10-Q 1 0001.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended: June 30, 2000 Commission File Number: 1-8147 MEDIQ Incorporated (Exact name of registrant as specified in its charter) Delaware 51-0219413 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One MEDIQ Plaza, Pennsauken, New Jersey 08110 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (856) 662-3200 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days. YES NO X ----- ----- At August 15, 2000, there were outstanding 1,115,669 shares of Common Stock, par value $.01. 1 MEDIQ INCORPORATED AND SUBSIDIARIES Quarter Ended June 30, 2000 INDEX Page Number ------ PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Statements of Operations- 4 Three and Nine Months Ended June 30, 2000 and 1999 Condensed Consolidated Balance Sheets- 5 June 30, 2000 and September 30, 1999 Condensed Consolidated Statements of Cash Flows- 6 Nine Months Ended June 30, 2000 and 1999 Notes to Condensed Consolidated Financial Statements 7 - 10 Item 2. Management's Discussion and Analysis of 11 - 15 Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk 15 PART II. OTHER INFORMATION Item 3. Defaults Upon Senior Securities 16 Item 6. Exhibits and Reports on Form 8-K 16 2 MEDIQ INCORPORATED AND SUBSIDIARIES Quarter Ended June 30, 2000 PART I. FINANCIAL INFORMATION Item 1. Financial Statements 3 MEDIQ INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except per share amounts)
Three Months Ended Nine Months Ended June 30, June 30, 2000 1999 2000 1999 -------- -------- -------- -------- Revenues: Rental $ 34,050 $ 39,670 $ 113,889 $122,288 Sales 12,949 12,848 47,398 28,925 Other 4,419 4,005 12,985 9,311 -------- -------- --------- -------- 51,418 56,523 174,272 160,524 Expenses of Operations: Cost of sales 11,160 10,197 39,872 22,589 Operating 17,571 19,592 53,535 55,638 Selling 4,515 7,062 18,069 20,128 General and administrative 8,290 6,005 22,737 18,380 Restructuring charges 3,000 -- 5,800 -- Depreciation and amortization 12,416 11,301 34,392 31,600 -------- -------- -------- -------- 56,952 54,157 174,405 148,335 -------- -------- -------- --------- Operating Income (5,534) 2,366 (133) 12,189 Other (Charges) and Credits: Interest expense (16,147) (13,956) (47,810) (40,768) Other-net 767 72 908 465 -------- -------- -------- -------- Loss before Income Taxes (20,914) (11,518) (47,035) (28,114) Income Tax (Benefit) Expense 17 (2,396) 62 (8,152) -------- -------- -------- -------- Net Loss (20,931) (9,122) (47,097) (19,962) Dividends on Preferred Stock (5,747) (4,802) (16,773) (13,900) -------- -------- -------- -------- Net Loss Attributable to Common Shareholders $(26,678) $(13,924) $(63,870) $(33,862) ======== ======== ======== ======== Basic and Diluted Net Loss Per Share Attributable to Common Shareholders $ (23.91) $ (12.86) $ (57.13) $ (31.44) ======== ======== ======== ======== Weighted Average Number of Common Shares Outstanding, Basic and Diluted 1,116 1,083 1,118 1,077 ======== ======== ======== ========
See Notes to Condensed Consolidated Financial Statements 4 MEDIQ INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
June 30, September 30, 2000 1999 ----------- ------------ (Unaudited) (See note below) Assets Current Assets: Cash $ 4,539 $ 9 Accounts receivable (net of allowance of $17,695 and $24,435, respectively) 43,012 53,836 Inventories 17,185 17,313 Other current assets 1,513 5,006 --------- --------- Total Current Assets 66,249 76,164 Property, Plant and Equipment 101,766 112,233 Goodwill (net of accumulated amortization of $29,722 and $23,212, respectively) 136,182 142,002 Deferred Financing Costs (net of accumulated amortization of $4,998 and $3,207, respectively) 16,580 18,322 Other Assets 13,130 12,872 --------- --------- Total Assets $ 333,907 $ 361,593 ========= ========= Liabilities and Stockholders' Deficiency Current Liabilities: Current portion of long term debt $ 580,265 $ 567,884 Accounts payable 18,473 17,502 Accrued expenses 16,016 16,316 Accrued interest 14,135 8,457 Other current liabilities 918 1,138 --------- --------- Total Current Liabilities 629,807 611,297 Senior Debt 1,707 557 Subordinated Debt -- -- Deferred Income Taxes 1,779 1,779 Other Liabilities 10,106 6,748 Mandatorily Redeemable Preferred Stock 144,154 130,955 Stockholders' Deficiency (453,646) (389,743) --------- --------- Total Liabilities and Stockholders' Deficiency $ 333,907 $ 361,593 ========= =========
Note: The balance sheet at September 30, 1999 has been condensed from the audited financial statements at that date. See Notes to Condensed Consolidated Financial Statements 5 MEDIQ INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands)
Nine Months Ended June 30, 2000 1999 --------- --------- Cash Flows From Operating Activities Net loss $ (47,097) $ (19,962) Adjustments to reconcile net loss to net cash provided by operating activities 65,077 26,099 --------- --------- Net cash provided by operating activities 17,980 6,137 Cash Flows From Investing Activities Purchases of equipment (15,254) (16,231) Acquisitions -- (82,947) Other (188) 328 ---------- --------- Net cash used in investing activities (15,442) (98,850) Cash Flows From Financing Activities Borrowings 9,000 93,000 Debt repayments (6,974) (1,400) Other (34) (1,298) --------- --------- Net cash provided by financing activities 1,992 90,302 --------- --------- Increase in cash 4,530 (2,411) Cash: Beginning balance 9 2,411 --------- --------- Ending balance $ 4,539 $ -- ========= ========= Supplemental disclosure of noncash investing and financing Activities: Equipment financed under capital leases $ 2,624 $ -- ========= ========= Capital stock issued in an acquisition $ -- $ 10,000 ========= =========
See Notes to Condensed Consolidated Financial Statements 6 MEDIQ INCORPORATED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note A - Condensed Consolidated Financial Statements The condensed consolidated balance sheet as of June 30, 2000, the condensed consolidated statements of operations for the three and nine months ended June 30, 2000 and the condensed consolidated statement of cash flows for the nine months ended June 30, 2000 have been prepared by the Company, without audit. In the opinion of management, all adjustments (consisting only of normal, recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at June 30, 2000 and for all periods presented have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's September 30, 1999 Annual Report on Form 10-K. The results of operations for the period ended June 30, 2000 are not necessarily indicative of the operating results for the full year. The condensed consolidated statements of operations for the three and nine months ended June 30, 1999 and the condensed consolidated statement of cash flows for the nine months ended June 30, 1999 were derived from the Company's Form 10-Q/A filed with the Securities and Exchange Commission on July 20, 2000. Certain reclassifications have been made to conform prior year balances to the current year presentation. Note B - Default of Indebtedness and Going Concern MEDIQ/PRN Life Support Services, Inc., a wholly owned subsidiary of the Company, is in default of a number of covenants under its $325 million Senior Secured Credit Facility, including timely filing of financial information for fiscal 1999 and fiscal 2000, meeting certain financial ratios, and the non-payment of certain interest and principal. Potential additional events of default may also exist. The lenders to the credit facility have the right to accelerate payment of all amounts outstanding under the facility as a result of these defaults. Although the lenders have not yet exercised that right, there can be no assurance that they will not do so in the future. The Company and MEDIQ/PRN are also in violation of a number of covenants under the indentures for the Company's 13% Senior Discount Debentures due 2009 and 7.5% Exchangeable Debentures due 2003, and MEDIQ/PRN's 11% Senior Subordinated Notes due 2008. The indentures contain cross default provisions that accelerate debt outstanding under each instrument in the event that outstanding debt under any other loan arrangement is in default and thereby accelerated. Pursuant to a letter dated May 25, 2000, the lenders to the credit facility sent notice to the trustee for the 11% notes and the Company to effect a payment blockage on the 11% notes such that the semiannual interest payment of $10.5 million payable on June 1, 2000 was not made. The indenture to the 11% notes permits the lenders under the credit facility to elect to block the payment of amounts due and payable with respect to the 11% notes for a period of up to 180 days. This payment blockage may occur during a period of default under the credit facility in which the maturity of debt outstanding thereunder may be accelerated. Any nonpayment of interest on the 11% notes existing for more than 30 days would be an event of default under the indenture to the 11% notes. As long as the maturity of the debt outstanding under the credit facility has not been accelerated, payments with respect to the 11% notes may be continued after the payment blockage period expires. On June 12, 2000 and June 30, 2000, MEDIQ/PRN made $8.5 million in payments under the credit facility. Such payments represented normal interest costs, LIBOR/prime plus the applicable margin, but did not include default interest of $1.8 million as required under the credit agreement. Non-payment of 7 such interest constitutes a default under the credit facility. In addition, MEDIQ/PRN notified the lenders for the credit facility that the Company intended to defer the principal payment of $3.3 million due June 30, 2000 to $1.1 million payable July 21, 2000; $1.1 million payable August 18, 2000; and $1.1 million payable September 15, 2000. Such deferment constitutes a default under the credit facility. MEDIQ/PRN has made all the deferred payments. The Company's next significant payment of principal and interest is due September 30, 2000, is pursuant to the credit facility, and aggregates $11.3 million, excluding default interest of $1.5 million. On October 2, 2000, MEDIQ/PRN paid $8.0 million in normal interest costs, prime plus the applicable margin, pursuant to such payment. MEDIQ/PRN has no plans at this time to pay the principal of $3.3 million or the default interest. The non-payment of the principal and default interest constitutes defaults under the credit facility. While the credit facility is in default, the ultimate disposition of the debt outstanding thereunder, as well as the debt outstanding under the various indentures, is not under the control of the Company. As a result, all outstanding principal under the credit facility and the indentures at June 30, 2000 was classified as a current liability. Until a formal agreement relating to the defaults and potential defaults is reached with the lenders, the Company is unable to access the credit facility and must fund its working capital needs through other sources of cash. The Company's current cash forecast indicates that the Company has short-term and long-term cash flow deficiencies for funding timely principal and interest payments. The Company does not have sufficient current assets nor does it presently have any other available sources of capital to satisfy the current liability represented by the potential to accelerate amounts outstanding under the credit facility and indentures. In addition, the credit facility permits the lenders thereunder the right to liquidate collateral under the security agreement thereto to satisfy amounts outstanding. The credit facility is secured by a first priority lien and security interests in substantially all tangible and intangible assets of MEDIQ/PRN and its subsidiaries. The Company has incurred recurring losses from operations, has negative working capital, and a significant shareholders deficiency. These conditions plus the foregoing circumstances raise substantial doubt about the Company's ability to continue as a going concern. The Company cannot predict at this time what actions may be taken with respect to its continued existence. The Company has engaged a financial advisor to evaluate its strategic alternatives. Upon completion of that analysis, the Company will commence discussions with the lenders to the credit facility to reach a formal agreement with respect to the defaults and potential defaults. The Company cannot predict what such agreement may consist of and what effects may ensue on the operations of the Company. Also, the Company is uncertain as to what actions will be taken by the lenders to the credit facility if the defaults are not cured. Upon completion of the evaluation of its strategic alternatives, the Company also intends to have discussions with the holders of the 11% notes. The Company can not predict what may result from such discussions. Note C - Inventory
June 30, September 30, 2000 1999 -------------- ---------------- (in thousands) Raw materials $ 1,554 $ 1,825 Finished goods 24,566 23,488 -------- --------- 26,120 25,313 Reserves for excessive quantities and obsolescence (8,935) (8,000) --------- ---------- $ 17,185 $ 17,313 ======== =========
As of June 30, 2000 and September 30, 1999, the Company has an additional $4.9 million and $2.5 million, respectively, of finished goods inventory included in other assets as such inventory is not anticipated to be sold within one year of the balance sheet date. 8 Note D - Property, Plant and Equipment
June 30, September 30, 2000 1999 ------------- ----------------- (in thousands) Rental equipment $ 262,796 $ 267,906 Equipment and fixtures 18,200 17,626 Building and improvements 7,582 8,599 Land 149 149 -------------- -------------- 288,727 294,280 Less accumulated depreciation and amortization (186,961) (182,047) ----------- ----------- $ 101,766 $ 112,233 ========== ==========
Historically, the Company reviews its rental equipment fleet for excessive quantities and obsolescence. Beginning in the second quarter of fiscal 2000, the Company has taken a more aggressive approach to such review, and is either selling or disposing of rental units at a higher pace than in previous years. Note E - Restructuring Charges In March 2000, the Company recorded a $2.8 million restructuring charge for severance and related costs. Such charge resulted from the implementation of phase one of a strategic initiative to streamline the organization, the goal of which is to increase operational response and efficiency. The Company recorded an additional charge for severance and related costs of $3.0 million in June 2000 for phase two of the strategic initiative and $.3 million in august 2000 for phase three. As a result, 280 positions have been combined or eliminated in phase one and two of the strategic initiative. Through June 30, 2000, the Company had paid $1.1 million pursuant to the restructuring charges. Note F - Professional Fees In the third quarter of fiscal 2000, the Company began to incur costs for consultants representing the Company and the lenders under the credit facility. Such consultants were performing legal, accounting and investment banking services for their respective constituents to evaluate the Company's capital structure and complete the Company's fiscal 1999 and 2000 securities filings. All of these projects are still in process as of September 30, 2000. The Company incurred $1.1 million for these costs in the third quarter and such costs were charged to general and administrative expenses in the Condensed Consolidated Statement of Operations. The Company can not estimate the total costs to be incurred to complete these projects. Note G - Loss Per Share Options and warrants to purchase shares of the Company's Common Stock were excluded from the computation of diluted loss per share for the three and nine months ended June 30, 2000 and 1999 because they were antidilutive. The number of options outstanding at June 30, 2000 and 1999 were 46,707 and 51,853, respectively, and the number of warrants outstanding at June 30, 2000 and 1999 was 91,209. Note H - Derivative Terminations In connection with the defaults under the credit facility, MEDIQ/PRN was notified by the counterparties to its collar agreements and its interest rate swap that such arrangements would be terminated. The Company received $1.6 million in connection with the terminations, and such proceeds were utilized to repay indebtedness under the credit facility. 9 Note I - Subsidiary Dividend and Funding Restriction As of June 30, 2000, MEDIQ had approximately $9,000 of assets, exclusive of its investment in MEDIQ/PRN and deferred financing costs, $2.6 million of current liabilities consisting principally of pension and deferred compensations liabilities, $97.5 million of long-term debt and $9.8 million of other long-term liabilities, exclusive of its obligations under mandatorily redeemable preferred stock and amounts owed to MEDIQ/PRN. MEDIQ's only means to satisfy its obligations and to pay its expenses is from cash advanced from MEDIQ/PRN. Effective January 2000, and due to the defaults under the credit facility, MEDIQ/PRN is no longer permitted to fund the obligations and expenses of MEDIQ. Note J - Business Segment Data The Company's business is essentially exclusive to the United States. Its business is focused on the health care industry in that the Company primarily rents medical equipment and support surfaces and sells parts and disposables to health care providers. The Company operates its rental, sale, asset management, and outsourcing service and product offerings through a single distribution system in that each service and product offering receives operational and administrative support from the same employees and through the same facilities. As a result, the Company's lines of businesses share similar characteristics, such as nature and purpose of equipment and products, type of customers and their industry concentration, marketing and distribution methods, and regulatory environment. The Company operates in three business segments based upon the type of product or service provided. Such segment classification is utilized solely in the determination of revenue. These revenue segments consist of rental, sales, and other, and such are presented on the statement of operations. Rental revenues are derived from rentals of moveable medical equipment and support surfaces, along with related revenue share arrangements. Sales revenues are principally derived from sales of parts and disposables, along with sales of medical equipment, support surfaces, medical gases, and related revenue share arrangements. Other revenues principally consist of asset management and outsourcing services. The Company does not evaluate expenses of operations or profit and loss by segment nor does it attribute assets or liabilities to any revenue segment. 10 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion addresses the financial condition of the Company as of June 30, 2000 and the results of operations for the three and nine months periods ended June 30, 2000 and 1999, and addresses other circumstances through, or that could be reasonably expected at, August 15, 2000. This discussion should be read in conjunction with the financial statements included elsewhere herein and the Management's Discussion and Analysis and financial statement sections of the Company's Annual Report on Form 10-K for the year ended September 30, 1999. The following information contains forward-looking statements. Certain forward looking statements can be identified by the use of forward looking terminology such as "believes", "expects", `may", "will", "should", "seeks", "approximately", "intends", "plans", "estimates", "anticipates", or "hopeful", or the negative thereof or other comparable terminology, or by discussions of strategy, plans, or intentions. Forward-looking statements involve risks and uncertainties that could cause actual results to be materially different than those in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward looking statements, which speak only as of the filing date of this report. The Company assumes no obligation to update such information. Seasonality In the past, the Company's rentals have been somewhat seasonal, with demand historically peaking during periods of increased hospital census, which generally occur in the winter months during the Company's second fiscal quarter. Liquidity and Capital Resources Default of Indebtedness and Going Concern MEDIQ/PRN Life Support Services, Inc., a wholly owned subsidiary of the Company, is in default of a number of covenants under its $325 million Senior Secured Credit Facility, including timely filing of financial information for fiscal 1999 and fiscal 2000, meeting certain financial ratios, and the non-payment of certain interest and principal. Potential additional events of default may also exist. The lenders to the credit facility have the right to accelerate payment of all amounts outstanding under the facility as a result of these defaults. Although the lenders have not yet exercised that right, there can be no assurance that they will not do so in the future. The Company and MEDIQ/PRN are also in violation of a number of covenants under the indentures for the Company's 13% Senior Discount Debentures due 2009 and 7.5% Exchangeable Debentures due 2003, and MEDIQ/PRN's 11% Senior Subordinated Notes due 2008. The indentures contain cross default provisions that accelerate debt outstanding under each instrument in the event that outstanding debt under any other loan arrangement is in default and thereby accelerated. Pursuant to a letter dated May 25, 2000, the lenders to the credit facility sent notice to the trustee for the 11% notes and the Company to effect a payment blockage on the 11% notes such that the semiannual interest payment of $10.5 million payable on June 1, 2000 was not made. The indenture to the 11% notes permits the lenders under the credit facility to elect to block the payment of amounts due and payable with respect to the 11% notes for a period of up to 180 days. This payment blockage may occur during a period of default under the credit facility in which the maturity of debt outstanding thereunder may be accelerated. Any nonpayment of interest on the 11% notes existing for more than 30 days would be an event of default under the indenture to the 11% notes. As long as the maturity of the debt outstanding under the credit facility has not been accelerated, payments with respect to the 11% notes may be continued after the payment blockage period expires. On June 12, 2000 and June 30, 2000, MEDIQ/PRN made $8.5 million in payments under the credit facility. Such payments represented normal interest costs, LIBOR/prime plus the applicable margin, but did not include default interest of $1.8 million as required under the credit agreement. Non-payment of such interest constitutes a default under the credit facility. In addition, MEDIQ/PRN notified the lenders for the credit facility that the Company intended 11 to defer the principal payment of $3.3 million due June 30, 2000 to $1.1 million payable July 21, 2000; $1.1 million payable August 18, 2000; and $1.1 million payable September 15, 2000. Such deferment constitutes a default under the credit facility. MEDIQ/PRN has made all of the deferred payments. The Company's next significant payment of principal and interest is due September 30, 2000, is pursuant to the credit facility, and aggregates $11.3 million, excluding default interest of $1.5 million. On October 2, 2000, MEDIQ/PRN paid $8.0 million in normal interest costs, prime plus the applicable margin, pursuant to such payment. MEDIQ/PRN has no plans at this time to pay the principal of $3.3 million or the default interest. The non-payment of the principal and default interest constitutes defaults under the credit facility. While the credit facility is in default, the ultimate disposition of the debt outstanding thereunder, as well as the debt outstanding under the various indentures, is not under the control of the Company. As a result, all outstanding principal under the credit facility and the indentures at June 30, 2000 was classified as a current liability. Until a formal agreement relating to the defaults and potential defaults is reached with the lenders, the Company is unable to access the credit facility and must fund its working capital needs through other sources of cash. The Company's current cash forecast indicates that the Company has short-term and long-term cash flow deficiencies for funding timely principal and interest payments. The Company does not have sufficient current assets nor does it presently have any other available sources of capital to satisfy the current liability represented by the potential to accelerate amounts outstanding under the credit facility and indentures. In addition, the credit facility permits the lenders thereunder the right to liquidate collateral under the security agreement thereto to satisfy amounts outstanding. The credit facility is secured by a first priority lien and security interests in substantially all tangible and intangible assets of MEDIQ/PRN and its subsidiaries. The Company has incurred recurring losses from operations, has negative working capital, and a significant shareholders deficiency. These conditions plus the foregoing circumstances raise substantial doubt about the Company's ability to continue as a going concern. The Company cannot predict at this time what actions may be taken with respect to its continued existence. The Company has engaged a financial advisor to evaluate its strategic alternatives. Upon completion of that analysis, the Company will commence discussions with the lenders to the credit facility to reach a formal agreement with respect to the defaults and potential defaults. The Company cannot predict what such agreement may consist of and what effects may ensue on the operations of the Company. Also, the Company is uncertain as to what actions will be taken by the lenders to the credit facility if the defaults are not cured. Upon completion of the evaluation of its strategic alternatives, the Company also intends to have discussions with the holders of the 11% notes. The Company can not predict what may result from such discussions. Liquidity and Capital Resources Net cash provided by operating activities in the first nine months of fiscal 2000 was $18.0 million compared to net cash provided by operating activities in the first nine months of fiscal 1999 of $6.1 million. The improvement is primarily attributable to implementation of cash management strategies to improve cash collections and extend cash payments, partially offset by increased investment in inventories to support the sale businesses. The Company used $9.0 million of its revolving credit facility, along with cash flow generated from operations and the sale of rental equipment, to meet a portion of its principal and interest payments, fund capital expenditures and working capital, and to provide for other general corporate purposes during the first nine months of fiscal 2000. Due to the defaults under the credit facility, there is no availability under the revolving credit facility at June 30, 2000. Absent the default under the credit facility, there would be $2.8 million of availability under the revolving credit facility as of August 15, 2000. 12 Results of Operations Total revenues for the third quarter fiscal 2000 were $51.4 million compared to $56.5 million for the third quarter fiscal 1999, a decrease of $5.1 million, or 9.0%. Rental revenues decrease $5.6 million partially offset by increased sales of parts and disposables of $.1 million and increased biomedical repair, CAMP, logistical services and consulting revenues (other revenue) of $.4 million. Total revenues for the first nine months of fiscal 2000 were $174.3 million compared to $160.5 million for the first nine months of fiscal 1999, an increase of $13.8 million, or 8.6%. Revenue growth was attributed to increased sales of parts and disposables of $18.5 million and increased biomedical repair, CAMP, logistical services and consulting revenues (other revenue) of $3.7 million, partially offset by a decrease in rental revenues of $8.4 million. The increase in sales revenue resulted primarily from the incremental effects of the June 1999 acquisition of HTD Corporation that expanded the Company's disposable products business. The Company expects revenues over the next fiscal quarter for the parts and disposable business to be less than the comparable period in fiscal 1999, but to be flat with the level reached in the third quarter. The fourth quarter fiscal 2000 reduction from fiscal 1999 is due to the loss of a major customer for non-payment issues, the loss of a significant product and reduced volume. The Company lost the product when the manufacturer decided to provide the product directly to the market instead of using independent distributors. Biomedical repair revenue decreased $.1 million and increased $1.3 million for the three and nine months ended June 30, 2000, respectively, over the comparable period in the prior fiscal year. The revenues for the nine months ended June 30, 2000 increased primarily as a result of incremental revenues provided by the biomedical repair business acquired from HTD and internal growth. The third quarter revenues were impacted by the loss of biomedical revenues associated with customer Y2K issues in fiscal 1999 mostly offset by incremental revenues from the HTD acquisition and internal growth. CAMP revenue increased $.2 million in each of the first three fiscal quarters compared to the first three quarters in fiscal 1999 due to internal growth. Consulting revenues decreased $.4 million and increased $1.4 million for the three and nine months ended June 30, 2000, respectively, over the comparable period in the prior fiscal year. The increase for the nine months ended June 30, 2000 was due to internal growth. The decrease in the third quarter was due to the closing of the consulting division effective June 30, 2000 as a result of the sale of certain assets of such division on June 1, 2000. Logistical services revenue increased $.8 million in the third quarter compared to the prior year fiscal period, while increasing $1.1 million for the nine months ended June 30, 2000. Such increase was due to increased volume as a result of the addition of a new services agreement. Exclusive of consulting revenues, the Company expects other revenue to continue to increase in the fourth quarter of fiscal 2000 over the comparable period in the prior fiscal year. Rental revenues declined $5.6 million and $8.4 million for the three and nine months ended June 30, 2000, respectively, when compared to the comparable periods in the prior fiscal year. The Company continues to experience significant rental rate pressure on its medical equipment and support surface products which is the primary reason for the decline in rental revenues. Average price for the medical equipment rental business declined 7%, 12% and 14% in the first, second and third fiscal quarters, respectively, when compared to the same periods in the prior fiscal year. Partially offsetting the effects of the price reductions, average units on rent increased 7% in the first quarter and 5% in the second quarter over the comparable periods in fiscal 1999, while average units on rent in the third quarter remained flat. The increased volume in the first and second quarters of fiscal 2000 is due to the effects of the fiscal 1999 acquisitions and, to a lesser extent, internal growth. In addition, the Company's largest revenue share agreement was terminated in June 1999, the effects of which were mitigated by the increased volume from the fiscal 1999 acquisitions. Medical equipment rental revenues decreased $3.7 million in the third quarter of fiscal 2000 compared to the third quarter of fiscal 1999, and decreased $4.4 million for the nine months ended June 30, 2000. Average price for the support surface rental businesses declined 15%, 19% and 18% in the first, second and third quarters of fiscal 2000, respectively, compared to the same periods in the prior fiscal year. Partially offsetting the price decreases, average units on rent increased 14% and 6% for the first and second quarters, respectively, of fiscal 2000, while decreasing 3% in the third quarter. Support surface rental revenues decreased $1.9 million and $4.0 million in the three and nine months ended June 30, 2000, respectively, compared to the same periods in the prior fiscal year. The Company expects rental revenues in the fourth quarter of fiscal 2000 to be slightly higher than rental revenue in fiscal 1999, due principally to the higher level of reserves recorded in fiscal 1999 for credit memos. However, the Company expects average unit volume and average price for both rental businesses to be down from historical levels, although average price is expect to stabilize compared to average price in May and June 2000. 13 Overall gross margin on the sale businesses dropped from 22% in the first nine months of fiscal 1999 to 16% in the first nine months of fiscal 2000, and overall gross margins on the sale businesses were 21% and 14% in the third quarters of fiscal 1999 and 2000, respectively. The decrease in gross margin is primarily due to competitive pricing pressures. Gross margins on the parts and disposables sale business dropped from 16% to 13% in the third quarter of fiscal 1999 and 2000, respectively, while gross margins on the sale of equipment dropped from 33% to 17%. The Company expects overall gross margins on the sale businesses to be flat in the next fiscal quarter compared to the third quarter of fiscal 2000. Operating, selling, and general and administrative expenses decreased $2.3 million in the third quarter of fiscal 2000 compared to the third quarter of fiscal 1999. Such expenses were flat for the nine months ended June 30, 2000. The decrease is a result of strategic initiatives to streamline the organization and increase operational efficiency, and due to the significantly higher levels of reserves for bad debts and excess and obsolete inventories recorded in the same periods in fiscal 1999. In addition, in the third quarter of fiscal 2000, the Company also incurred $1.1 million in charges associated with consultants hired by the Company and the lenders to the credit facility to evaluate the Company's capital structure and complete the Company's fiscal 1999 and 2000 securities filings. Such costs are included in general and administrative expenses. The Company recorded a restructuring charge for severance and related costs of $2.8 million and $3.0 million in the second and third quarters of fiscal 2000, respectively, associated with the Company's strategic initiative. The Company expects costs to continue to decline in the fourth quarter of fiscal 2000 as a result of two reductions in force implemented during the latter half of the second and third fiscal quarters, the reduction in force implemented in August 2000, and the significantly higher levels of reserves for bad debts, excess and obsolete inventories and other items recorded in fiscal 1999. Depreciation and amortization increased by $2.8 million in the first nine months of fiscal 2000 compared to the comparable period in the prior fiscal year. Such increase resulted from additional depreciable rental equipment purchased, rental equipment obtained in acquisitions, and increased amortization related to the goodwill recognized on acquisitions in fiscal 1999. Operating income/loss exclusive of depreciation and amortization is known as EBITDA. EBITDA for the three months ended June 30, 2000 and 1999 was $6.9 million and $13.7 million, respectively, and $34.2 million and $43.8 million for the nine months then ended. EBITDA for fiscal 2000 included restructuring charges of $5.8 million ($2.8 million and $3.0 million recorded in second and third quarters, respectively). EBITDA is presented because it is a widely accepted financial indicator of a company's ability to service indebtedness in the medical equipment rental industry. However, EBITDA should not be considered as an alternative to income from operations or to cash flows from operating activities (as determined in accordance with generally accepted accounting principles) and should not be construed as an indication of a company's operating performance or as a measure of liquidity. The Company expects fourth quarter EBITDA to be higher than the comparable amount from fiscal 1999 due to the higher level of reserves for bad debts, excess and obsolete inventories and other items recorded in fiscal 1999. Interest expense was $16.1 million and $47.8 million for the three and nine months ended June 30, 2000 compared to $14.0 million and $40.8 million for the comparable periods in the prior year. The increase in interest expense was principally due to higher levels of debt outstanding and increased interest rates, including default rates of interest on amounts outstanding under the credit facility. The cash portion of interest expense was $8.8 million and $26.8 for the three and nine months ended June 30, 2000. The remaining interest expense represents non-cash accretion on the 13% discount debentures, interest expense on the 11% notes to be deferred pursuant to the payment blockage letter dated May 25, 2000, and amortization of deferred debt issuance costs. The Company expects interest expense to increase over the next several quarters due to increases in the prime rate of interest and default rates of interest on amounts outstanding under the credit agreement. 14 Although the Company has generated a net loss, which should give rise to net operating loss carryforwards, and therefore income tax benefits, the Company has recorded a valuation allowance equal to the federal and state income tax benefits due to the uncertainty of the Company's future ability to recognize such benefits. Accreted but unpaid dividends on preferred stock for the three and nine months ended June 30, 2000 were $5.7 million and $16.8 million, respectively, compared to $4.8 million and $13.9 million in the corresponding prior year periods. These amounts reflect accretion of dividends on the three cumulative preferred stock series issued in connection with the Company's recapitalization in May 1998. For the three and nine months ended June 30, 2000 there was a net loss attributable to common shareholders of $26.7 million and $63.9 million, respectively. The Company expects to continue to report a net loss attributable to common shareholder for the foreseeable future Year 2000 The Company did not incur any Year 2000 related problems concerning its equipment on rent and business operations on January 1, 2000 through the filing date of this report. All rental equipment performed safely as represented by equipment manufacturers or as indicated by separate assessments conducted by the Company. There were no disruptions in business operations, as all of the Company's information systems performed seamlessly in the transition to the new year and there were no Year 2000 related interruptions in external services provided to the Company. There was no need by the Company to employ any contingency measures in any of its operations with respect to Year 2000 issues. It is possible that some Year 2000 problems related to the Company's rental equipment and information systems and those related to customers and suppliers may manifest later in Year 2000. However, based on what was experienced on January 1, 2000 through the filing date of this report, the Company believes that the potential for wide spread problems materially impacting the Company has passed. The Company further believes that any Year 2000 problems that may yet occur will most likely be isolated incidences that will not materially impact the Company. The Company will rely on its general contingency measures routinely in place concerning the overall continued operations of the business to address isolated problems that may occur. The Company cannot make any assurances about the later occurrence of any Year 2000 problems and their impact on the Company's financial position and results of operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's primary market risk is changes in interest rates as the loan facilities under MEDIQ/PRN's credit facility are subject to variable rates of interest. The variable interest rates impacting MEDIQ/PRN are LIBOR and prime, which are the interest rate options available under the credit facility. Beginning January 2000, and as a result of the defaults under the credit facility, the Company's only interest rate option is prime, the Company is incurring default rates of interest which are two percentage points over the Company's historical interest rates, and the Company is no longer permitted to borrow at LIBOR. As of June 30, 2000, all amounts borrowed under the credit facility bear interest at prime plus the applicable margin, and at defaults rates of interest. To mitigate a portion of the interest rate risk, MEDIQ/PRN had two interest rate collars and an interest rate swap. Due to the defaults under the credit facility, the interest rate collars and the interest rate swap were terminated in May and June 2000. 15 MEDIQ INCORPORATED AND SUBSIDIARIES Quarter Ended June 30, 2000 PART II. OTHER INFORMATION Item 3. Defaults Upon Senior Securities. At the filing date of this report, MEDIQ/PRN Life Support Services, Inc., a wholly owned subsidiary of MEDIQ Incorporated is in default of a number of covenants under its $325 million Senior Secured Credit Facility including timely filing of financial information in fiscals 1999 and 2000, meeting certain financial ratios, and the non-payment of certain principal and interest. In addition, the Company and MEDIQ/PRN are in violation of a number of covenants under the indentures for the Company's 13% Senior Discount Debentures due 2009 and 7.5% Exchangeable Debentures due 2003, and MEDIQ/PRN's 11% Senior Subordinated Notes due 2008. The debt outstanding under the credit facility is subject to acceleration upon demand by the lenders to the facility. The indentures to the 13% discount debentures, 11% notes and 7.50% exchangeable debentures contain cross default provisions that accelerate debt outstanding under each in the event that outstanding debt under any other loan arrangement is in default and thereby accelerated. As of the filing date of this report, MEDIQ/PRN had not paid certain amounts due under the credit facility, as follows: $1.8 million and $1.5 million of default interest due June 30, 2000 and September 30, 2000, respectively; and $3.3 million of principal due September 30, 2000. The Company has not paid $20 thousand of interest on the 7.5% exchangeable debentures due in July 2000. In addition, pursuant to a letter dated May 25, 2000, the lenders to the credit facility sent notice to the trustee for the 11% notes and the Company to effect a payment blockage on the 11% notes such that the semiannual interest payment of $10.5 million payable on June 1, 2000 was not made. The indenture to the 11% notes permits the lenders under the credit facility to elect to block the payment of amounts due and payable with respect to the 11% notes for a period of up to 180 days. This payment blockage may occur during a period of default under the credit facility in which the maturity of debt outstanding thereunder may be accelerated. Any nonpayment of interest on the 11% notes existing for more than 30 days would be an event of default under the indenture to the 11% notes. As long as the maturity of the debt outstanding under the credit facility has not been accelerated, payments with respect to the 11% notes may be continued after the payment blockage period expires. The Company's current cash forecast indicates that the Company has short-term and long-term cash flow deficiencies for funding timely principal and interest payments. See Management's Discussion and Analysis of Financial Condition and Results of Operations and Note B to the Condensed Consolidated Financial Statements for further information on the foregoing matter. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 Financial Data Schedule appears on page 17. (b) Reports on Form 8-K During the quarter ended June 30, 2000, the Company filed reports on Form 8-K on May 5, 2000 and May 22, 2000. The May 5, 2000 report updated the information disclosed in the reports on Form 8-K filed on January 13, 2000 and February 15, 2000. The January 8K and the February 8K disclosed that the Company would not file its Annual Report on Form 10-K for the year ended September 30, 1999 and its Quarterly Report on Form 10-Q for the three months ended December 31, 1999 timely. The May 22, 2000 report on Form 8-K disclosed that the Company would not file its Quarterly Report on Form 10-Q for the three months ended March 31, 2000 timely, and disclosed the reasons why therein. 16 MEDIQ INCORPORATED AND SUBSIDIARIES Quarter Ended June 30, 2000 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MEDIQ Incorporated -------------------------- (Registrant) October 2, 2000 /s/ Kenneth K. Kreider --------------- ---------------------------------- (Date) Kenneth K. Kreider Senior Vice President and Chief Financial Officer 17