years ended September 30, 1995. The Company believes that MEDIQ's charges for such services are on terms no less favorable to the Company than those that could be obtained from unaffiliated third parties for comparable services. Insurance -- The Company obtains certain insurance coverages through programs administered by MEDIQ. Insurance expense under these programs was $409,000, $464,000 and $213,000 for fiscal years 1995, 1994 and 1993, respectively. Pledge of Stock -- A portion of the shares of the Company's stock owned by MEDIQ is subject to exchange for outstanding MEDIQ debentures and a portion secures certain MEDIQ indebtedness. 22 NUTRAMAX PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note J - Stock Options The Company maintains a Stock Option Plan which includes an Incentive Stock Option Program and a Non-Qualified Stock Option Program. Incentive stock options may be granted to key employees, including the Company's officers, at the discretion of the Stock Option Plan Committee, until termination of the Plan. Non-qualified stock options may be granted to employees, non-employee directors, advisors and independent consultants at the discretion of the Committee. No options may be granted under the programs for a term in excess of five years from the date of grant. As of September 30, 1995, 401,000 stock options were exercisable under such plans. The stock option prices listed below represent the quoted market value of the common stock at dates of grant. A summary of stock option activity for the three years ended September 30, 1995 follows:
Number Option Price of Shares Per Share --------- ------------ October 1, 1992 345,000 $4.00-$8.50 Granted 88,000 $12.25 Exercised (70,000) $5.00-$8.50 ------- October 2, 1993 363,000 $4.00-$12.25 Granted 524,000 $9.63-$12.00 Exercised (27,000) $4.00-$12.00 Terminated (15,000) $6.00-$12.25 ------- October 1, 1994 845,000 $6.00-$12.25 Granted 60,000 $9.38-$9.69 Exercised --(1) $6.00 ------- September 30, 1995 905,000 $6.00-$12.25 =======
- ---------------- (1) 180 stock options were exercised in 1995. Note K - Major Customers American Home Products, Inc. accounted for 14% and 17% of net sales in 1995 and 1994, respectively. No individual customer represented in excess of 10% of the Company's net sales for 1993. Note L - Special Committee The Board of Directors of MEDIQ Incorporated ("MEDIQ"), a 47% owner of the Company, is currently in the process of exploring alternative ways to maximize MEDIQ's shareholder value, which could include the disposition of its holdings in the Company. In connection with MEDIQ's activities, the Company formed a Special Committee of its Board of Directors to explore strategic alternatives for the Company. The Committee has retained Wasserstein Perella & Co. as financial advisors to seek opportunities for the Company to enhance shareholder value. 23 NUTRAMAX PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note M - Subsequent Event In October 1995, the Company acquired substantially all of the assets and assumed certain liabilities of Mi-Lor Corporation, Professional Brushes, Inc. and Codent Dental Products, Inc., which manufacture and market toothbrushes, dental floss and related products for the store brand market. The purchase price consisted of $1,800,000 in cash, liabilities assumed of $225,000 and related expenses of approximately $375,000. 24 PART III The information required to be included herein has been incorporated herein by reference to the Registrant's proxy statement relating to the annual meeting of its stockholders scheduled to be held in 1996. PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) (1) The response to this portion of Item 14 is submitted as a separate section of this report commencing on page 11. (a) (2) Financial Statement Schedules Schedule II Valuation and Qualifying Accounts and Reserves Other schedules are omitted because of the absence of conditions under which they are required. (a) (3) and (c) Exhibits (numbered in accordance with Item 601 of Regulation S-K). EXHIBIT INDEX
Exhibit Method of Number Description Filing - ------- ----------- --------- 3(a) Restated and Amended Certificate of Incorporation (1) 3(b) Amendment, filed June 12, 1991, to the Company's Certificate of Incorporation (1) 3(c) Amendment, filed March 5, 1992 to the Company's Certificate of Incorporation (2) 3(d) By-Laws (1) 10(a) Employment Agreement between the Company and Donald E. Lepone, dated November 28, 1993 (3) 10(b) Employment Agreement between the Company and Richard Zakin, dated January 1, 1994 (3) 10(c) Employment Agreement between the Company and Gary A. LeDuc, dated January 1, 1994 (4) 10(h) 1988 Stock Option Plan (adopted April 28, 1988) (5) 10(i) Amendment No. 1 to the 1988 Stock Option Plan (2) 10(j) Amendment No. 2 to the 1988 Stock Option Plan (2) 10(k) Amendment No. 3 to the 1988 Stock Option Plan (2) 10(l) Amendment No. 4 to the 1988 Stock Option Plan (3) 10(m) Letter, dated March 29, 1994, from the Company to Donald E. Lepone, reflecting the terms of a stock option grant (4) 10(n) Tax Allocation/Sharing Agreement between the Company and MEDIQ Incorporated, dated July 25, 1990 (1) 10(o) Lease Agreement, dated January 1, 1987, between The Aid-Pack Limited Partnership and Aid-Pack, Inc. (6)
25
Exhibit Method of Number Description Filing - ------- ----------- --------- 10(p) Lease Extension Agreement, dated May 1, 1991, between The Aid-Pack Limited Partnership and the Company (6) 10(q) Registration Rights Agreement, dated July 1, 1991 between MEDIQ Incorporated and the Company (7) 10(r) Amendment to Registration Rights Agreement, dated July 1, 1991 among MEDIQ, MEDIQ Investment Services, Inc. and the Company (8) 10(s) Services Agreement, dated August 22, 1991 between MEDIQ Incorporated and the Company (7) 10(t) Revolving Credit and Security Agreement between the Company and State Street Bank and Trust Company (8) 10(u) Revolving Credit and Security Agreement between the Company and State Street Bank and Trust Company (8) 21 Subsidiaries of the Company (4) 23 Consent of Deloitte & Touche LLP, Independent Certified Public Accountants (4) 27 Financial Data Schedule (4)
(1) Filed as an Exhibit to the Company's Registration Statement on Form S-1 on July 5, 1991, and incorporated herein by reference. (2) Filed as an Exhibit to the Company's Annual Report on Form 10-K for fiscal year 1992, and incorporated herein by reference. (3) Filed as an Exhibit to the Company's Annual Report on Form 10-K for fiscal year 1994, and incorporated herein by reference. (4) Filed herewith. (5) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1990, and incorporated herein by reference. (6) Filed as an Exhibit to Amendment No. 1 to the Company's Registration Statement on Form S-1 on August 15, 1991, and incorporated herein by reference. (7) Filed as an Exhibit to the Company's Annual Report on Form 10-K for fiscal year 1991, and incorporated herein by reference. (8) Filed as an Exhibit to the Company's Annual Report on Form 10-K for fiscal 1993, and incorporated herein by reference. (b) Reports on Form 8-K: No reports on Form 8-K were filed during the fourth quarter of fiscal 1995. 26 SIGNATURES Pursuant to requirements of Section 13 of 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: December 8, 1995 NUTRAMAX PRODUCTS, INC. By: /s/ Donald E. Lepone ------------------------------- Donald E. Lepone, President and Chief Executive Officer By: /s/ Robert F. Burns ------------------------------- Robert F. Burns, Vice President, 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, which include at least a majority of the Board of Directors on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ----- /s/ Bernard J. Korman Chairman of the Board December 8, 1995 - --------------------- Bernard J. Korman /s/ Donald E. Lepone President, Chief December 8, 1995 - -------------------- Executive Officer and Donald E. Lepone Director /s/ Donald M. Gleklen Director December 8, 1995 - --------------------- Donald M. Gleklen /s/ Frederick W. McCarthy Director December 8, 1995 - ------------------------- Frederick W. McCarthy /s/ Dennis M. Newnham Director December 8, 1995 - --------------------- Dennis M. Newnham /s/ Michael F. Sandler Director December 8, 1995 - ---------------------- Michael F. Sandler
27 NUTRAMAX PRODUCTS, INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FISCAL YEARS 1995, 1994 AND 1993
- --------------------------------------------------------------------------------------------------------------------- COL. A COL. B COL. C - Additions COL. D COL. E - --------------------------------------------------------------------------------------------------------------------- (1) (2) Description Balance at Charged to Charged to Deductions Balance Beginning Costs and Other at End of Period Expenses Accounts of Period - --------------------------------------------------------------------------------------------------------------------- Year ended September 30, 1995: Allowance for doubtful accounts $738,000 $149,000 $ -- $(286,000) $601,000 ======== ======== ======== ========= ======== Year ended October 1, 1994: Allowance for doubtful accounts $375,000 $337,000 $ 73,000 $ (47,000) $738,000 ======== ======== ======== ========= ======== Year ended October 2, 1993: Allowance for doubtful accounts $275,000 $ 83,000 $ 17,000 $ -- $375,000 ======== ======== ======== ========= ========
(1) Includes allowance from acquisition of Optopics in 1993 and Powers in 1994. (2) Represents accounts directly written-off net of recoveries. DELOITTE & TOUCHE LLP Philadelphia, Pennsylvania December __, 1995 -----END PRIVACY-ENHANCED MESSAGE-----