<PAGE>
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 [FEE REQUIRED]
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission file number 33-84262
<TABLE>
MVE HOLDINGS, INC. MVE, INC.
(Exact name of co-registrant as (Exact name of co-registrant as
specified in its charter) specified in its charter)
<S> <C> <C> <C>
Delaware 41-1641718 Delaware 41-1396485
(State or other jurisdiction of (I.R.S. employer (State or other jurisdiction (I.R.S. employer
incorporation or identification no.) of incorporation or identification no.)
organization) organization)
</TABLE>
Two Appletree Square, Suite 100
8011 34th Avenue South
Bloomington, MN 55425
(Address of principal executive offices)
Registrants' telephone number, including area code: (612) 853-9600
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrants (1) have 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
registrants were required to file such reports), and (2) has been subject to
such filing requirements for at least the past 90 days. Yes.____ No.____
Indicate by check mark if disclosure of delinquent filings pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants' knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K for any amendment to
this Form 10-K. Not provided.
Aggregate market value of voting stock held by non-affiliates of the
registrants: Not provided.
Number of shares of Common Stock outstanding as of March 1, 1997: Not provided.
<PAGE>
NOTE: The duty of each of MVE Holdings, Inc., a Delaware corporation
("Holdings") and MVE, Inc. also a Delaware corporation ("MVE"), to file reports
under Section 15(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), has been suspended. Holdings and MVE are voluntarily filing
this annual report under cover of Form 10-K. Please be advised that this
report does not inlcude all the information required to be included in an annual
report on Form 10-K filed pursuant to Section 13 or 15(d) of the Exchange Act.
ITEM 1. BUSINESS.
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MVE, Inc., a Delaware corporation (the "Company"), develops, manufactures,
and distributes vacuum insulated containers and equipment used to transport and
store liquid cryogens (gases that enter a liquid state at temperatures below -
80 degreesF), biological matter, and other substances. Substantially all of the
products of the Company's three business segments are based on its vacuum
insulation technology, which enables the Company to produce containers with
extremely high insulation characteristics. MVE Holdings, Inc. ("Holdings") owns
all of the outstanding capital stock of the Company.
The Company owns all of the outstanding shares of Series A Participating
Convertible Preferred Stock, $.01 par value per share, of CAIRE, Inc. (the
"CAIRE Preferred Stock"), which comprises 91% of the outstanding shares of CAIRE
capital stock. On a fully diluted basis, assuming conversion of the CAIRE
Preferred Stock and exchange of a note held by a third party for CAIRE common
stock, the Company would own 85% of the shares.
The Company and Holdings have the same principal place of business, which
is located at Two Appletree Square, Suite 100, 8011 34th Avenue South,
Bloomington, Minnesota 55425-1636, telephone 612-853-9600.
The Company has three business segments: Industrial Products, Medical
Respiratory Products, and Distributed Products.
INDUSTRIAL PRODUCTS
The Industrial Products business segment develops, manufactures, and
markets cryogenic storage tanks and transportation equipment and provides
related services to producers, distributors, and end users of liquid industrial
gases (e.g., from the metals, electronics, pulp and paper, food processing, and
chemical industries). This equipment is used to store and transport liquid
industrial gases such as oxygen, nitrogen, argon, hydrogen, helium, and CO\\2\\.
The cryogenic storage tanks and transportation equipment range in storage
capacity from approximately 40 to 40,000 gallons.
The Industrial Products business segment serves a wide variety of
customers. Industrial gas producers, as a group, are the Company's largest
source of revenue. These customers produce and distribute industrial gases and
purchase the Company's products for their own use and for rent or resale to
third party distributors and end users. Home healthcare companies, food
processing companies, and semiconductor manufacturers also represent a
significant customer base for Industrial Products' direct sales.
<PAGE>
The Industrial Products business segment sells its products and services
worldwide. The Company's competitors include a number of other companies, some
of which are larger (in the aggregate) and have greater financial resources than
the Company. The Company believes that competition is based primarily upon
product design, dependability, and customer support and service.
MEDICAL RESPIRATORY PRODUCTS
The Medical Respiratory Products business segment, which is operated
through CAIRE, Inc., develops, manufactures, assembles, and markets a limited
range of medical products, including liquid oxygen systems, ambulatory oxygen
systems, and oxygen concentrators, all of which are used for the in-home
supplemental oxygen treatment of patients with chronic obstructive pulmonary
diseases ("COPD"), such as bronchitis, emphysema, and asthma. In addition,
CAIRE manufactures nebulizers that are used for the oral, inhaled delivery of
medication for a wide variety of respiratory ailments, particularly asthma. It
also manufactures and markets patient information systems, consisting of both
electronic hardware and software, that allow its customers to monitor system
performance and patient compliance.
Individuals for whom supplemental oxygen is prescribed generally purchase
or rent an oxygen system from a home healthcare provider or medical equipment
dealer. The provider/dealer usually selects which type of oxygen system to
recommend to its customers: liquid oxygen systems, oxygen concentrators, or high
pressure oxygen cylinders. Physicians can also prescribe the method. The three
methods are currently believed to be therapeutically equivalent.
The Company's primary competitors in the sale of liquid oxygen systems,
oxygen concentrators, and nebulizers include a number of other companies, some
of which are larger and have greater financial resources than the Company. The
Company believes that competition for liquid oxygen systems and oxygen
concentrators is based primarily upon product performance, reliability, ease-of-
service, and price. The Company believes that competition in the nebulizer
market is based primarily upon product pricing and reliability and focuses its
marketing strategies on these considerations.
DISTRIBUTED PRODUCTS
The Distributed Products business segment consists of three product lines:
restaurant products, biological storage systems, and new applications.
Restaurant Products
This product line consists primarily of vacuum-insulated, bulk liquid
CO\\2\\ containers used for beverage carbonation in restaurants, convenience
stores, and cinemas. The Company also manufactures and markets non-insulated
bulk flavored syrup containers for side-by-side installation with its CO\\2\\
systems. The Company's beverage systems are sold to fast food franchisers, soft
drink companies, and CO\\2\\ distributors.
<PAGE>
The Company's primary competitors for its bulk liquid CO\\2\\ beverage
delivery systems are producers of high pressure gaseous CO\\2\\ systems and
sellers of bulk liquid CO\\2\\ beverage systems, some of which are larger (in
the aggregate) and have greater financial resources than the Company. The
Company believes that competition for bulk liquid CO\\2\\ beverage systems is
based primarily on service and price.
Biological Storage Systems
This product line consists of vacuum insulated vessels used by the beef and
dairy cattle breeding industry to transport frozen semen and embryos and vessels
used to transport and store human organs, tissue samples, and other temperature-
sensitive biological matter by hospitals, medical laboratories, and research
facilities.
These products are sold through laboratory product original equipment
manufacturers ("OEMs"), laboratory products distributors, industrial gas
distributors, and breeding service providers. Many of these distributors
provide a single source for many different types of products to hospitals,
medical laboratories, and research facilities.
The Company's competitors for biological storage systems include a few
companies inside and outside the United States, some of which are larger and
have greater financial resources than the Company. Competition for biological
storage systems is based primarily on product design, reliability, and price.
Alternatives to vacuum insulated vessels include mechanical, electrically
powered refrigeration for storage of biological matter.
New Applications
This area of the Company's activity focuses on the development of new
markets and new applications for the Company's existing and developing
technologies. For example, a new application of the Company's vacuum insulation
technology currently being pursued is insulated containers for liquid methane
natural gas ("LNG"). The Company has developed and sells vacuum insulated
containers for LNG storage and fueling systems for centrally fueled fleets of
vehicles (such as fleets operated by metropolitan transportation authorities,
refuse haulers, railroads, and utilities) powered by LNG. Competition for LNG
fueling and storage systems is based primarily on product design, customer
support and service, dependability, and price. Although there are alternatives
to LNG fuel, the Company is not aware of any alternatives to vacuum insulated
containers for LNG fueling and storage systems. The Company is also pursuing a
number of other applications for its vacuum insulation technology and other
related technologies.
<PAGE>
SUPPLIES AND MATERIALS
The Company's primary raw materials for its vacuum insulated containers are
carbon, stainless, and nickel alloy steel. Aluminum is also a significant
component of its biological products line. The Company is not dependent on any
sole source for its supply of these materials. Certain major components of the
Company's other products are purchased from a single source of supply, an
interruption of which could cause a disruption of product availability; however,
the Company believes that the strategic and operational advantages of working
with certain key suppliers on a single source basis outweigh the risks of this
dependence.
PATENTS AND TRADEMARKS
The Company owns various domestic and foreign patents and trademarks. The
registered processes and products were either purchased by the Company in
connection with the acquisition of one of its businesses or developed by the
Company through research and development activities.
REGULATION
The Company is subject to a wide variety of federal, state, and local
environmental laws and regulations ("Environmental Laws"), which continue to be
adopted and amended. The Environmental Laws regulate, among other things: air
and water emissions and discharges at the Company's manufacturing facilities;
the safety and health of employees in the production areas of its manufacturing
facilities; the generation, storage, treatment, transportation, and disposal of
solid and hazardous waste by the Company; the release of toxic substances,
pollutants, and contaminants into the environment at properties owned or
operated by the Company and at other sites; and, in some circumstances, the
environmental condition of property prior to a transfer or sale.
To date, the costs of compliance with Environmental Laws have not had a
material adverse effect on the financial condition or results of operations of
the Company. It should be recognized, however, that a number of the Company's
present and past facilities have been in operation for many years. Although
future costs related to compliance with Environmental Laws could be significant,
the Company does not believe that such costs will have a material adverse effect
on the Company's financial condition or results of operations.
The manufacturing and marketing of CAIRE's products are subject to
regulation by the Food and Drug Administration (the "FDA") under the Federal
Food, Drug and Cosmetic Act. These regulations subject manufacturers to certain
controls to provide reasonable assurance of the safety and effectiveness of
medical devices, including labeling requirements, registration with the FDA as a
manufacturer, listing with the FDA of devices in commercial distribution, pre-
market notification to the FDA of changes in a listed device or manner of
production or of other devices proposed to be marketed, conformity to specified
current "good manufacturing practices," and conformity to certain record keeping
requirements. Similarly, many of the Company's vacuum insulated containers are
made to conform to various pressure vessel design codes around the world
including those of the Department of Transportation, American Society of
Mechanical Engineers, ASTM, BS 5500, and A.D. Merkblatter.
<PAGE>
ITEM 2. PROPERTIES.
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Not provided.
ITEM 3. LEGAL PROCEEDINGS.
-----------------
Not provided.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
---------------------------------------------------
Not provided.
<PAGE>
PART II
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ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER
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MATTERS.
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Because there is no established public trading market for Holdings Common
or Preferred Stock, there is no price information available for Holdings Common
or Preferred Stock. As of March 1, 1997 there were nine stockholders of
Holdings Common Stock, one stockholder of Holdings Preferred Class A Stock, and
three stockholders of Holdings Preferred Class B Stock on record. Holdings owns
all of the outstanding Common Stock of the Company. The agreement governing the
Company's revolving credit facility and the indenture governing the Senior
Secured Notes restrict the Company's ability to pay dividends to Holdings.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
-----------------------
The following table sets forth selected consolidated financial data with
respect to Holdings as of the dates and for the periods indicated. Since its
formation, Holdings has engaged in no operations independent from those of the
Company. As a result, the historical consolidated financial statements of
Holdings and the Company are substantially the same. The financial data set
forth below should be read in conjunction with the historical consolidated
financial statements and related notes thereto of Holdings and the Company, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained elsewhere herein.
<TABLE>
<CAPTION>
Holdings
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Fiscal Year Ended
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FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, DECEMBER 31,
1993(1) 1994(2)(6) 1995(3)(6) 1996(6) 1996(4)(5)(6)
----------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales......................... $100,113 $116,353 $146,480 $179,220 $155,746
Cost of sales..................... 73,354 80,042 100,394 128,196 113,875
--------- -------- -------- -------- --------
Gross profit...................... 26,759 36,311 46,086 51,024 41,871
Selling, general and
administrative expenses.......... 15,613 17,359 20,500 22,169 24,765
Research and development.......... 1,284 2,827 2,792 4,718 3,578
Amortization and other
nonrecurring expense............. 10,204 6,455 4,915 5,463 26,595
--------- -------- -------- -------- --------
Operating income (loss)........... (342) 9,670 17,879 18,664 (13,067)
Interest expense.................. 10,021 9,930 9,878 16,305 13,742
--------- -------- -------- -------- --------
Income (loss) before income tax
provision (benefit) , minority
interest, and extraordinary item (10,363) (260) 8,001 2,359 (26,809)
Income tax provision (benefit).... (575) (1,431) 3,112 1,673 (3,197)
--------- -------- -------- -------- --------
Income (loss) before minority
interest and extraordinary item.. (9,788) 1,171 4,889 686 (23,612)
Minority interest in net income
(loss)........................... 26 (172) 5 (949)
--------- -------- -------- -------- --------
Income (loss) before
extraordinary item............... $ 9,788 $ 1,197 $ 5,061 $ 691 $(22,663)
Extraordinary loss................ (1,307)
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Net income (loss)................. $ (9,788) $ 1,197 $ 3,754 $ 691 $(22,663)
========= ======== ======== ======== ========
Net income (loss) per common share $ (18.37) $ (12.79) 4.80 1.35 $(129.13)
========= ======== ======== ======== ========
OTHER DATA:
Gross margin...................... 26.7% 31.2% 31.5% 28.5% 26.9%
EBITDA............................ $ 8,885 $ 18,676 $ 25,981 $ 27,619 $ (4,327)
EBITDA Margin..................... 8.9% 16.1% 17.7% 15.4% (2.8)%
Depreciation and amortization..... $ 9,227 $ 8,980 $ 7,930 $ 8,950 $ 7,791
Capital expenditures.............. $ 948 $ 1,838 $ 7,594 $ 8,384 $ 12,414
CONSOLIDATED BALANCE SHEET DATA
(END OF PERIOD):
Total assets...................... $ 96,566 $103,195 $118,819 $ 133,888 $142,176
Current assets.................... 33,747 36,723 48,149 62,518 76,623
Long-term debt, net of current
maturities....................... 83,876 73,824 119,952 131,024 143,009
Holdings Preferred Stock.......... 15,797 15,797 53,331
</TABLE>
_________________________
(1) Operating loss for Fiscal 1993 is net of a $3,658 restructuring charge
related primarily to closure of the Company's Delphi, Indiana facility.
(2) The Holdings Preferred Stock issued as of February 28, 1994 was redeemed in
Fiscal 1995
(3) The extraordinary loss in 1995 of $1,307 is due to losses realized upon
extinguishment of debt, net of an income tax benefit of $871.
(4) Ten months ended December 31, 1996.
(5) Operating loss for the ten months ended December 31, 1996 included non
recurring charges of $22.0 million relating to the reevaluation of certain
business units and product lines including $3.5 million relating to the
recapitalization of Holdings in August 1996.
(6) EBITDA has been adjusted to include minority interest in net income (loss).
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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OF OPERATION.
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SUMMARY
- -------
During 1989, Holdings was formed to acquire the Company. Since that time,
Holdings has followed a strategy of acquiring complementary businesses, internal
sales growth and alignment with key customers through long-term sourcing
agreements.
Holdings develops, manufactures, markets and sells products which are grouped
according to three business segments: Industrial, Distributed and Medical.
Industrial products include cryogenic storage tanks and transportation equipment
sold to producers, distributors and end users of industrial gases. Distributed
products include bulk CO\\2\\ containers used for beverage carbonization,
biological storage systems used to store and transport temperature-sensitive
biological matter and insulated storage of liquid natural gas. Medical products
include a broad range of respiratory products such as liquid oxygen systems,
ambulatory oxygen systems, oxygen concentrators and nebulizers.
Holdings' sales are sensitive to changes in the economy and government. Vacuum
insulated cryogenic tanks, particularly in the industrial market, represent
capital expenditures for Holdings' major customers. Sales to the medical
industry are strongly dependent on healthcare reimbursement policies. Sales of
bulk liquid CO\\2\\ beverage systems depend on growth in the restaurant and fast
food industries and the extent and timing of such industries' change from high
pressure gaseous CO\\2\\ systems to bulk liquid CO\\2\\ systems.
RESULTS OF OPERATIONS
- ---------------------
Ten Months Ended December 31, 1996 and 1995
NET SALES
Net sales for the ten months ended December 31, 1996 increased 8.0% to $155.7
million from $144.2 million for the ten months ended December 31, 1995.
Industrial Products: Net sales for the ten months ended December 31, 1996
increased 24.4% to $96.5 million from $77.6 million for the ten months ended
December 31, 1995. The increase is primarily attributable to sales to the
Japanese market of liquid cylinders, and increased demand for electronic-grade
and liquid hydrogen tanks.
Distributed Products: Net sales for the ten months ended December 31, 1996
increased 4.8% to $36.8 million from $35.1 million for the ten months ended
December 31, 1995. The increase is primarily attributable to increased
restaurant CO\\2\\ sales, offset by significant decreases in AURA panel sales.
<PAGE>
Sales of AURA panels were $949,000 and $4.4 million in the ten months ended
December 31, 1996 and 1995, respectively, and will be discontinued after March
31, 1997.
Medical Products: Net sales for the ten months ended December 31, 1996
decreased 28.6% to $22.5 million from $31.5 million for the ten months ended
December 31, 1995. The decrease is primarily attributable to continued
uncertainty in oxygen reimbursement caused by the review of Medicare/Medicaid
expenditures and the delayed introduction of a new concentrator product.
GROSS MARGIN
Gross margin (expressed as a percent of net sales) decreased to 26.9% for the
ten months ended December 31, 1996 from 28.2% for the ten months ended December
31, 1995.
Industrial Products: Gross margin increased to 23.4% for the ten months ended
December 31, 1996 from 23.3% for the ten months ended December 31, 1995. The
increase was primarily attributable to reduced material costs and improved
manufacturing efficiencies offset by increased discounts and allowances.
Distributed Products: Gross margin increased to 37.6% for the ten months ended
December 31, 1996 from 34.4% for the ten months ended December 31, 1995. The
increase is primarily attributable to improved manufacturing efficiencies as a
result of increased volumes for restaurant products, improved unit manufacturing
costs for biological products, and decreased sales of AURA flat vacuum panels.
Medical Products: Gross margin decreased to 24.5% for the ten months ended
December 31, 1996 from 33.6% for the ten months ended December 31, 1995. The
decrease is primarily attributable to lower volumes, increased levels of
obsolete and excess inventories, and a less profitable product mix.
OPERATING EXPENSES
Operating expenses for the ten months ended December 31, 1996 were $54.9 million
compared to $28.6 million for the ten months ended December 31, 1995. The
increase in operating expenses is primarily attributable to one-time, primarily
non-cash charges of $22.0 million in 1996, including expenses of $3.5 million
relating to the recapitalization of Holdings in August 1996.
In connection with the change of ownership of Holdings in August 1996,
management, at the direction of Holdings Board of Directors, undertook a
strategic review of all business units. This review was completed and presented
to the Board of Directors in December 1996. As a result of this review, the
Company revised various estimates used in the valuation of assets and
liabilities, related to various medical and industrial product lines, and
discontinued its AURA product line. One-time charges of $22 million were taken
in the ten months ended December 31, 1996 as a direct result of this review and
the recapitalization (see Note 10 to the Financial Statements).
After adjusting for one-time charges, including recapitalization expenses,
operating expenses for the ten months ended December 31, 1996 increased $4.4
million from the same period one year ago.
<PAGE>
OPERATING INCOME
Operating loss was $13.1 million for the ten months ended December 31, 1996
compared to income of $12.1 million for the ten months ended December 31, 1995.
The decrease in operating income is primarily attributable to nonrecurring
expenses (see Note 10 of the Financial Statements), the recapitalization of
Holdings in August 1996 and the decline in Medical product sales. Adjusting for
the nonrecurring and recapitalization expenses, operating income would have
decreased 26.4% to $8.9 million.
INTEREST EXPENSE
Interest expense was $13.9 for the ten months ended December 31, 1996 compared
to $13.5 million in the ten months ended December 31, 1995.
INCOME TAXES
The benefit from income taxes was $3.2 million for the ten months ended December
31, 1996 compared to a provision of $190,000 for the ten months ended December
31, 1995. The decrease is attributable to the decrease in pre-tax income. The
effective tax rate for the ten months ended December 31, 1996 and 1995 was
different from the statutory rate as a result of various permanent differences
(see Note 6 to the Financial Statements).
NET INCOME
Net loss before preferred dividends for the ten months ended December 31, 1996
was $22.6 million compared to a net loss of $1.6 million for the ten months
ended December 31, 1995.
EBITDA
EBITDA (earnings before interest, income taxes, depreciation and amortization)
was a loss of $4.3 million for the ten months ended December 31, 1996 compared
to income of $19.5 million or 13.5% of net sales for the ten months ended
December 31, 1995. The decrease in EBITDA is attributable to the factors noted
in "Operating Income" above. Adjusting for nonrecurring expenses of $22.0
million including expenses relating to the recapitalization of Holdings in
August 1996, EBITDA for the ten months ended December 31, 1996 was $17.7
million.
Twelve months ended February 29, 1996 and February 28, 1995
NET SALES
Net sales for Fiscal 1996 increased 22.3% to $179.2 million from $146.5 million
for Fiscal 1995.
Industrial Products: Net sales for Fiscal 1996 increased 38.7% to $95.3 million
from $68.7 million for Fiscal 1995. The increase is primarily attributable to
sales of cryogenic tanks specifically designed for
<PAGE>
use in cylinder filling operations and storing large quantities of C0\\2\\ and
to international sales arising from growth in the Asia-Pacific and European
markets.
Distributed Products: Net sales for Fiscal 1996 increased 41.0% to $47.1 million
from $33.4 million in Fiscal 1995. The increase is primarily attributable to
enhanced effectiveness of the Company's Restaurant and Biological products sales
and distribution network, to higher sales in Europe, and to increased sales of
LNG products, Restaurant and Biological products, and AURA/(R)/ flat vacuum
panels.
Medical Products: Net sales for Fiscal 1996 decreased 17.1% to $36.8 million
from $44.4 million for Fiscal 1995. The decrease is primarily attributable to
the merger of Homedco and Abbey Medical into Apria which slowed orders to
consolidate their combined inventory and market uncertainty over potentially
reduced levels of oxygen reimbursement.
GROSS MARGIN
Gross margin decreased to 28.5% for Fiscal 1996 from 31.5% for fiscal 1995.
Industrial Products: Gross margin decreased to 23.4% for Fiscal 1996 from 25.5%
for Fiscal 1995. The decrease primarily resulted from a higher proportion of
sales to industrial gas producers versus distributors and end users, higher
alloy steel costs that were not offset by increases in sales contract price
adjustments and lower productivity associated with the Company's expansion
efforts.
Distributed Products: Gross margin decreased to 36.2% for Fiscal 1996 from 38.4%
for Fiscal 1995. The decrease is primarily attributable to price increases in
aluminum used to manufacture certain biological storage products not passed on
to the Company's customers and the effect of increased sales of AURA/(R)/ flat
vacuum panels that have a significantly lower gross margin than the other
products in this segment.
Medical Products: Gross margin increased to 32.8% for Fiscal 1996 from 30.2% for
Fiscal 1995. The increase is primarily attributable to a decline in sales to
Apria.
OPERATING INCOME
Operating income increased 4.5% to $18.7 million or 10.4% of net sales for
Fiscal 1996 from $17.9 million or 12.2% of net sales for Fiscal 1995. The
increase is primarily due to the increase in net sales, offset by the decrease
in gross margins described above and the increase in research and development
expense associated with Aura flat vacuum panels.
INTEREST EXPENSE
Interest expense was $16.3 and $9.9 million for Fiscal 1996 and 1995,
respectively. The increase in interest expense in Fiscal 1996 is primarily
attributable to the interest on the Senior Secured Notes, which were issued at
the close of Fiscal 1995.
<PAGE>
INCOME TAXES
The provision for income taxes was $1.7 million for Fiscal 1996 as compared to a
provision of $3.1 million for Fiscal 1995. The decrease is attributable to the
decrease in pre-tax income. The effective tax rate went from 38% in Fiscal 1995
to 71% in Fiscal 1996 primarily due to a greater proportion of non-deductible
amortization expense in Fiscal 1996.
NET INCOME
As a result of the above, net income decreased to $.7 million in Fiscal 1996
from $3.8 million, or $5.1 million before the extraordinary loss from the early
extinguishment of debt, in Fiscal 1995.
EBITDA
EBITDA (earnings before interest, income taxes, depreciation and amortization)
increased 6.2% to $27.6 million or 15.4% of net sales for Fiscal 1996 from $26.0
million or 17.7% of net sales in Fiscal 1995. The increase in Adjusted EBITDA
is attributable to the factors noted in "Operating Income" above.
LIQUIDITY AND CAPITAL RESERVES
- ------------------------------
CASH FLOW FROM OPERATING ACTIVITIES
Cash flow provided by or (used in) operating activities was approximately $8.4
million, $(1.5) million, and $8.4 million for the ten months ended December 31,
1996, Fiscal 1996 and Fiscal 1995, respectively. The key factors affecting cash
flow from operating activities in the ten months ended December 31, 1996 were
changes in net income and increases in current assets (primarily receivable and
inventory) due to increases in sales and orders, and decreases in payables
relative to purchasing volume.
Working capital was $29.9 million, $27.8 million and $16.2 million, respectively
at December 31, 1996, February 29, 1996, and February 28, 1995.
CASH FLOW FROM INVESTING ACTIVITIES
For the ten months ended December 31, 1996, Fiscal 1996 and Fiscal 1995,
Holdings had approximately $9.8 million, $8.4 million and $7.6 million in
capital expenditures, respectively. For the ten months ended December 31, 1996,
Holdings invested $2.6 million in non-cash capital expenditures. The
expenditures in the ten months ended December 31, 1996 were primarily due to the
expansion of the Company's New Prague operations, the construction of the Caire
facility, and normal equipment acquisition and replacement. The expenditures in
Fiscal 1996 and 1995 include replacement equipment for existing manufacturing
processes, tooling for new products and capital expenditures related to the AURA
flat vacuum panel project.
<PAGE>
CASH FLOW FROM FINANCING ACTIVITIES
Cash flow provided by (used in) financing activities was approximately $10.6
million, $10.9 million and ($0.4) million in the ten months ended December 31,
1996, Fiscal 1996, and Fiscal 1995, respectively. Cash flow from investing
activities during the ten months ended December 31, 1996 was primarily
attributable to the recapitalization of Holdings in August 1996 described below.
The increase in Fiscal 1996 resulted primarily from borrowings, net of
repayments under the Company's credit facilities. Fiscal 1995 cash used in
financing activities included the effect of the refinancing plan described
below.
In February 1995, Holdings consummated a refinancing plan which included the
issuance of $112 million of Senior Secured Notes and acquiring a $20 million
revolving credit facility. As part of the issuance of $112 million of Senior
Secured Notes, Holdings issued 112,000 Warrants to purchase shares of Holdings
Common Stock, each Warrant allowing the holder to purchase 0.24 shares of
Holdings Common Stock for $0.01 per share. The proceeds from this refinancing
plan were used to redeem all outstanding shares of Holdings Preferred Stock, all
outstanding redeemable common stock warrants and to retire certain outstanding
debt of the Company. As part of this refinancing, Holdings recognized an
extraordinary loss of $1.3 million, net of a tax benefit of $.9 million.
The agreement governing the revolving credit facility expires in February 1998
and contains numerous financial and operating covenants and prohibitions that
impose limitations on the liquidity of the Company, including requirements that
the Company satisfy certain financial ratios and maintain certain specific
levels of net income. The indenture governing the Senior Secured Notes, as
amended in connection with the recapitalization of Holdings in August 1996, also
imposes limitations on the incurrence of additional indebtedness. The ability
of the Company to meet its debt service requirements and to comply with such
covenants will be dependent upon its future operating performance and financial
results, which will be subject to financial, economic, competitive and other
factors affecting the Company, many of which are beyond its control. The
Company was in compliance or had obtained waivers for all covenants included in
the agreement governing the revolving credit facility and the indenture as of
December 31, 1996.
On August 28, 1996, MVE Investors, LLC purchased 4,700 shares of Holdings 12.5%
Class A Cumulative Convertible Participating Preferred Stock, par value $100 per
share, for the purchase price of $47 million. Holdings used the proceeds of
this transaction to redeem a substantial portion of certain shareholders' Common
Stock. MVE Investors, LLC's shares of Class A Preferred Stock are immediately
convertible into 374,633 shares of Holdings Common Stock, or approximately 67.4%
of the Common Stock on a fully diluted basis.
In exchange for 66,406 shares of Common Stock held by certain shareholders,
Holdings issued 833 shares of 10% Class B Preferred Stock. Additionally,
Holdings purchased, for cash, 79% of its outstanding Warrants for $30.10944 per
warrant. At March 1, 1997, Holdings has 23,722 warrants outstanding convertible
into 5,693 shares of Holdings' Common Stock.
Holdings accrued, but did not declare or pay, dividends of $2.3 million to the
holders of Holdings Preferred Stock during the ten months ended December 31,
1996. Holdings paid cash dividends of $1.3 million to the holders of Holdings
Preferred Stock during Fiscal 1995. Holdings Preferred Stock in existence
during Fiscal 1995 was redeemed in February 1995 pursuant to the refinancing
plan discussed above.
<PAGE>
To the extent that operating cash flows are insufficient to repay borrowings
under the Senior Secured Notes, the revolving credit agreement and the IRB
financing at their respective maturities, the Company expects that it will be
required to refinance all or substantially all of the Senior Secured Notes, the
revolving credit agreement and the IRB financing or sell equity or assets to
fund the repayment of all or substantially all of the Senior Secured Notes, the
revolving credit and the IRB financing at or prior to their respective
maturities, or effect a combination of the foregoing; however, there can be no
assurance that the Company would be able to refinance such indebtedness.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
-------------------------------------------
See Appendix A.
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE.
---------------------
On January 17, 1997, MVE Holdings, Inc. ("Holdings") and MVE, Inc. (the
"Company") terminated the services of Arthur Andersen LLP as their principal
accountant and engaged Deloitte & Touche LLP as their principal accountant to
audit their financial statements for the ten months year ending December 31,
1996. The decision to change accountants was approved by the Boards of
Directors of Holdings and the Company.
In connection with the audits of the fiscal years ended February 29, 1996 and
February 28, 1995, and in the subsequent interim period through the date of
dismissal, there were no disagreements with Arthur Andersen LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedures.
Arthur Andersen LLP's report on the consolidated financial statements as of and
for the years ended February 29, 1996 and February 28, 1995, did not contain any
adverse opinion or disclaimer of opinion, nor was it qualified as to
uncertainty, audit scope, or accounting principles.
<PAGE>
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS.
---------------------------------------------------
Not provided.
ITEM 11. EXECUTIVE COMPENSATION.
----------------------
Not provided.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
---------------------------------------------------
MANAGEMENT.
----------
Not provided.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
----------------------------------------------
Not provided.
<PAGE>
PART IV
-------
Item 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K.
-----------------------------------------------------------------
Documents
---------
(i) Financial Statements - See Appendix A
(ii) Financial Statement Schedules - See Appendix A
(iii) Not provided
Reports on Form 8-K
-------------------
Form 8-K was filed on April 22, 1996, reporting that MVE
Holdings, Inc. entered into a binding letter of intent concerning
the issuance and sale by Holdings of preferred stock to an
investment firm (MVE Investors, LLC) led by A.C. Israel Capital
Co., LTD. and American Securities Capital Partners, LP.
Form 8-K was filed on January 24, 1997, reporting a change in the
Registrant's certifying accountant and fiscal year.
<PAGE>
FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
Report of Deloitte & Touche LLP, Independent Public Accountants on MVE Holdings,
Inc. and Subsidiaries
MVE Holdings, Inc. and Subsidiaries Consolidated Balance Sheets as of December
31, 1996 and February 29, 1996
MVE Holdings, Inc. and Subsidiaries Consolidated Statements of Operations for
the Ten Months Ended December 31, 1996, and Years Ended February 29, 1996, and
February 28, 1995
MVE Holdings, Inc. and Subsidiaries Consolidated Statements of Stockholders'
Equity (Deficit) for the Ten Months Ended December 31, 1996, and Years Ended
February 29, 1996 and February 28, 1995
MVE Holdings, Inc. and Subsidiaries Consolidated Statements of Cash Flows for
the Ten Months Ended December 31, 1996, and Years Ended February 28, 1996, and
February 28, 1995
Notes to MVE Holdings, Inc. and Subsidiaries Consolidated Financial Statements
Report of Deloitte & Touche LLP, Independent Public Accountants on MVE, Inc. and
Subsidiaries
MVE, Inc. and Subsidiaries Consolidated Balance Sheets as of December 31, 1996
and February 29, 1996
MVE, Inc. and Subsidiaries Consolidated Statements of Operations for the Ten
Months Ended December 31, 1996, and Years Ended February 29, 1996 And February
28, 1995
MVE, Inc. and Subsidiaries Consolidated Statements of Stockholder's Equity
(Deficit) for the Ten Months Ended December 31, 1996, and Years Ended February
29, 1996, and February 28, 1995
MVE, Inc. and Subsidiaries Consolidated Statements of Cash Flows for the Ten
Months Ended December 31, 1996, and Years Ended February 29, 1996, and February
28, 1995
Notes to MVE, Inc. and Subsidiaries Consolidated Financial Statements
Report of Deloitte & Touche LLP, Independent Public Accounts on CAIRE, INC.
CAIRE, INC. Balance Sheets as of December 31, 1996 and February 29, 1996
CAIRE, INC. Statements of Operations for the Ten Months Ended December 31, 1996,
and Years Ended February 29, 1996 and February 28, 1995
<PAGE>
CAIRE, INC. Statements of Stockholders' Equity for the Ten Months Ended December
31, 1996, and Years Ended February 29, 1996 and February 28, 1995
CAIRE, INC. Statements of Cash Flows for the Ten Months Ended December 31, 1996,
and Years Ended February 29, 1996 and February 28, 1995
Notes to CAIRE, INC. Financial Statements
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of MVE Holdings, Inc.
We have audited the accompanying consolidated balance sheet of MVE Holdings,
Inc. and subsidiaries (Holdings) as of December 31, 1996, and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
the ten months then ended. These consolidated financial statements are the
responsibility of Holdings' management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit. The
consolidated financial statements of Holdings for the years ended February 29,
1996 and February 28, 1995 were audited by other auditors whose report, dated
April 16, 1996, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated 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 audit provides a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements for the ten months ended
December 31, 1996, present fairly, in all material respects, the financial
position of Holdings as of December 31, 1996, and the results of its operations
and its cash flows for the ten months then ended in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
March 21, 1997
<PAGE>
MVE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
December 31, February 29,
1996 1996
----------- -----------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 10,505 $ 1,306
Accounts receivable, net of allowance for doubtful accounts 26,958 30,877
Inventories 28,091 24,428
Prepaid expenses 1,227 783
Income tax refund receivable 3,102 730
Deferred income taxes 6,740 4,394
-------- --------
Total current assets 76,623 62,518
PROPERTY, PLANT AND EQUIPMENT 42,388 36,340
Less-Accumulated depreciation and amortization (15,376) (14,064)
-------- --------
Net property, plant and equipment 27,012 22,276
GOODWILL, net 26,001 39,259
OTHER ASSETS, net 12,540 9,835
-------- --------
Total assets $142,176 $133,888
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term debt $ 3,633 $ 2,142
Accounts payable 18,090 18,368
Accrued expenses and other liabilities 24,988 14,205
-------- --------
Total current liabilities 46,711 34,715
LONG-TERM DEBT, net of current maturities 143,009 131,024
DEFERRED INCOME TAXES 1,887 2,470
OTHER NONCURRENT LIABILITIES 4,159 2,509
-------- --------
Total liabilities 195,766 170,718
MINORITY INTEREST 320 961
SERIES A CONVERTIBLE REDEEMABLE PREFERRED STOCK 47,000
SERIES B REDEEMABLE PREFERRED STOCK 8,331
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Notes receivable from shareholders (2,000)
Common stock, no par value, stated value $.01 per share, 1,500,000 shares authorized;
175,502 and 510,000 shares issued and outstanding, respectively 2 5
Additional paid-in deficit (449) (449)
Common stock warrants 168 770
Accumulated deficit (106,962) (38,117)
-------- --------
Total stockholders' deficit (109,241) (37,791)
-------- --------
Total liabilities and stockholders' deficit $142,176 $133,888
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
balance sheets.
<PAGE>
MVE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Ten Months Ended December 31, 1996, and the Years Ended February 29,
1996 and February 28, 1995
(In Thousands)
<TABLE>
<CAPTION>
December 31, February 29, February 28,
1996 1996 1996
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES $155,746 $179,220 $146,480
COST OF SALES 113,875 128,196 100,394
------------ ------------ ------------
Gross profit 41,871 51,024 46,086
OPERATING EXPENSES:
Selling and marketing 9,855 11,039 9,747
General and administrative 14,910 11,130 10,753
Research and development 3,578 4,718 2,792
Amortization 4,623 5,463 4,915
Other expenses (Note 10) 21,972
------------ ------------ ------------
Total operating expenses 54,938 32,350 28,207
------------ ------------ ------------
Operating income (loss) (13,067) 18,674 17,879
INTEREST INCOME (145) (47)
INTEREST EXPENSE 13,887 16,352 9,878
------------ ------------ ------------
Income (loss) before income tax
provision (benefit), minority (26,809) 2,369 8,001
interest and extraordinary item
INCOME TAX PROVISION (BENEFIT) (3,197) 1,673 3,112
------------ ------------ ------------
Income (loss) before minority
interest and extraordinary item (23,612) 696 4,889
MINORITY INTEREST IN NET INCOME (LOSS) (949) 5 (172)
------------ ------------ ------------
Income (loss) before extraordinary
item (22,663) 691 5,061
EXTRAORDINARY ITEM (Note 5):
Loss on extinguishment of debt,
net of income tax benefit of $871 (1,307)
------------ ------------ ------------
Net income (loss) (22,663) 691 3,754
PREFERRED STOCK DIVIDENDS (2,251) (1,304)
------------ ------------ ------------
NET INCOME (LOSS) AVAILABLE TO COMMON
STOCKHOLDERS $(24,914) $ 691 $ 2,450
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
MVE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Deficit
For the Ten Months Ended December 31, 1996, and the Years Ended February 29,
1996 and February 28, 1995
(In Thousands)
<TABLE>
<CAPTION>
Notes
Receivable
From Common Stock Additional Common Accumu- Total
Share- --------------- Paid-In Stock lated Stockholders'
holders Shares Amount Deficit Warrants Deficit Deficit
---------- ------ ------ ---------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, February 28, 1994 510 $5 $(449) $ (32,709) $ (33,153)
Preferred stock dividend (1,304) (1,304)
Retirement of preferred stock
and warrants (8,549) (8,549)
Issuance of common stock $770 770
warrants
Net income 3,754 3,754
---------- ------ ------ ---------- -------- --------- ---------
BALANCE, February 28, 1995 510 5 (449) 770 (38,808) (38,482)
Net income 691 691
------- ------ ------ --------- ------- --------- ---------
BALANCE, February 29, 1996 510 5 (449) 770 (38,117) (37,791)
Notes receivable from
shareholders $(2,000) (2,000)
Preferred stock dividend (2,251) (2,251)
Purchase of common stock
warrants (602) (2,036) (2,638)
Purchase of treasury stock (268) (2) (33,636) (33,638)
Exchange of preferred stock (66) (1) (8,330) (8,331)
Other 71 71
Net loss (22,663) (22,663)
------- ------ ------ ---------- -------- --------- ---------
BALANCE, December 31, 1996 $(2,000) 176 $2 $(449) $168 $(106,962) $(109,241)
======= ====== ====== ========= ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
MVE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Ten Months Ended December 31, 1996, and the Years Ended February 29,
1996 and February 28, 1995
(In Thousands)
<TABLE>
<CAPTION>
December 31, February 29, February 28,
1996 1996 1995
------------ ------------ ------------
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net (loss) income before extraordinary item and
preferred stock dividends $ (22,663) $ 691 $ 5,061
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities-
Depreciation and amortization 7,791 8,950 7,930
Extraordinary loss on extinguishment of debt (1,307)
Minority interest (949) 5 (172)
Interest on exchangeable debt 274 329 329
Deferred income tax benefit (2,929) (478) (272)
Gain on sale of assets, net (323) (10)
Loss on write-off of assets 2,768
Loss on write-off of goodwill 10,824
Loss on debt forgiveness 3,722
Changes in other non-current liabilities 2,114
Changes in operating assets and liabilities (Note 3) 7,419 (10,685) (3,110)
--------- --------- --------
Net cash provided by (used in) operating
activities 8,371 (1,511) 8,449
INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net (9,783) (8,384) (7,594)
Proceeds from sale of assets 107 3,011 10
Decrease (increase) in other assets (750) (3,954) 522
Cash acquired from acquisitions 687
--------- --------- --------
Net cash used in investing activities (9,739) (9,327) (7,062)
FINANCING ACTIVITIES:
Borrowings under revolving credit facility 174,266 197,201 9,052
Repayments under revolving credit facility (174,121) (191,771) (18,056)
Repayment of long-term debt (2,489) (3,228) (65,235)
Borrowings of long-term debt 4,680 8,299
Repayment of warrants (14,452)
Repayment of preferred stock (17,333)
Proceeds from preferred stock sale 47,000
Purchase of treasury stock (33,638)
Purchase of common stock warrants (2,638)
Notes receivable from shareholders (2,000)
Issuance of senior secured notes and warrants,
net of $5,056 of debt issuance costs 106,944
Dividends paid (1,304)
Changes in other noncurrent assets and liabilities (493) 419
--------- --------- --------
Net cash provided by (used in) financing
activities 10,567 10,920 (384)
--------- --------- --------
Net increase in cash and cash equivalents 9,199 82 1,003
CASH AND CASH EQUIVALENTS, beginning of year 1,306 1,224 221
--------- --------- --------
CASH AND CASH EQUIVALENTS, end of year $ 10,505 $ 1,306 $ 1,224
========= ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 9,037 $ 15,846 $ 9,256
========= ========= ========
Cash paid during the year for income taxes $ 1,626 $ 3,306 $ 1,531
========= ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
MVE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Ten Months Ended December 31, 1996 and the Years Ended February 29, 1996
and February 28, 1995
(In Thousands, Except Share, Warrant and Per Share Data)
1. Organization and Summary of Significant Accounting Policies:
Principles of Consolidation and Business
The consolidated financial statements include the accounts of MVE Holdings, Inc.
and its wholly owned subsidiaries, MVE, Inc. and MVE, Inc.'s subsidiaries and
CAIRE, INC. (see Note 4). All intercompany balances and transactions have been
eliminated in consolidation. MVE Holdings, Inc. and its subsidiaries are
collectively referred to as Holdings or the Company. Holdings develops,
manufactures, markets and sells products which are grouped according to three
business segments: Industrial, Distributed and Medical. Industrial products
include cryogenic storage tanks and transportation equipment sold to producers,
distributors and end users of industrial gases. Distributed products include
bulk CO\\2\\ containers used for beverage carbonization, biological storage
systems used to store and transport temperature-sensitive biological matter and
insulated storage of liquid natural gas. Medical products include a range of
respiratory products such as liquid oxygen systems, ambulatory oxygen systems,
oxygen concentrators and nebulizers.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Estimates are used for
such items as plant depreciable lives, tax provisions and reserves,
uncollectible accounts receivable and warranty liabilities. As better
information becomes available or accrual amounts are determinable, the recorded
estimates are revised. Consequently, operating results can be affected by
revisions to prior accounting estimates.
Cash and Cash Equivalents
Holdings considers all highly liquid investments with original maturities of
three months or less to be cash equivalents. These investments are reflected at
cost which approximates fair value. Accounts payable include issued checks,
which have not yet cleared Holdings' bank, totaling $1,030 at December 31, 1996
and $1,472 at February 29, 1996.
Receivables
Allowance for doubtful accounts consisted of the following for the ten months
ended December 31, 1996 and for the years ended February 29, 1996 and February
28, 1995:
<TABLE>
<CAPTION>
Additions: Write-offs,
Beginning Charged to net of Ending
Balance Expense Recoveries Balance
--------- ---------- ----------- -------
<S> <C> <C> <C> <C>
February 28, 1995 $553 $253 $ (37) $769
February 29, 1996 769 221 (315) 675
December 31, 1996 675 168 45 888
</TABLE>
<PAGE>
Inventories
Inventories include material, labor and overhead and are stated at the lower of
cost or market. Holdings uses the first-in, first out (FIFO) method of
accounting for inventories. Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, February 29,
1996 1996
------------ ------------
<S> <C> <C>
Inventories at cost:
Purchased materials and subassemblies $15,662 $13,451
Work in process 6,591 4,404
Finished goods 5,838 6,573
------------ ------------
$28,091 $24,428
============ ============
</TABLE>
Property, Plant and Equipment
Property, plant and equipment is recorded at cost, less accumulated
depreciation. Additions and improvements to property and equipment are
capitalized at cost while maintenance and repair expenditures are charged to
operations as incurred. Depreciation is calculated principally by the straight-
line method for financial reporting purposes and accelerated methods for income
tax purposes. For financial reporting purposes, depreciation is provided over
the following estimated useful lives:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Buildings and improvements 10-30
Machinery and equipment 3-8
Furniture, fixtures and office equipment 3-8
</TABLE>
Property, plant and equipment consisted of:
<TABLE>
<CAPTION>
December 31, February 29,
1996 1995
------------ ------------
<S> <C> <C>
Land $ 2,058 $ 1,390
Buildings and improvements 11,122 7,419
Machinery and equipment 16,882 17,263
Furniture, fixtures and office equipment 7,118 5,559
Construction in progress 5,208 4,709
------------ ------------
42,388 36,340
Less - accumulated depreciation and amortization (15,376) (14,064)
------------ ------------
Net property, plant and equipment $ 27,012 $ 22,276
============ ============
</TABLE>
<PAGE>
Other Assets
Other assets are being amortized on a straight-line basis over their estimated
useful lives which range from 3 to 12 years. Accumulated amortization was $8,830
at December 31, 1996 and $7,635 at February 29, 1996. Other assets consist of
the following:
<TABLE>
<CAPTION>
December 31, February 29,
1996, Net 1996, Net
------------ -----------
<S> <C> <C>
Deferred financing costs $ 4,030 $4,471
Patents, trademarks and product lines 657 791
Noncompete agreement 6,048
Other 1,805 4,573
------------ -----------
$12,540 $9,835
============ ===========
</TABLE>
Revenue Recognition
Revenue is generally recognized upon shipment of goods. At the request of
certain customers, large cryogenic tanks will be accepted by the customer at
Holdings' facilities and stored there for later shipment. In these instances,
title passes to the customer upon acceptance, and revenue is recognized at that
time.
For the ten months ended December 31, 1996, one of Holdings' customers
represented approximately 15% of Holdings' net sales. For the year ended
February 29, 1996, no single customer exceeded 10% of Holdings' sales.
Research and Development Costs
Holdings' policy is to charge all research and development costs to expense in
the period incurred.
Warranty Costs
Holdings warrants most of its products against defects in materials and
workmanship under normal use and service for periods extending to five years.
Warranty costs have not been material and Holdings accrues estimated costs of
warranty obligations at the time of sale.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using currently enacted tax rates. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Disclosure About Fair Value of Financial Instruments
The carrying amount of accounts receivable and accounts payable approximates
fair value because of the short maturity of those instruments. The fair value of
the long-term debt obligations approximates carrying value based on the maturity
and security of the related obligations.
Long-Lived Assets and Goodwill
In fiscal 1996, the Company adopted Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of". The Statement establishes accounting standards for
the impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets. There was no material effect on the financial
statements from the adoption because the Company's prior impairment recognition
practice was consistent with the major provisions of the Statement. Under
provisions of the Statement, impairment losses are recognized when expected
future cash flows are less than the assets' carrying value. Accordingly, when
indicators of impairment are present, the Company evaluates the carrying value
of property, plant and equipment, intangibles and goodwill in relation to the
operating performance and future undiscounted cash flows of the underlying
business. The Company adjusts the net book value of the underlying assets if the
sum of expected future cash flows is less than book value. Goodwill represents
the cost of acquired businesses in excess of net assets and is being amortized
on a straight-line basis over 5 to 20 years. Accumulated amortization was
$14,487 at December 31, 1996 and $21,129 at February 29, 1996 (see Note 10).
<PAGE>
Incentive Stock Option Plan
On March 25, 1996, the Board of Directors approved an incentive stock option
plan which grants 66,800 options to certain key employees and officers of
Holdings. The plan vests over a seven-year period, with accelerated vesting
upon achievement of certain operational objectives and other specified events.
Reclassifications
Certain amounts in the financial statements have been reclassified to conform to
the presentation used in the ten months ended December 31, 1996. These
reclassifications had no effect on Holdings' financial position or results of
operations.
Change in Fiscal Year
On January 17, 1997, the Board of Directors of Holdings and MVE adopted a
resolution to change the fiscal year of the Company from the last day in
February to a calendar year. The change in fiscal year is effective for the
fiscal year ended December 31, 1996.
2. Accrued Expenses and Other Liabilities:
Accrued expenses and other liabilities consists of the following:
<TABLE>
<CAPTION>
December 31, February 29,
1996 1996
------------ ------------
<S> <C> <C>
Employee compensation and payroll $ 4,924 $ 3,453
taxes
Income taxes 1,732 1,252
Warranty 1,909 1,652
Accrued pension cost 1,741 1,655
Accrued interest 5,366 612
Insurance 1,967 2,446
Deposits and rebates 4,185 1,568
Accrued freight 567
Other 2,597 1,567
------- -------
$24,988 $14,205
======= =======
</TABLE>
3. Supplemental Cash Flow Information:
Changes in operating assets and liabilities were as follows:
<TABLE>
<CAPTION>
December 31, February 29, February 28,
1996 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Accounts receivable $ 4,479 $ (7,025) $(9,508)
Inventories (2,700) (6,684) (1,361)
Prepaid expenses and other (329) 56 (140)
Income tax refund receivable (2,372) 461
Accounts payable (1,245) 4,176 1,700
Accrued expenses and other liabilities 9,586 (1,208) 5,738
------- -------- -------
$ 7,419 $(10,685) $(3,110)
======= ======== =======
</TABLE>
Noncash Investing and Financing Activities
The Company entered into a non-compete agreement in 1996 for a total of $6,257
with a shareholder of the Company.
Several lease obligations of $2,131 were incurred when the Company entered into
leases for new equipment and furniture.
The Company purchased a building for $500 in exchange for long-term debt.
In exchange for 66,406 shares of Common Stock, the Company issued 833 shares of
10% Class B Preferred Stock, each share having a liquidation preference of
$10,000 plus accrued and unpaid dividends.
<PAGE>
The Company acquired two companies in 1996 with purchase prices of $1,300 and
$600. The acquisitions were not significant to the consolidated financial
statements.
4. Acquisition:
Effective July 30, 1993, CAIRE INC. (CAIRE), a subsidiary of Holdings,
acquired Mountain Medical Equipment, Inc. (MME) through a merger of a
subsidiary of CAIRE with MME. The transaction was accounted for using the
purchase method of accounting. The total purchase price, including
acquisition costs of $2,954, was allocated to the net assets acquired based
on fair values at the date of acquisition. The purchase price exceeded the
fair value of net assets acquired by $7,035. Holdings recorded an increase
to stockholders' equity of $512 as the transaction has been reflected as a
partial sale of CAIRE's net assets to the minority stockholders. On March 1,
1995, MME was merged into CAIRE. Pursuant to the merger agreement:
a. CAIRE issued 404,027 shares of its Series A Participating Convertible
Preferred Stock (the Preferred Stock) to MVE, Inc. The Preferred Stock
is convertible into 404,027 shares of CAIRE's common stock, votes with
the common stock as to all matters and carries a $23.56 per share annual
dividend which is limited to CAIRE's net available cash flow as defined
by the merger agreement. The Preferred Stock has a liquidation
preference of $161.65 per share at February 29, 1996 plus accrued and
unpaid dividends which will decline over time by the cumulative present
value of dividends actually paid, discounted at 12% per year back to the
merger date. The Preferred Stock must be converted to common stock upon
certain events.
b. CAIRE issued 41,924 shares of common stock to the former stockholders of
MME, resulting in a 9% ownership by such stockholders in the combined
company.
c. MME debt held by a third party was amended to be exchangeable under
certain conditions into 29,558 shares of CAIRE common stock.
d. MME's operating results subsequent to July 30, 1993 have been included
in the accompanying consolidated statements of operations.
<PAGE>
5. Long-Term Debt:
<TABLE>
<CAPTION>
Certain assets of Holdings are pledged as collateral for long-term debt consists of the following:
December 31, February 29,
1996 1996
------------ ------------
<S> <C> <C>
12.5% senior secured notes, due February 2002, interest payable semiannually, net of
unamortized discounts of $568 and $660 $ 111,432 $ 111,340
Revolving credit facility, due February 1998, interest payabale monthly at the reference
rate plus .5%, 8.75% at December 31, 1996 6,054 5,910
Bonds, due September 2005, semi-annual principal payments of $345, plus interest
at rates ranging from 2.75% to 15%, 5.84% at December 31, 1996 6,210 6,900
12.5% non-compete agreement, with semi-annual principal and interest payments,
due November 2006 6,257
7% exchangeable note, including accrued interest, with principal and accrued interest
payable August 1, 1998 5,826 5,551
Industrial Development Revenue Bonds, Series 1996, semi-annual principal payments of $220,
plus interest at variable rates from 3.7% to 12%, 4.3% at December 31, 1996, due June 2011 4,180
10.25% first mortgage note, payable in monthly installments of $14, including interest,
with final payment due July 2003 899 959
10% subordinated debentures, interest payable semiannually, subject to 10% per year mandatory
redemption beginning 1997, balance due May 2001 418 418
Several notes payable with varying principal and interest payments through April 2012 with
interest rates ranging from 6% to 9% 2,085 873
Two revolving foreign loans, with
varying principal and interest payments through November 1997 with interest rates ranging
from 6.75% to 8.5% 520
11% subordinated notes, quarterly principal payments of $333 plus interest, due quarterly
through March 1996 333
Capitalized leases payable in varying monthly installments through February 2003 with interest
rates ranging from 5% to 13% 2,761 882
------------ ------------
Total long-term debt 146,642 133,166
Less- Current maturities 3,633 2,142
------------ ------------
Long-term debt, net of current maturities $ 143,009 $ 131,024
============ ============
The revolving credit facility provides for borrowings and issuance of letters of credit of up to $20 million, subject to a defined
borrowing base of qualified accounts receivable and eligible inventory. The note is renewable for three-year periods through June
2001. Holdings is charged a monthly fee based on an annualized rate of .5% of the unused portion of the commitment.
In February 1995, Holdings consummated a refinancing plan. As part of this refinancing plan, MVE, Inc. issued $112 million of senior
secured notes and Holdings issued 112,000 common stock warrants, each allowing the holder to purchase 0.24 shares of Holdings common
stock at $0.01 per share. The proceeds from this refinancing plan were used to redeem all outstanding shares of Holdings 11.32%
Cumulative Redeemable Preferred Stock ($100 par value per share), all outstanding redeemable common stock warrants, and retire
certain outstanding debt of Holdings. As part of this refinancing, Holdings recognized an extraordinary loss of $1,307, net of a tax
benefit of $871.
The senior secured notes are redeemable at the option of Holdings, in whole or in part, on or after February 15, 2000, at the
redemption prices (expressed as percentages of principal amount) set forth below, plus accrued and unpaid interest thereon to the
redemption dates indicated below:
Year Percentage
------------------- ------------
<S> <C> <C>
2000 102.083%
2001 and thereafter 100.000%
The senior secured notes and revolving credit facility agreements contain certain covenants which restrict borrowings, dividends,
acquisition and disposition of assets, and require Holdings to maintain certain liquidity and debt coverage ratios. As of December
31, 1996, Holdings was in compliance with, or had obtained amendments and waivers for its financial covenants.
</TABLE>
<PAGE>
The scheduled annual maturities of long-term debt at December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1997 $ 3,633
1998 14,658
1999 2,820
2000 2,637
2001 2,812
Thereafter 120,082
--------
$146,642
========
</TABLE>
6. Income Taxes:
Income tax provision (benefit) consists of the following for the periods ended:
<TABLE>
<CAPTION>
10 months Fiscal Year
--------- -----------
December 31, 1996 February 29, 1996 February 28, 1995
----------------- ----------------- -----------------
Current:
<S> <C> <C> <C>
Federal $ (198) $1,870 $3,081
State (70) 281 303
------------------- ----------------- -----------------
(268) 2,151 3,384
Deferred (2,929) (478) (272)
------------------- ----------------- -----------------
$(3,197) $1,673 $3,112
=================== ================= =================
</TABLE>
The differences between income taxes computed using the federal statutory rate
and the provision (benefit) for income taxes were as follows for the periods
ended:
<TABLE>
<CAPTION>
10 months Fiscal Year
--------- -----------
December 31, 1996 February 29, 1996 February 28, 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Income tax provision (benefit) at federal $(9,116) $ 804 $2,779
statutory rate
Increase (reduction) attributable to:
Nondeductible goodwill 5,161 1,450 1,399
Foreign Sales Corporation benefit (714) (447) (232)
Consent and solicitation fees 422
Recapitalization fees 783
Change in valuation allowance for (606) (348)
deferred tax assets
State taxes, net of federal benefit (132) 293 180
Other, net 399 179 (666)
----------------- ----------------- -----------------
$(3,197) $1,673 $3,112
================= ================= =================
</TABLE>
<PAGE>
The tax effects of temporary differences that give rise to the net deferred tax
asset were as follows:
<TABLE>
<CAPTION>
December 31, February 29,
1996 1996
------------ ------------
<S> <C> <C>
Accrued pension $ 659 $ 684
Accrued compensation 1,417 615
Accrued self insurance reserve 746 1,140
Aura write-off 522
Deferred compensation 725
Inventory reserves 1,120 1,851
Depreciable assets (2,494) (2,471)
Loss and credit carryforwards 1,059 551
Warranty reserve 773 712
Other accruals 510 581
Other 367 (1,188)
------- -------
5,404 2,475
Valuation allowance (551) (551)
------- -------
Net deferred tax asset $ 4,853 $ 1,924
======= =======
</TABLE>
The Company has tax loss carryforwards for income tax purposes. Such tax loss
carryforwards have been reduced in part by a valuation allowance, since
realization of the carryforwards is not deemed more likely than not. The
carryforwards of $1,059 expire in 2001.
7. Employee Benefit Plans:
Pension Plan
Holdings maintains two noncontributory defined benefit pension plans covering
substantially all employees. The benefits to which an employee is entitled
under the plans are derived using a formula based on the number of years of
service and compensation levels during the last five years of service before
retirement. Holdings funds the plans in accordance with the requirements of
federal laws and regulations.
The net periodic cost is computed as follows:
<TABLE>
<CAPTION>
December 31, February 29, February 28,
1996 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Service cost $ 565 $ 458 $ 414
Interest cost 523 483 407
Actual return on plan assets (950) (1,182) (246)
Net amortization and deferral 497 755 (147)
----- ------- -----
$ 635 $ 514 $ 428
===== ======= =====
</TABLE>
The expected long-term rate of return on plan assets was 8.5% in the ten months
ended December 31, 1996 and in the fiscal years ended February 29, 1996 and
February 28, 1995. The discount rate used for determining fiscal year expense
and the end of the year projected benefit obligation was 7.5% in the ten months
ended December 31, 1996, and in the fiscal year ended February 29, 1996 and 8.0%
in the fiscal year ended February 28, 1995. Approximately 60% of the plan
assets are invested in equity securities and 40% in bonds as of December 31,
1996.
<PAGE>
The following table sets forth the funded status of the plans:
<TABLE>
<CAPTION>
December 31, 1996 February 29, 1996
----------------------- ------------------------
Service Service
Retirement Related Retirement Related
Income Pension Income Pension
Plan Plan Plan Plan
---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Actuarial present value of:
Vested benefits $4,267 $1,647 $3,597 $1,464
Nonvested benefits 1,202 154 478 90
-------- ------ ------ ------
Accumulated Benefit Obligation 5,469 1,801 4,075 1,554
Effect of anticipated future compensation levels 2,670 2,158
-------- ------ ------ ------
Projected Benefit Obligation 8,139 1,801 6,233 1,554
Plan assets at fair value 6,001 1,656 4,940 1,393
-------- ------ ------ ------
Projected Benefit Obligation in excess of
Plan Assets 2,138 145 1,293 161
Unrecognized prior service cost 96 (191) 102 (168)
Unrecognized net transition (asset) obligation (118) 51 (134) 68
Unrecognized net (loss) gain (519) 115 232 3
Adjustment required to recognize minimum liability 24 98
-------- ------ ------ ------
Accrued Pension Cost $1,597 $ 144 $1,493 $ 162
======== ====== ====== ======
</TABLE>
Savings Plan
Holdings has a 401(k) savings plan (the Plan) which covers all employees who
have completed one month of service and attained the age of 21. The Plan
provides for voluntary participant contributions of 1% to 15% of each employee's
wages. Holdings may make matching contributions at the discretion of the board
of directors. Holdings did not make matching contributions to the Plan in the
ten months ended December 31, 1996, or the fiscal years ended February 29, 1996
or February 28, 1995. Holdings has approved new 401(k) amendments which provide
for matching contributions of up to 6% of eligible employee's wages.
Deferred Compensation Plan
As of February 29, 1996, Holdings had a deferred compensation plan for key
management employees to encourage and reward the continued profitable growth of
Holdings. The awards of the plan are capital appreciation units and are made at
the discretion of the board of directors. As of February 29, 1996, 36,000 units
were outstanding. Each unit was valued at the date of grant at the board of
directors' discretion and is related to the book value of common stock, as
defined. Units vested over a five-year period, and compensation was payable
under various terms and conditions after the end of the vesting period or in the
event of a sale or public offering, in which case compensation was determined on
fair market value of the units. Amounts accrued under this plan were not
significant at February 29, 1996 and February 28, 1995.
During the ten months ended December 31, 1996, Holdings' Board of Directors
approved a deferred compensation plan to replace the existing plan in its
entirety. The new plan awarded deferred compensation to certain key members of
upper management with the objective of retaining their services, encouraging
profitability and rewarding them. The plan awarded 29,750 units to three
individuals which may be exchanged for Common Stock of an equal number at a
future date, given the occurrence of certain events. For the ten months ended
December 31, 1996, Holdings expensed $1,916 in connection with the adoption of
this plan.
8. Commitments and Contingencies:
Leases
A portion of Holdings' operations is conducted using leased equipment and
facilities. These leases are noncancelable and renewable. Total rental expense
included in the accompanying consolidated statements of operations was
approximately $702, $502, and $738 for the ten months ended December 31, 1996,
and for the fiscal years ended February 29, 1996, and February 28, 1995. The
future minimum rental payments required under these leases are $801 in 1997,
$414 in 1998, $239 in 1999, $85 in 2000, and $10 in 2001.
Litigation
Holdings is subject to a number of asserted and unasserted potential claims
encountered in the normal course of business. In the opinion of management,
based on consultation with outside legal counsel, the resolution of these
matters will not have a material adverse effect on Holdings' financial position
or results of operations.
<PAGE>
9. Segment Reporting and Export Sales:
The operations of Holdings are divided into three business segments for
financial reporting purposes. The industrial products segment develops and
manufactures cryogenic storage tanks and transportation equipment and markets
them to producers, distributors and end users of industrial gases. The
distributed products segment develops, manufactures and markets a variety of
products utilizing similar technologies as the industrial products segment, but
markets them through distributors to various commercial markets, principally end
users of bulk liquid CO\\2\\ beverage systems and biological material storage
systems. Also included in the distributed products segment are those emerging
products anticipated to be used in commercial markets including liquid natural
gas systems for vehicle fleets and flat vacuum panels for use in refrigeration
appliances. The medical products segment develops, manufactures and markets a
broad range of medical products, including liquid oxygen systems, oxygen
concentrators and medication nebulizers, all of which are used primarily for the
in-home treatment of patients. Intersegment sales consist of sales of bottles
and reservoirs from the industrial products segment to the medical products
segment. General corporate assets include cash and cash equivalents and income
taxes.
<PAGE>
Financial information by business segment as of and for the ten months ended
December 31, 1996, and the fiscal years ended February 29, 1996 and February 28,
1995 was as follows:
<TABLE>
<CAPTION>
Industrial Distributed Medical Corporate and
Products Products Products Eliminations Total
---------- ----------- -------- ------------- -----
<S> <C> <C> <C> <C> <C>
December 31, 1996:
Customer sales $ 96,519 $36,760 $ 22,467 $155,746
Intersegment sales 1,480 $ (1,480)
-------- ------- -------- -------- --------
Total Sales 97,999 36,760 22,467 (1,480) 155,746
Operating income (loss) 10,208 5,941 (14,737) (14,479) (13,067)
Identifiable assets 40,281 24,211 17,382 60,302 142,176
Capital additions 5,286 1,145 2,616 3,367 12,414
Depreciation 751 774 682 962 3,169
Amortization 28 28 1,445 3,121 4,622
February 29, 1996:
Customer sales $ 95,348 $47,064 $ 36,808 $179,220
Intersegment sales 7,808 $ (7,808)
-------- ------- -------- -------- --------
Total sales 103,156 47,064 36,808 (7,808) 179,220
Operating income 11,182 4,757 2,730 5 18,674
Identifiable assets 54,926 40,604 29,361 8,997 133,888
Capital additions 3,594 1,696 1,883 1,211 8,384
Depreciation 748 828 854 1,056 3,486
Amortization 2,393 1,178 1,893 5,464
February 28, 1995:
Customer sales $ 68,692 $33,378 $ 44,410 $146,480
Intersegment sales 9,306 $ (9,306)
-------- ------- -------- -------- --------
Total sales 77,998 33,378 44,410 (9,306) 146,480
Operating income (loss) 9,579 4,710 3,762 (172) 17,879
Identifiable assets 53,516 30,431 27,655 7,217 118,819
Capital additions 1,287 5,830 477 7,594
Depreciation 707 1,291 736 281 3,015
Amortization 2,015 924 1,976 4,915
</TABLE>
Export sales from Holdings' U.S. operations for the ten months ended December
31, 1996, and the fiscal years ended February 29, 1996 and February 28, 1995
were as follows:
<TABLE>
<CAPTION>
December 31, February 29, February 28,
1996 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Canada and Mexico $ 6,957 $ 7,999 $ 7,591
Europe 12,407 13,358 8,720
Pacific 24,868 26,434 15,506
Other 7,271 7,497 5,368
------- ------- -------
Total $51,503 $55,288 $37,185
======= ======= =======
</TABLE>
<PAGE>
10. Other Expenses:
Other expense recorded in the ten months ended December 31, 1996 include the
following:
<TABLE>
<CAPTION>
<S> <C>
Recapitalization Expenses $ 3,545
Deferred compensaton plan (Note 7) 1,916
Discontinue AURA product line 1,280
Debt forgiveness 3,722
Goodwill write-offs 10,824
Other 685
-------
$21,972
=======
</TABLE>
Recapitalization Expenses
In 1996, the Company incurred $3,545 of expenses related to recapitalization of
the Company. These expenses related to consent and solicitation of the holders
of the senior secured notes and legal and accounting fees.
Discontinuance of AURA Product Line
Holdings wrotedown $1,280 of fixed and other assets, net of debt forgiveness,
related to the discontinuance of the AURA product line, which was included in
the Distributed Products segment. Prior to December 1996, the Company had an
agreement with a third party to participate in a joint venture to produce and
market its AURA product line. In December 1996, the Company and the joint
venture partner agreed to discontinue all AURA operating and marketing
activities.
Debt Forgiveness
Prior to December 1996, the Company made loans to a major supplier of components
for its medical oxygen concentrators. The loans were to be repaid through
future purchase credits from the supplier. In December 1996, the Company
entered into a new agreement with the supplier which forgave $3,722 of the debt.
Goodwill Write-down
In December 1996, the Company recorded a goodwill write-down of $10,824 ($4,750
in Industrial Products and $6,074 in the Medical Products segment). In
connection with the change in ownership in 1996, management undertook a
strategic review of all business units. As a result of the review, goodwill was
determined to have been impaired because of the financial condition of certain
medical and industrial business units and the Company's inability to generate
future operating income from these business units. Moreover, anticipated future
cash flow of these business units indicate that the recoverability of the
goodwill is not reasonably assured. Prior to December of 1996, goodwill was
amortized using the straight-line method over twenty years.
11. Preferred Stock and Recapitalization
On August 28, 1996 MVE Investors, LLC purchased 4,700 shares of Holdings 12.5%
Series A Cumulative Redeemable Convertible Participating Preferred Stock, par
value $100 per share, for the purchase price of $47 million. Holdings used the
proceeds of this transaction to purchase a substantial portion of certain
Holdings shareholders' common stock.
Following this recapitalization, MVE Investors, LLC holds shares of Series A
Redeemable Preferred Stock which are convertible into 374,633 shares of Holdings
Common Stock, or approximately 67.4% of the Common Stock outstanding on a fully
diluted basis. For the ten months ended December 31, 1996, Holdings had accrued,
but unpaid dividends of $1,973 relating to Series A Preferred Stock.
In exchange for 66,406 shares of Common Stock held by certain shareholders,
Holdings issued 833 shares of 10% Series B Redeemable Preferred Stock, each such
share having a liquidation preference of $10,000 plus accrued and unpaid
dividends. This class of stock is subject to mandatory redemption. For the ten
months ending December 31, 1996, Holdings had accrued, but unpaid dividends of
$278 relating to Series B Preferred Stock.
Additionally, Holdings purchased for cash 79% of its outstanding warrants for
$30.10944 per warrant.
<PAGE>
12. Fiscal Results for the Ten Months Ended December 31, 1995 (Unaudited)
<TABLE>
<CAPTION>
December 31,
1995
------------
<S> <C>
Net sales $144,183
Cost of sales 103,501
--------
Gross profit 40,682
Operating expenses:
Selling and Marketing 8,525
General and administrative 10,867
Research and development 4,654
Amortization 4,539
--------
Total operating expenses 28,585
--------
Operating income 12,097
Interest expense 13,517
Income tax provision 190
--------
Net (loss) $ (1,610)
========
</TABLE>
13. Related Party Transactions
The Company loaned two shareholders $2,000 on August 27, 1996, to be repaid to
the Company on or before August 27, 2003. Simple interest accrues on the
principle amount at an annual rate of 8%. Principle of $2,000 and accrued
interest of $56 was outstanding at December 31, 1996. The loan is secured by
Holdings Common Stock owned by the shareholders.
A director of Holdings has an agreement with the Company which pays an annual
fee of $75 in exchange for consulting services. This agreement has a term of
one year, renewable at the option of Holdings.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of MVE, Inc.
We have audited the accompanying consolidated balance sheet of MVE, Inc. and
subsidiaries (the Company) as of December 31, 1996, and the related consolidated
statements of operations, stockholders' deficit, and cash flows for the ten
months then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit. The
consolidated financial statements of the Company for the years ended February
29, 1996 and February 28, 1995 were audited by other auditors whose report,
dated April 16, 1996, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated 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 audit provides a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements for the ten months ended
December 31, 1996, present fairly, in all material respects, the financial
position of the Company as of December 31, 1996, and the results of its
operations and its cash flows for the ten months then ended in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
March 21, 1997
<PAGE>
MVE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
December 31, 1996 February 29, 1996
------------------ ------------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,054 $ 1,306
Accounts receivable, net of
allowance for doubtful accounts 26,958 30,877
Inventories 28,091 24,428
Prepaid expenses 1,227 783
Income tax refund receivable 3,102 730
Deferred income taxes 6,740 4,394
------------------ ------------------
Total current assets 69,172 62,518
PROPERTY, PLANT AND EQUIPMENT 42,388 36,340
Less- Accumulated depreciation and
amortization (15,376) (14,064)
------------------ ------------------
Net property, plant and equipment 27,012 22,276
DUE FROM MVE HOLDINGS, INC. 31,015 31,015
GOODWILL, net 26,001 39,259
OTHER ASSETS, net 12,540 9,835
------------------ ------------------
Total assets $165,740 $164,903
================== ==================
LIABILITIES AND STOCKHOLDER'S DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term debt $ 3,633 $ 2,142
Accounts payable 18,071 18,368
Accrued expenses and other liabilities 24,982 14,205
------------------ ------------------
Total current liabilities 46,686 34,715
LONG-TERM DEBT, net of current maturities 143,009 131,024
DEFERRED INCOME TAXES 1,887 2,470
OTHER NONCURRENT LIABILITIES 1,041 2,509
------------------ ------------------
Total liabilities 192,623 170,718
MINORITY INTEREST 320 961
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S DEFICIT:
Common stock, no par value, stated
value $.01 per share, 1,000,000
shares authorized; 1,000 shares
issued and outstanding 1 1
Additional paid-in capital 10,411 10,411
Accumulated deficit (37,615) (17,188)
------------------ ------------------
Total stockholder's deficit (27,203) (6,776)
------------------ ------------------
Total liabilities and
stockholder's deficit $165,740 $164,903
================== ==================
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
<PAGE>
MVE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Ten Months Ended December 31, 1996, and the
Years Ended February 29, 1996 and February 28, 1995
(In Thousands)
<TABLE>
<CAPTION>
December 31, February 29, February 28,
1996 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES $155,746 $179,220 $146,480
COST OF SALES 113,875 128,196 100,394
-------- -------- --------
Gross profit 41,871 51,024 46,086
OPERATING EXPENSES:
Selling and marketing 9,855 11,039 9,747
General and administrative 14,910 11,130 10,753
Research and development 3,578 4,718 2,792
Amortization 4,623 5,463 4,915
Other expenses (Note 10) 19,668
-------- -------- --------
Total operating expenses 52,634 32,350 28,207
-------- -------- --------
Operating income (loss) (10,763) 18,674 17,879
INTEREST INCOME (6) (47)
INTEREST EXPENSE 13,887 16,352 9,878
-------- -------- --------
Income (loss) before income tax provision
(benefit), minority interest and
extraordinary item (24,644) 2,369 8,001
INCOME TAX PROVISION (BENEFIT) (3,197) 1,673 3,112
-------- -------- --------
Income (loss) before minority
interest and extraordinary item (21,447) 696 4,889
MINORITY INTEREST IN NET INCOME (LOSS) (949) 5 (172)
-------- -------- --------
Income (loss) before extraordinary item (20,498) 691 5,061
EXTRAORDINARY ITEM (Note 5):
Loss on extinguishment of debt, net
of income tax benefit of $871 (1,307)
-------- -------- --------
Net income (loss) $(20,498) $ 691 $ 3,754
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
MVE, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholder's Deficit
For the Ten Months Ended December 31, 1996, and the
Years Ended February 29, 1996 and February 28, 1995
(In Thousands)
<TABLE>
<CAPTION>
Common Stock Additional Total
---------------- Paid-In Accumulated Stockholder's
Shares Amount Capital Deficit Deficit
------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, February 28, 1994 1 $1 $10,411 $(20,329) $ (9,917)
Net income 3,754 3,754
Dividends paid (1,304) (1,304)
-- -- ------- -------- --------
BALANCE, February 29, 1995 1 1 10,411 (17,879) (7,467)
Net income 691 691
-- -- ------- -------- --------
BALANCE, February 29, 1996 1 1 10,411 (17,188) (6,776)
Other 71 71
Net loss (20,498) (20,498)
-- -- ------- -------- --------
BALANCE, December 31, 1996 1 $1 $10,411 $(37,615) $(27,203)
== == ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
MVE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Ten Months Ended December 31, 1996, and the
Years Ended February 29, 1996 and February 28, 1995
(In Thousands)
<TABLE>
<CAPTION>
December 31, February 29, February 28,
1996 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) before extraordinary item $ (20,498) $ 691 $ 5,061
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities-
Depreciation and amortization 7,791 8,950 7,930
Extraordinary loss on extinguishment of debt (Note 5) (1,307)
Minority interest (949) 5 (172)
Interest on exchangeable debt 274 329 329
Deferred income tax benefit (2,929) (478) (272)
Gain on sale of assets, net (323) (10)
Loss on write-off of assets 2,768
Loss on write-off of goodwill 10,824
Loss on debt forgiveness 3,722
Changes in other non-current liabilities 2,114
Changes in operating assets and liabilities (Note 3) 7,394 (10,685) (3,110)
--------- --------- ---------
Net cash provided by (used in) operating activities 10,511 (1,511) 8,449
INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net (9,783) (8,384) (7,594)
Proceeds from sale of assets 107 3,011 10
Decrease (increase) in other assets (750) (3,954) 522
Cash acquired from acquisitions 687 0 0
--------- --------- ---------
Net cash used in investing activities (9,739) (9,327) (7,062)
FINANCING ACTIVITIES:
Borrowings under revolving credit facility 174,266 197,201 9,052
Repayments under revolving credit facility (174,121) (191,771) (18,056)
Repayment of long-term debt (2,489) (3,228) (65,235)
Borrowings of long-term debt 4,680 8,299
Advance to MVE Holdings, Inc. (31,015)
Issuance of senior secured notes, net of $5,056 of debt
issuance costs (106,174)
Dividends paid (1,304)
Changes in other noncurrent assets and liabilities (1,360) 419
--------- --------- ---------
Net cash provided by (used in) financing activities 976 10,920 (384)
--------- --------- ---------
Net increase in cash and cash equivalents 1,748 82 1,003
CASH AND CASH EQUIVALENTS, beginning of year 1,306 1,224 221
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of year $ 3,054 $ 1,306 $ 1,224
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 9,037 $ 15,846 $ 9,256
========= ========= =========
Cash paid during the year for income taxes $ 1,626 $ 3,306 $ 1,531
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
MVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Ten Months Ended December 31, 1996, and the
Years Ended February 29, 1996 and February 28, 1995
(In Thousands, Except Share, Warrant and Per Share Data)
1. Organization and Summary of Significant Accounting Policies:
Principles of Consolidation and Business
The consolidated financial statements include the accounts of MVE, Inc. and its
majority owned subsidiaries. All intercompany balances and transactions have
been eliminated in consolidation. MVE, Inc. and its subsidiaries are
collectively referred to as the Company. The Company develops, manufactures,
markets and sells products which are grouped according to three business
segments: Industrial, Distributed and Medical. Industrial products include
cryogenic storage tanks and transportation equipment sold to producers,
distributors and end users of industrial gases. Distributed products include
bulk CO\\2\\ containers used for beverage carbonization, biological storage
systems used to store and transport temperature-sensitive biological matter, and
insulated storage of liquid natural gas. Medical products include a range of
respiratory products such as liquid oxygen systems, ambulatory oxygen systems,
oxygen concentrators and nebulizers. The Company is a wholly owned subsidiary of
MVE Holdings, Inc. (Holdings).
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Estimates are used for such items as plant depreciable lives, tax provisions and
reserves, uncollectible accounts receivable and warranty liabilities. As better
information becomes available, or accrual amounts are determinable, the recorded
estimates are revised. Consequently, operating results can be affected by
revisions to prior accounting estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents. These investments are reflected at
cost which approximates fair value. Accounts payable include issued checks,
which have not yet cleared the Company's bank, totaling $1,030 at December 31,
1996 and $1,472 at February 29, 1996.
Receivables
Allowance for doubtful accounts consisted of the following for the ten months
ended December 31, 1996 and for the years ended February 29, 1996 and February
28, 1995:
<TABLE>
<CAPTION>
Additions: Write-offs,
Beginning Charged to net of Ending
Balance Expense Recoveries Balance
--------- ---------- ----------- -------
<S> <C> <C> <C> <C>
February 28, 1995 $553 $253 $ (37) $769
February 29, 1996 769 221 (315) 675
December 31, 1996 675 168 45 888
</TABLE>
<PAGE>
Inventories
Inventories include material, labor and overhead and are stated at the lower of
cost or market. The Company uses the first-in, first out (FIFO) method of
accounting for inventories. Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, February 29,
1996 1996
------------ ------------
<S> <C> <C>
Inventories at cost:
Purchased materials and subassemblies $15,662 $13,451
Work in process 6,591 4,404
Finished goods 5,838 6,573
------- -------
$28,091 $24,428
======= =======
</TABLE>
Property, Plant and Equipment
Property, plant and equipment is recorded at cost, less accumulated
depreciation. Additions and improvements to property and equipment are
capitalized at cost while maintenance and repair expenditures are charged to
operations as incurred. Depreciation is calculated principally by the straight-
line method for financial reporting purposes and accelerated methods for income
tax purposes. For financial reporting purposes, depreciation is provided over
the following estimated useful lives:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Buildings and improvements 10-30
Machinery and equipment 3-8
Furniture, fixtures and office equipment 3-8
</TABLE>
Property, plant and equipment consisted of:
<TABLE>
<CAPTION>
December 31, February 29,
1996 1996
------------ ------------
<S> <C> <C>
Land $ 2,058 $ 1,390
Building and improvements 11,122 7,419
Machinery and equipment 16,882 17,263
Furniture, fixtures and office equipment 7,118 5,559
Construction in progress 5,208 4,709
-------- --------
42,388 36,340
Less - accumulated depreciation and
amortization (15,376) (14,064)
-------- --------
Net property, plant and equipment $ 27,012 $ 22,276
======== ========
</TABLE>
Other Assets
Other assets are being amortized on a straight-line basis over their estimated
useful lives which range from 3 to 12 years. Accumulated amortization was
$8,830 at December 31, 1996, and $7,635 at February 29, 1996. Other assets
consist of the following:
<TABLE>
<CAPTION>
December 31, February 29,
1996, Net 1996, Net
------------ ------------
<S> <C> <C>
Deferred financing costs $ 4,030 $4,471
Patents, trademarks and product lines 657 791
Non-compete agreement 6,048
Other 1,805 4,573
------- ------
$12,540 $9,835
======= ======
</TABLE>
<PAGE>
Revenue Recognition
Revenue is generally recognized upon shipment of goods. At the request of
certain customers, large cryogenic tanks will be accepted by the customer at the
Company's facilities and stored there for later shipment. In these instances,
title passes to the customer upon acceptance and revenue is recognized at that
time.
For the ten months ended December 31, 1996, one of the Company's customers
represented approximately 15% of the Company's net sales. For the year ended
February 29, 1996, no single customer exceeded 10% of the Company's sales.
Research and Development Costs
The Company's policy is to charge all research and development costs to expense
in the period incurred.
Warranty Costs
The Company warrants most of its products against defects in materials and
workmanship under normal use and service for periods extending to five years.
Warranty costs have not been material and the Company accrues estimated costs of
warranty obligations at the time of sale.
Income Taxes
The Company files a consolidated federal income tax return with MVE Holdings,
Inc. The Company is operating under the provisions of a tax sharing arrangement
that requires it to pay taxes to or receive refunds from MVE Holdings, Inc.
based on the Company's taxable income determined as if the Company were a
separate company.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of assets and liabilities and their respective tax bases and
operating loss and tax credit carry forwards. Deferred tax assets and
liabilities are measured using currently enacted tax rates. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Disclosure About Fair Value of Financial Instruments
The carrying amount of accounts receivable and accounts payable approximates
fair value because of the short maturity of those instruments. The fair value
of the long-term debt obligations approximates carrying value based on the
maturity and security of the related obligations.
Long-Lived Assets and Goodwill
In fiscal 1996, the Company adopted Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of". The Statement establishes accounting standards for
the impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets. There was no material effect on the financial
statements from the adoption because the Company's prior impairment recognition
practice was consistent with the major provisions of the Statement. Under
provisions of the Statement, impairment losses are recognized when expected
future cash flows are less than the assets' carrying value. Accordingly, when
indicators of impairment are present, the Company evaluates the carrying value
of property, plant and equipment, intangibles and goodwill in relation to the
operating performance and future undiscounted cash flows of the underlying
business. The Company adjusts the net book value of the underlying assets if
the sum of expected future cash flows in less than book value. Goodwill
represents the cost of acquired businesses in excess of net assets and is being
amortized on a straight-line basis over 5 to 20 years. Accumulated amortization
was $14,487 at December 31, 1996 and $21,129 at February 29, 1996 (See Note 10).
Incentive Stock Option Plan
On March 25, 1996, the Board of Directors approved an incentive stock option
plan which grants 66,800 options to certain key employees and officers of the
Company. The plan vests over a seven-year period, with accelerated vesting upon
achievement of certain operational objectives and other specified events.
Reclassifications
Certain amounts in the financial statements have been reclassified to conform to
the presentation used in the ten months ended December 31, 1996. These
reclassifications had no effect on the Company's financial position or results
of operations.
<PAGE>
Change in Fiscal Year
On January 17, 1997, the Board of Directors of Holdings and MVE adopted a
resolution to change the fiscal year of the Company from the last day in
February to a calendar year. The change in fiscal year is effective for the
fiscal year ended December 31, 1996.
2. Accrued Expenses and Other Liabilities:
Accrued expenses and other liabilities consists of the following:
<TABLE>
<CAPTION>
December 31, February 29,
1996 1996
------------ ------------
<S> <C> <C>
Employee compensation and payroll taxes $ 4,924 $ 3,545
Income taxes 1,732 1,252
Warranty 1,909 1,652
Accrued pension cost 1,741 1,655
Accrued interest 5,366 612
Insurance 1,967 2,446
Deposits and rebates 4,185 1,568
Accrued freight 567
Other 2,591 1,567
------------ ------------
$24,982 $14,205
============ ============
</TABLE>
3. Supplemental Cash Flow Information:
Changes in operating assets and liabilities were as follows:
<TABLE>
<CAPTION>
December 31, February 29, February 28,
1996 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Accounts receivable $ 4,479 $ (7,025) $(9,508)
Inventories (2,700) (6,684) (1,361)
Prepaid expenses and other (329) 56 (140)
Income tax refund receivable (2,372) - 461
Accounts payable (1,264) 4,176 1,700
Accrued expenses and other liabilities 9,580 (1,208) 5,738
------------ ------------ ------------
$ 7,394 $(10,685) $(3,110)
============ ============ ============
</TABLE>
Non-cash Investing and Financing Activities
The Company entered into a non-compete agreement in 1996 for a total of $6,257
with a shareholder of the Company.
Several lease obligations of $2,131 were incurred when the Company entered into
leases for new equipment and furniture.
The Company purchased a building for $500 in exchange for long-term debt.
The Company acquired two companies in 1996 with purchase prices of $1,300 and
$600. The acquisitions were not significant to the consolidated financial
statements.
4. Acquisition:
Effective July 30, 1993, CAIRE INC. (CAIRE), a subsidiary of the Company,
acquired Mountain Medical Equipment, Inc. (MME) through a merger of a subsidiary
of CAIRE with MME. The transaction was accounted for using the purchase method
of accounting. The total purchase price, including acquisition costs of $2,954,
was allocated to the net assets acquired based on fair values at the date of
acquisition. The purchase price exceeded the fair value of net assets acquired
by $7,035. The Company recorded an increase to stockholder's equity of $512 as
the transaction has been reflected as a partial sale of CAIRE's net assets to
the minority stockholders. On March 1, 1995, MME was merged into CAIRE.
Pursuant to the merger agreement:
<PAGE>
a. CAIRE issued 404,027 shares of its Series A Participating Convertible
Preferred Stock (the Preferred Stock) to the Company. The Preferred Stock is
convertible into 404,027 shares of CAIRE's common stock, votes with the
common stock as to all matters and carries a $23.56 per share annual
dividend which is limited to CAIRE's net available cash flow as defined by
the merger agreement. The Preferred Stock has a liquidation preference of
$161.65 per share at February 29, 1996 plus accrued and unpaid dividends,
which will decline over time by the cumulative present value of dividends
actually paid, discounted at 12% per year back to the merger date. The
Preferred Stock must be converted to common stock upon certain events.
b. CAIRE issued 41,924 shares of common stock to the former stockholders of
MME, resulting in a 9% ownership by such stockholders in the combined
company.
c. MME debt held by a third party was amended to be exchangeable under certain
conditions into 29,558 shares of CAIRE common stock.
d. CAIRE's operating results subsequent to July 30, 1993 have been included in
the accompanying consolidated statements of operations.
5. Long-Term Debt:
Certain assets of the Company are pledged as collateral for long-term debt.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, February 29,
1996 1996
------------ ------------
<S> <C> <C>
12.5% senior secured notes, due February 2002, interest payable
semiannually, net of unamortized discounts of $568 and $660 $111,432 $111,340
Revolving credit facility, due February 1998, interest payable monthly
at the reference rate plus .5%, 8.75% at December 31, 1996 6,054 5,910
Bonds, due September 2005, semi-annual principal payments of $345,
plus interest at rates ranging from 2.75% to 15%, 5.84% at
December 31, 1996 6,210 6,900
12.5% non-compete agreement, with semi-annual principal and interest
payments, due November 2006 6,257
7% exchangeable note, including accrued interest, with principal and
accrued interest payable August 1, 1998 5,826 5,551
Industrial Development Revenue Bonds, Series 1996, semi-annual principal
payments of $220, plus interest at variable rates from 3.7% to 12%,
4.3% at December 31, 1996, due June 2011 4,180
10.25% first mortgage note, payable in monthly installments of $14,
including interest, with final payment due July 2003 899 959
10% subordinated debentures, interest payable semiannually, subject to 10%
per year mandatory redemption beginning 1997, balance due May 2001 418 418
Several notes payable with varying principal and interest payments
through April 2012 with interest rates ranging from 6% to 9% 2,085 873
Two revolving foreign loans, with varying principal and interest
payments through November 1997 with interest rates ranging from
6.75% to 8.5% 520
11% subordinated notes, quarterly principal payments of $333 plus
interest due quarterly through March 1996 333
Capitalized leases payable in varying monthly installments through February
2003 with interest rates ranging from 5% to 13% 2,761 882
------------ ------------
Total long-term debt 146,642 133,166
Less- Current maturities 3,633 2,142
------------ ------------
Long-term debt, net of current maturities $143,009 $131,024
============ ============
</TABLE>
The revolving credit facility provides for borrowings and issuance of letters of
credit of up to $20,000, subject to a defined borrowing base of qualified
accounts receivable and eligible inventory. The note is renewable for three-
year periods through June 2001. The Company is charged a monthly fee based on
an annualized rate of .5% of the unused portion of the commitment.
In February 1995, the Company consummated a refinancing plan. As part of this
refinancing plan, the Company issued $112,000 of senior secured notes and
Holdings issued 112,000 common stock warrants, each allowing the holder to
purchase 0.24 shares of Holdings common stock at $0.01 per share. The proceeds
from this refinancing plan were used to retire certain long-term debt of the
Company and make an advance to Holdings of $31,015 to allow it to redeem all
outstanding shares of Holdings 11.32% Cumulative
<PAGE>
Redeemable Preferred Stock ($100 par value per share), and all outstanding
warrants to purchase Holdings common stock. As part of this refinancing, the
Company recognized an extraordinary loss of $1,307, net of a tax benefit of
$871.
The senior secured notes are redeemable at the option of the Company, in whole
or in part, on or after February 15, 2000, at the redemption prices (expressed
as percentages of principal amount) set forth below, plus accrued and unpaid
interest thereon to the redemption dates indicated below:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2000 102.083%
2001 and thereafter 100.000%
</TABLE>
The senior secured notes and revolving credit facility agreements contain
certain covenants which restrict borrowings, dividends, acquisition and
disposition of assets, and require the Company to maintain certain liquidity and
debt coverage ratios. As of December 31, 1996, the Company was in compliance
with, or had obtained amendments and waivers for, its financial covenants.
The scheduled annual maturities of long-term debt at December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1997 $ 3,633
1998 14,658
1999 2,820
2000 2,637
2001 2,812
Thereafter 120,082
--------
$146,642
========
</TABLE>
6. Income Taxes:
Income tax provision (benefit) consists of the following for the periods ended:
<TABLE>
<CAPTION>
Ten Months Fiscal Year
------------ ---------------------------
December 31, February 29, February 28,
1996 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Current:
Federal $ (198) $1,870 $3,081
State (70) 281 303
------- ------ ------
(268) 2,151 3,384
Deferred (2,929) (478) (272)
------- ------ ------
$(3,197) $1,673 $3,112
======= ====== ======
</TABLE>
The differences between income taxes computed using the federal statutory rate
and the provision (benefit) for income taxes were as follows for the periods
ended:
<TABLE>
<CAPTION>
Ten Months Fiscal Years
------------ ---------------------------
December 31, February 29, February 28,
1996 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Income tax provision Benefit at $(8,333) $ 804 $2,779
federal statutory rate
Increase (reduction) attributable to:
Amortization of goodwill 5,161 1,450 1,399
Foreign Sales Corporation benefit (714) (447) (232)
Consent and solicitation fees 422
Change in valuation allowance for (606) (348)
deferred tax asset
State taxes, net of federal benefit (132) 293 180
Other, net 399 179 (666)
------- ------ ------
$(3,197) $1,673 $3,112
======= ====== ======
</TABLE>
<PAGE>
The tax effects of temporary differences that give rise to the net deferred
tax asset were as follows:
<TABLE>
<CAPTION>
December 31, February 29,
1996 1996
------------ ------------
<S> <C> <C>
Accrued Pension 659 684
Accrued Compensation 1,417 615
Accrued Self Insurance Reserve 746 1,140
Aura Write-off 522
Deferred compensation 725
Inventory reserves 1,120 1,851
Depreciable assets (2,494) (2,471)
Loss and credit carryforwards 1,059 551
Warranty reserve 773 712
Other accruals 510 581
Other 367 (1,188)
------ -------
5,404 2,475
Valuation allowance (551) (551)
------ -------
Net deferred tax asset $4,853 $ 1,924
====== =======
</TABLE>
The Company has tax loss carryforwards for income tax purposes. Such tax loss
carryforwards have been reduced in part by a valuation allowance, since
realization of the carryforwards is not deemed more likely than not. The
carryforwards of $1,059 expire in 2001.
7. Employee Benefit Plans:
Pension Plan
The Company maintains two noncontributory defined benefit pension plans covering
substantially all employees of the Company. The benefits to which an employee is
entitled under the plans are derived using a formula based on the number of
years of service and compensation levels during the last five years of service
before retirement. The Company funds the plans in accordance with the
requirements of federal laws and regulations.
The net periodic cost is computed as follows:
<TABLE>
<CAPTION>
December 31, February 29, February 28,
1996 1995 1995
------------ ------------ ------------
<S> <C> <C> <C>
Service cost $ 565 $ 458 $ 414
Interest cost 523 483 407
Actual return on plan assets (950) (1,182) (246)
Net amortization and deferral 497 755 (147)
----- ------- -----
$ 635 $ 514 $ 428
===== ======= =====
</TABLE>
The expected long-term rate of return on plan assets was 8.5% in the ten months
ended December 31, 1996 and in the fiscal years ended February 29, 1996 and
February 28, 1995. The discount rate used for determining fiscal year expense
and the end of the year projected benefit obligation was 7.5% in the ten months
ended December 31, 1996, and in the fiscal year ended February 29, 1996 and 8%
in the fiscal year ended February 28, 1995. Approximately 60% of the plan assets
are invested in equity securities and 40% in bonds as of December 31, 1996.
<PAGE>
The following table sets forth the funded status of the plans:
<TABLE>
<CAPTION>
December 31, 1996 February 29, 1996
----------------------- -------------------------
Service Service
Retirement Related Retirement Related
Income Pension Income Pension
Plan Plan Plan Plan
---------- -------- ---------- -------
<S> <C> <C> <C> <C>
Actuarial present value of:
Vested benefits $4,267 $1,647 $3,597 $1,464
Nonvested benefits 1,202 154 478 90
------ ------ ------ ------
Accumulated Benefit Obligation 5,469 1,801 4,075 1,554
Effect of Anticipated future
compensation levels 2,670 2,158
------ ------ ------ ------
Projected Benefit Obligation 8,139 1,801 6,233 1,554
Plan assets at fair value 6,001 1,656 4,940 1,393
------ ------ ------ ------
Projected Benefit Obligation in
excess of Plan Assets 2,138 145 1,293 161
Unrecognized prior service cost 96 (191) 102 (168)
Unrecognized net transition (asset)
obligation (118) 51 (134) 68
Unrecognized net (loss) gain (519) 115 232 3
Adjustment required to recognize
minimum liability 24 98
------ ------ ------ ------
Accrued Pension Cost $1,597 $ 144 $1,493 $ 162
====== ====== ====== ======
</TABLE>
Savings Plan
The Company has a 401(k) savings plan (the Plan) which covers all employees who
have completed one month of service and attained the age of 21. The Plan
provides for voluntary participant contributions of 1% to 15% of each employee's
wages. The Company may make matching contributions at the discretion of the
Board of Directors. The Company did not make matching contributions to the Plan
in the ten months ended December 31, 1996, or the fiscal years ended February
29, 1996 or February 28, 1995. The Company has approved new 401(k) amendments
which provide for matching contributions of up to 6% of employee's wages.
Deferred Compensation Plan
As of February 29, 1996, the Company had a deferred compensation plan for key
management employees to encourage and reward the continued profitable growth of
the Company. The awards of the plan are capital appreciation units and are made
at the discretion of the board of directors. As of February 29, 1996, 36,000
units were outstanding. Each unit was valued at the date of grant at the board
of directors' discretion and is related to the book value of common stock, as
defined. Units vested over a five-year period, and compensation was payable
under various terms and conditions after the end of the vesting period or in the
event of a sale or public offering, in which case compensation was determined on
fair market value of the units. Amounts accrued under this plan were not
significant at February 29, 1996 and February 28, 1995.
During the ten months ended December 31, 1996, the Company's Board of Directors
approved a deferred compensation plan to replace the existing plan in its
entirety. The new plan awarded deferred compensation to certain key members of
upper management with the objective of retaining their services, encouraging
profitability and rewarding them. The plan awarded 29,270 units to three
individuals which may be exchanged for Common Stock of an equal number at a
future date, given the occurrence of certain events. For the fiscal year ended
December 31, 1996, the Company expensed $1,916 in connection with the adoption
of this plan.
<PAGE>
8. Commitments and Contingencies:
Leases
A portion of the Company's operations is conducted using leased equipment and
facilities. These leases are noncancelable and renewable. Total rental expense
included in the accompanying consolidated statements of operations was
approximately $702, $502 and $738 for the ten months ended December 31, 1996 and
for the fiscal years ended February 29, 1996 and February 28, 1995. The future
minimum rental payments required under these leases are $801 in 1997, $414 in
1998, $239 in 1999, $85 in 2000 and $10 in 2001.
Litigation
The Company is subject to a number of asserted and unasserted potential claims
encountered in the normal course of business. In the opinion of the Company's
management, based on consultation with outside legal counsel, the resolution of
these matters will not have a material adverse effect on the Company's financial
position or results of operations.
9. Segment Reporting and Export Sales:
The operations of the Company are divided into three business segments for
financial reporting purposes. The industrial products segment develops and
manufactures cryogenic storage tanks and transportation equipment and markets
them to producers, distributors and end users of industrial gases. The
distributed products segment develops, manufactures and markets a variety of
products utilizing similar technologies as the industrial products segment, but
markets them through distributors to various commercial markets, principally end
users of bulk liquid CO\\2\\ beverage systems and biological material storage
systems. Also included in the distributed products segment are those emerging
products anticipated to be used in commercial markets including liquid natural
gas systems for vehicle fleets and flat vacuum panels for use in refrigeration
appliances. The medical products segment develops, manufactures and markets a
broad range of medical products, including liquid oxygen systems, oxygen
concentrators and medication nebulizers, all of which are used primarily for the
in-home treatment of patients. Intersegment sales consist of sales of bottles
and reservoirs from the industrial products segment to the medical products
segment. General corporate assets include cash and cash equivalents and income
taxes.
<PAGE>
Financial information by business segment as of and for the ten months ended
December 31, 1996 and the fiscal years ended February 29, 1996 and February 28,
1995 was as follows:
<TABLE>
<CAPTION>
Industrial Distributed Medical Corporate and
Products Products Products Eliminations Total
---------- ----------- -------- ------------- --------
<S> <C> <C> <C> <C> <C>
December 31, 1996:
Customer sales $ 96,519 $36,760 $ 22,467 $155,746
Intersegment sales 1,480 $ (1,480)
-------- ------- -------- -------- --------
Total Sales 97,999 36,760 22,467 (1,480) 155,746
Operating income (loss) 10,208 5,941 (14,737) (12,175) (10,763)
Identifible assets 40,281 24,211 17,382 83,866 165,740
Capital additions 5,286 1,145 2,616 3,367 12,414
Depreciation 751 774 682 962 3,169
Amortization 28 28 1,445 3,121 4,622
February 29, 1996:
Customer sales $ 95,348 $47,064 $ 36,808 $179,220
Intersegment sales 7,808 $ (7,808)
-------- ------- -------- -------- --------
Total sales 103,156 47,064 36,808 (7,808) 179,220
Operating income 11,182 4,757 2,730 5 18,674
Identifiable assets 54,926 40,604 29,361 40,012 164,903
Capital additions 3,594 1,696 1,883 1,211 8,384
Depreciation 748 828 854 1,056 3,486
Amortization 2,393 1,178 1,893 5,464
February 29, 1995:
Customer sales $ 68,692 $33,378 $ 44,410 $146,480
Intersegment sales 9,306 $ (9,306)
-------- ------- -------- -------- --------
Total sales 77,998 33,378 44,410 (9,306) 146,480
Operating income 9,579 4,710 3,762 (172) 17,879
Identifiable assets 53,516 30,431 27,655 38,232 149,834
Capital additions 1,287 5,830 477 7,594
Depreciation 707 1,291 736 281 3,015
Amortization 2,015 924 1,976 4,915
</TABLE>
Export sales from the Company's U.S. operations for the ten months ended
December 31, 1996 and the fiscal years ended February 29, 1996 and February 28,
1995 were as follows:
<TABLE>
<CAPTION>
December 31, February 29, February 28,
1996 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Canada and Mexico $ 6,957 $ 7,999 $ 7,591
Europe 12,407 13,358 8,720
Pacific 24,868 26,434 15,506
Other 7,271 7,497 5,368
------- ------- -------
Total $51,503 $55,288 $37,185
======= ======= =======
</TABLE>
<PAGE>
10. Other Expense:
Other expense recorded in the ten months ended December 31, 1996 include the
following:
<TABLE>
<CAPTION>
<S> <C>
Recapitalization Expenses $ 1,241
Deferred Compensation Plan (Note 7) 1,916
Discontinue AURA product line 1,280
Debt Forgiveness 3,722
Goodwill write-offs 10,824
Other 685
-------
$19,668
=======
</TABLE>
Recapitalization Expenses
In 1996, the Company incurred $1,241 of expenses related to recapitalization of
the Company. These expenses related to consent and solicitation of the holders
of the senior secured notes and legal and accounting fees.
Discontinuance of AURA Product line
The Company wrotedown $1,280 of fixed and other assets, net of debt forgiveness,
related to the discontinuance of the AURA product line, which was included in
the Distributed Products segment. Prior to December 1996, the Company had an
agreement with a third party to participate in a joint venture to product and
market its AURA product line. In December 1996, the Company and the joint
venture partner agreed to discontinue all AURA operating and marketing
activities.
Debt Forgiveness
Prior to December 1996, the Company made loans to a major supplier of components
for its medical oxygen concentrators. The loans were to be repaid through future
purchase credits from the supplier. In December 1996, the Company entered into a
new agreement with the supplier which forgave $3,722 of the debt.
Goodwill Writedown
In December 1996, the Company recorded a goodwill writedown of $10,824 ($4,750
in Industrial Products and $6,074 in the Medical Products segment). In
connection with the change in ownership in 1996, management undertook a
strategic review of all business units. As a result of the review, goodwill was
determined to have been impaired because of the financial condition of certain
medical and industrial business units and the Company's inability to generate
future operating income from these business units. Moreover, anticipated future
cash flow of these business units indicate that the recoverability of the
goodwill is not reasonably assured. Prior to December of 1996, goodwill was
amortized using the straight-line method over twenty years.
11. Fiscal Results for the Ten Months Ended December 31, 1995 (Unaudited)
<TABLE>
<CAPTION>
<S> <C>
Net Sales $144,183
Cost of sales 103,501
--------
Gross profit 40,682
--------
Operating expenses:
Selling and Marketing 8,525
General and administrative 10,867
Research and development 4,654
Amortization 4,539
--------
Total operating expenses 28,585
--------
Operating income 12,097
Interest expense 13,517
Income tax provision 190
--------
Net income $ (1,610)
========
</TABLE>
<PAGE>
12. Related Party Transaction
A director of the Company has an agreement with the Company which pays an annual
fee of $75 in exchange for consulting services. This agreement has a term of one
year, renewable at the option of the Company.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of CAIRE, Inc.:
We have audited the accompanying balance sheet of CAIRE, Inc. (the Company) as
of December 31, 1996, and the related statements of operations, stockholders'
equity (deficit), and cash flows for the ten months then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The financial statements of the Company for the years ended February
29, 1996 and February 28, 1995 were audited by other auditors whose report,
dated April 16, 1996, expressed an unqualified opinion on those statements.
We conducted our audit 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 audit provide a reasonable basis for our opinion.
In our opinion, such financial statements for the ten months ended December 31,
1996, present fairly, in all material respects, the financial position of the
Company as of December 31, 1996, and the results of its operations and its cash
flows for the ten months then ended in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
March 21, 1997
<PAGE>
CAIRE, INC.
Balance Sheets
December 31, 1996 and February 29, 1996
(In Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
December 31, February 29,
1996 1996
------------ ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash $ 6 $ 5
Accounts receivable, net of allowance for
doubtful accounts of $155 and $218 3,407 5,387
Inventories 6,252 7,223
Prepaid expenses 83 305
Deferred Tax Asset 850 572
------------ ------------
Total current assets 10,598 13,492
PROPERTY, PLANT AND EQUIPMENT 6,721 6,313
Less-accumulated depreciation (2,888) (1,636)
------------ ------------
Net property, plant and equipment 3,833 4,677
GOODWILL, net 7,507
OTHER ASSETS, net 845 3,685
------------ ------------
Total assets $15,276 $29,361
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt $ 508 $ 913
Accounts payable 2,703 2,826
Accrued expenses and other liabilities 2,139 2,122
Due to MVE 2,131 923
------------ ------------
Total current liabilities 7,481 6,784
LONG-TERM DEBT, net of current maturities 10,667 10,864
DEFERRED INCOME TAXES 690 296
------------ ------------
Total liabilities 18,838 17,944
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Convertible Preferred Stock, par value $.01, 1,000,000 shares
authorized; 404,027 shares issued and outstanding 3,940 3,940
Common stock, par value $.01, 1,000,000 shares authorized;
41,924 shares issued and outstanding 1 1
Paid-in capital 2,018 2,018
Retained earnings (accumulated deficit) (9,521) 5,458
------------ ------------
Total stockholders' equity (deficit) (3,562) 11,417
------------ ------------
Total liabilities and stockholders' equity (deficit) $15,276 $29,361
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
<PAGE>
CAIRE, INC.
Statements of Operations
For the Ten Months Ended December 31, 1996, and the Years Ended February 29,
1996 and February 28, 1995
(In Thousands)
<TABLE>
<CAPTION>
December 31, February 29, February 28,
1996 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES $ 22,467 $36,808 $44,410
COST OF SALES 16,958 24,718 30,996
-------- ------- -------
Gross profit 5,509 12,090 13,414
-------- ------- -------
OPERATING EXPENSES:
Selling and marketing 2,808 2,854 3,024
General and administrative 4,014 2,645 3,314
Research and development 1,884 1,968 1,338
Amortization 1,445 1,893 1,976
Other expenses (Note 9) 10,095
-------- ------- -------
Total operating expenses 20,246 9,360 9,652
-------- ------- -------
Operating income (loss) (14,737) 2,730 3,762
INTEREST EXPENSE 870 845 591
-------- ------- -------
Income (loss) before income tax
provision (benefit) (15,607) 1,885 3,171
INCOME TAX PROVISION (BENEFIT) (2,549) 837 1,237
-------- ------- -------
Net income (loss) $(13,058) $ 1,048 $ 1,934
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CAIRE, INC.
Statements of Stockholders' Equity (Deficit)
For the Ten Months Ended December 31, 1996, and the Years Ended February 29,
1996 and February 28, 1995
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Common Stock
-------------------
Retained
Convertible Earnings
Preferred Paid-In (Accumu-
Stock Shares Amount Capital lated
deficit) Total
----------- ------- ------ -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, February 28, 1994 $3,940 41,924 $1 $2,018 $ 5,727 $ 11,686
Dividends to MVE (Note 3) (3,251) (3,251)
Net income 1,934 1,934
-------- ------- ------ -------- -------- --------
BALANCE, February 28, 1995 3,940 41,924 1 2,018 4,410 10,369
Net income 1,048 1,048
-------- ------- ------ -------- -------- --------
BALANCE, February 29, 1996 3,940 41,924 1 2,018 5,458 11,417
Net loss (13,058) (13,058)
Excess paid to MVE over
historical cost of net assets
acquired (Note 8) (1,921) (1,921)
-------- ------- ------ -------- -------- --------
BALANCE, December 31, 1996 $3,940 41,924 $1 $2,018 $ (9,521) $ (3,562)
======== ======= ====== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CAIRE, INC.
Statements of Cash Flows
For the Ten Months Ended December 31, 1996, and the
Years Ended February 29, 1996 and February 28, 1995
(In Thousands)
<TABLE>
<CAPTION>
December 31, February 29, February 28,
1996 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(13,058) $ 1,048 $ 1,934
Adjustments to reconcile net income (loss) to net cash
provided by operating activities-
Depreciation and amortization 2,127 2,747 2,712
Deferred income taxes 116 (148) (452)
Interest on exchangeable note payable 274 329 329
Gain on sale of assets (333)
Loss on write-off of assets 464
Loss on write-off of goodwill 6,074
Loss on debt forgiveness 3,722
Change in current assets and liabilities:
Accounts receivable 1,980 2,712 (3,857)
Inventories 1,418 (3,770) 1,296
Prepaid expenses 182 (174) (42)
Accounts payable (407) 45 (744)
Accrued expenses 17 169 (402)
-------- ------- -------
Net cash provided by operating activities 2,909 2,625 774
INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net (2,295) (1,883) (477)
Proceeds from sale of property, plant and equipment 2,974
Increase in other assets (855) (3,238) (450)
-------- ------- -------
Net cash used in investing activities (3,150) (2,147) (927)
FINANCING ACTIVITIES:
Repayments of long-term debt (893) (715) (1,320)
Proceeds from issuance of long-term debt 4,500
Change in amounts due to MVE 1,135 221 144
Dividends paid to MVE (3,251)
-------- ------- -------
Net cash provided by (used in) financing activities 242 (494) 73
-------- ------- -------
Net increase (decrease) in cash 1 (16) (80)
CASH, beginning of year 5 21 101
-------- ------- -------
CASH, end of year $ 6 $ 5 $ 21
======== ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 519 $ 122 $ 462
Cash paid during the year for income taxes 658 1,102
Land acquired through issuance of note payable 873
Furniture acquired through issuance of a capital lease 321
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
CAIRE, INC.
Notes to Financial Statements
December 31, 1996 and February 29, 1996
(In Thousands, Except Share and Per Share Data)
1. Organization and Summary of Significant Accounting Policies:
On July 30, 1993, MVE, Inc. (MVE), a subsidiary of MVE Holdings, Inc.,
contributed all the assets of its Cryogenic Associates division to a newly
established, wholly owned subsidiary, CAIRE, INC. (formerly Cryogenic
Associates, Inc.), a Delaware corporation (CAIRE or the Company). CAIRE
operates a production facility in Minnesota and is engaged in the manufacture,
assembly and distribution of oxygen delivery vehicles, oxygen reservoirs and
ambulatory oxygen systems for oxygen therapy in the home. CAIRE extends credit
to medical product distributors throughout the United States and
internationally.
Effective July 30, 1993, a subsidiary of CAIRE merged with Mountain Medical
Equipment, Inc. (MME). The transaction was accounted for using the purchase
method of accounting. The total purchase price, including acquisition costs of
$2,954, was allocated to the net assets acquired based on fair values at the
date of acquisition. The purchase price exceeded the fair value of net
liabilities acquired by $7,035. On March 1, 1995, MME was merged into CAIRE.
Pursuant to the merger agreement:
a. CAIRE issued 404,027 shares of its Series A Participating Convertible
Preferred Stock (the Preferred Stock) to MVE.
b. CAIRE issued 41,924 shares of common stock to the former stockholders of
MME, resulting in a 9% ownership by such stockholders in the combined
company.
c. MME debt held by a third party was amended to be exchangeable under certain
conditions into 29,558 shares of CAIRE common stock.
MME's operating results subsequent to July 30, 1993 have been included in the
accompanying consolidated statements of operations.
Receivables
Allowance for doubtful accounts consisted of the following for the ten months
ended December 31, 1996 and for the years ended February 29, 1996 and February
28, 1995:
<TABLE>
<CAPTION>
Additions: Write-offs,
Beginning Charged to Net of Ending
Balance Expense Recoveries Balance
--------- ---------- ----------- -------
<S> <C> <C> <C> <C>
February 28, 1995 $195 $184 $ (9) $370
February 29, 1996 370 0 (152) 218
December 31, 1996 218 0 (63) 155
</TABLE>
Inventories
Inventories include material, labor and overhead and are stated at the lower of
cost or market as determined by the first-in, first-out method. Inventories
consist of the following:
<TABLE>
<CAPTION>
December 31, February 29,
1996 1996
------------ ------------
<S> <C> <C>
Purchased materials and subassemblies $4,523 $3,148
Work in process 428 255
Finished goods 1,301 3,820
------ ------
$6,252 $7,223
====== ======
</TABLE>
<PAGE>
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Additions and improvements
to property, plant and equipment are capitalized at cost while maintenance and
repair expenditures are charged to operations as incurred. Depreciation is
calculated principally by the straight-line method for financial reporting
purposes and accelerated methods for income tax purposes. For financial
reporting purposes, depreciation is provided over the following estimated useful
lives:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Buildings and improvements 10-30
Machinery and equipment 3-8
Furniture, fixtures and office equipment 3-8
Property, plant and equipment consisted of:
December 31, February 29,
1996 1996
------------ ------------
Land $1,138
Buildings and improvements $ 58 432
Machinery and equipment 5,552 2,524
Furniture, fixtures and office equipment 889 770
Construction in progress 222 1,449
------------ ------------
6,721 6,313
Less - accumulated depreciation and amortization (2,888) (1,636)
------------ ------------
Net property, plant and equipment $3,833 $4,677
============ ============
</TABLE>
On January 31, 1996, the Company sold land and building related to its Colorado
facility. In March 1996, the Company transferred land and construction costs
totaling $2,315 to MVE. In May 1996, the Company moved into the new production
facility in Minnesota and is leasing the facility from MVE.
Revenue Recognition
Revenue is generally recognized upon shipment of goods. One of the Company's
customers represented approximately 36% in the ten months ended December 31,
1996, two of the Company's customers approximated 38% and 12% in the fiscal
year ended February 29, 1996, and 45% and 10% in the fiscal year ended February
28, 1995 of the Company's net sales.
Research and Development Costs
The Company expenses all research and development costs in the period incurred.
Warranty Costs
The Company warrants most of its products against defects in materials and
workmanship under normal use and service for periods extending to five years.
The Company maintains reserves for warranty costs based on its experiences.
Income Taxes
The Company files a consolidated federal income tax return with MVE and MVE
Holdings, Inc. The Company is operating under the provisions of a tax sharing
arrangement that requires it to pay taxes to or receive refunds from MVE based
on the Company's taxable income determined as if the Company were a separate
company. Income taxes payable or refundable is reflected in the accompanying
consolidated balance sheets as due to MVE.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of assets and liabilities and their respective tax bases and
operating loss and tax credit carry forwards. Deferred tax assets and
liabilities are measured using currently enacted tax rates. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Disclosure About Fair Value of Financial Instruments
The carrying amount of accounts receivable and accounts payable approximates the
fair value because of the short maturity of those instruments. The fair value
of the long-term debt obligations approximates the carrying value based on the
maturity and security of the related obligations.
<PAGE>
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Estimates are used for such items as plant depreciable lives, tax provisions and
reserves, uncollectible accounts and warranty liabilities. As better
information becomes available, or accrual amounts are determinable, the recorded
estimates are revised. Consequently, operating results can be affected by
revisions to prior accounting estimates.
Long-Lived Assets and Goodwill
In fiscal 1996, the Company adopted Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of". The Statement establishes accounting standards for
the impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets. There was no material effect on the financial
statements from the adoption because the Company's prior impairment recognition
practice was consistent with the major provisions of the Statement. Under
provisions of the Statement, impairment losses are recognized when expected
future cash flows are less than the assets' carrying value. Accordingly, when
indicators of impairment are present, the Company evaluates the carrying value
of property, plant and equipment, intangibles and goodwill in relation to the
operating performance and future undiscounted cash flows of the underlying
business. The Company adjusts the net book value of the underlying assets if
the sum of expected future cash flows is less than book value (See Note 9).
Goodwill represents the cost of acquired businesses in excess of net assets and
is being amortized on a straight-line basis over 5 to 20 years. Accumulated
amortization was $5,949 at February 29, 1996.
Reclassifications
Certain amounts in the financial statements for fiscal years ended February 29,
1996 and February 28, 1995 have been reclassified to conform to the presentation
of financial statements for the ten months ended December 31, 1996. These
reclassifications had no effect on the Company's financial position or results
of operations.
Change in Fiscal Year
On January 17, 1997, the Board of Directors of CAIRE, Inc. adopted a resolution
to change the fiscal year of the Company from the last day in February to a
calendar year. The change in fiscal year is effective for the fiscal year ended
December 31, 1996.
2. Accrued Expenses and Other Liabilities:
Accrued expenses and other liabilities consist of the following:
<TABLE>
<CAPTION>
December 31, February 29,
1996 1996
------------ ------------
<S> <C> <C>
Compensation $ 562 $ 223
Warranty 583 536
Interest 760 409
Other 234 954
------ ------
$2,139 $2,122
====== ======
</TABLE>
3. Convertible Preferred Stock:
The Preferred Stock is convertible into 404,027 shares of the Company's common
stock, votes with the common stock as to all matters and carries a $23.56 per
share annual dividend which is limited to the Company's net available cash flow,
as defined by the merger agreement summarized in Note 1. The Company paid
dividends of $3,251 during the year ended February 28, 1995. No dividends were
accrued at December 31, 1996 and February 29, 1996 due to dividends not being
declared by the Company's Board of Directors. The Company is prohibited from
paying common stock dividends until all Preferred Stock dividends are paid. The
Preferred Stock has a liquidation preference of $65,309 at December 31, 1996
plus accrued and unpaid dividends, which will decline over time by the
cumulative present value of dividends actually paid, discounted at 12% per year
back to the merger date. The Preferred Stock must be converted upon the
election of MVE to have certain MME debt converted to common stock or a public
offering by the Company of at least $10,000, reflecting a market capitalization
for the Company of at least $45,000.
<PAGE>
4. Long-Term Debt:
<TABLE>
<CAPTION>
Long-term debt consists of the following:
December 31, February 29,
1996 1996
------------ ------------
<S> <C> <C>
7% exchangeable note payable, including accrued interest, with
principal and interest payable August 1, 1998 $ 5,826 $ 5,551
Unsecured note payable to MVE, due February 1998 or upon default by
MVE under the working capital commitment described below, interest
due quarterly at a bank's reference rate plus 1% (9.25% at
December 31, 1996) 4,500 4,500
Note payable, collateralized by land, due May 1, 1996 873
10% subordinated debentures, interest payable semiannually, subject
to 10% per year mandatory redemption beginning 1997; debentures
mature May 1, 2001 418 418
Capitalized lease obligations, payable in varying monthly
installments through April 1997 with interest rates ranging from
5% to 6% 431 435
------------ -----------
Total debt 11,175 11,777
------------ -----------
Less- current maturities (508) (913)
------------ -----------
Long-term debt $10,667 $10,864
============ ===========
</TABLE>
The Company and MVE have a joint $20,000 working capital agreement which is
collateralized by substantially all the current assets of the Company and MVE.
The interest rate on working capital advances is based upon the prime lending
rate plus .5% for average borrowings of $5,000 or less, plus 1.0% for average
borrowings of between $5,000 and $10,000 and plus 1.5% for average borrowings of
greater than $10,000. The Company's portion of the aggregate outstanding
working capital advances is limited to the lesser of $12,000 or the calculated
borrowing base. The borrowing base consists of "qualified accounts receivable"
and "eligible inventory" as defined by the agreement. The working capital
agreement will expire February 14, 1998. MVE and the Company are charged a
quarterly fee based on an annualized rate of .5% of the unused portion of the
commitment. There are no borrowings outstanding on the working capital
agreement at December 31, 1996 and February 29, 1996. The working capital
agreement contains certain covenants which restrict capital expenditures,
borrowings and disposition of assets. As of December 31, 1996 and February 29,
1996, the Company and MVE were in compliance with or had obtained waivers for
all financial covenants.
The minimum annual maturities of long-term debt at December 31, 1996 are as
follows:
<TABLE>
<S> <C>
1997 $ 508
1998 10,458
1999 52
2000 58
2001 64
Thereafter 35
---------
$11,175
=========
</TABLE>
5. Income Taxes:
Income tax provision (benefit) consists of the following:
<TABLE>
<CAPTION>
December 31, February 29, February 28,
1996 1996 1995
------------ ------------ ------------
Current:
<S> <C> <C> <C>
Federal $(2,445) $ 852 $1,519
State (220) 133 170
------------ ------------ ------------
(2,665) 985 1,689
Deferred 116 (148) (452)
------------ ------------ ------------
$(2,549) $ 837 $1,237
============ ============ ============
</TABLE>
<PAGE>
Income tax provision (benefit) at the federal statutory rate differed from the
effective tax rate as follows for the ten months ended December 31, 1996, and
for the years ended February 29, 1996 and February 28, 1995:
<TABLE>
<CAPTION>
December 31, February 29, February 28,
1996 1996 1995
----------- ------------ ------------
<S> <C> <C> <C>
Income tax provision (benefit) at federal statutory rate $(5,308) $ 641 $1,078
Increase (reduction) attributable to:
Nondeductible goodwill 2,450 643 529
State taxes net of federal benefit (178) 88 112
Change in valuation allowance (606) (348)
Other, net 487 71 (134)
----------- ------------ ------------
Income tax provision (benefit) $(2,549) $ 837 $1,237
=========== ============ ============
</TABLE>
The tax effects of temporary differences that give rise to the net deferred tax
asset were as follows:
<TABLE>
<CAPTION>
December 31, February 29,
1996 1996
------------ ------------
<S> <C> <C>
Accrued compensation $169
Inventory reserves 384 $167
Depreciable assets (690) (296)
Other accruals 76 405
Loss and credit carryforwards 551 551
Warranty reserve 221
------------ ------------
Total deferred tax asset 711 827
Valuation allowance (551) (551)
------------ ------------
Net deferred tax asset $160 $276
============ ============
</TABLE>
6. Employee Benefit Plans:
MVE has two defined benefit pension plans covering certain employees of CAIRE.
Pension expense has been allocated to the Company based on the percentage of
CAIRE employees in each plan and aggregated $200, $81 and $59 for the ten months
ended December 31, 1996, and for the years ended February 29, 1996 and February
28, 1995, respectively. The plans are in compliance with the applicable ERISA
minimum funding requirements.
MVE has a 401(k) savings plan (the Plan) which covers certain employees of CAIRE
who have completed one month of service and attained the age of 21. The Plan
provides for voluntary participant contributions of 1% to 15% of each employee's
wages. MVE may make matching contributions at the discretion of the Board of
Directors. MVE did not make matching contributions to the Plan in the ten months
ended December 31, 1996, or for the years ended February 29, 1996 or February
28, 1995. Approximately 60% of the plan assets are invested in equity securities
and 40% in bonds as of December 31, 1996.
7. Commitments and Contingencies:
Litigation
The Company is subject to a number of asserted and unasserted potential claims
encountered in the normal course of business. In the opinion of management, the
resolution of these matters will not have a material adverse effect on the
Company's financial position or results of operations.
<PAGE>
8. Related-Party Transactions:
During the ten months ended December 31, 1996, the Company purchased from MVE
the medical bottles division for $2,303. The Company recorded net assets of $382
at MVE's historical cost and recorded the amount paid in excess over the
historical cost as a charge to retained earnings.
Prior to March 1, 1996, pursuant to a supply agreement, MVE supplied the Company
with bottles and reservoirs at prices that were subject to adjustment to reflect
changes in steel prices, market conditions, and improvements in productivity by
MVE or the Company. Effective February 29, 1996, the prices that the Company
paid to MVE reflected MVE's actual cost.
Pursuant to a master services agreement, MVE provides the Company with
substantial administrative, financial planning, material management, material
testing, manufacturing support and customer support services. All such services
are provided on a basis that approximates MVE's cost of rendering such services.
Total amounts paid to MVE under the supply agreement and master services
agreement were $3,458, $9,284, and $10,802 in the ten months ended December 31,
1996, and the years ended February 29, 1996 and February 28, 1995, respectively.
The Company participates in a cash management program with MVE. The balance
sheet account, due to MVE, represents amounts due resulting from the cost of
services performed by MVE, inventory purchases from MVE, working capital funded
through MVE and preferred stock dividends (as described in Note 3), net of
excess cash deposited with MVE and tax benefits.
Effective May 1996, the Company began leasing the production facility from MVE.
Rent expense for the ten months ended December 31, 1996 was $304.
9. Other Expenses
Other expenses recorded in the ten months ended December 31, 1996 include the
following:
<TABLE>
<CAPTION>
<S> <C>
Debt Forgiveness $ 3,722
Goodwill write-offs 6,074
Other 299
-------
$10,095
=======
</TABLE>
Debt Forgiveness
Prior to December 1996, the Company made loans to a major supplier of components
for its medical oxygen concentrators. The loans were to be repaid through future
purchase credits from the supplier. In December 1996, the Company entered into a
new agreement with the supplier which forgave $3,722 of the debt.
Goodwill Writedown
In December 1996, the Company recorded a goodwill writedown of $6,074. In
connection with the change in ownership of MVE Holdings, Inc. in 1996,
management undertook a strategic review of all business units. As a result of
the review, goodwill was determined to have been impaired because of the
financial condition of certain medical and industrial business units and the
company's inability to generate future operating income from these business
units. Moreover, anticipated future cash flow of these business units indicate
that the recoverability of the goodwill is not reasonably assured. Prior to
December of 1996, goodwill was amortized using the straight-line method over
20 years.
<PAGE>
EXHIBIT INDEX
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Exhibit
Number
- ---------
3.1 Certificate of Incorporation of MVE Holdings, Inc. as amended
3.2 Certificate of Designations of the 12 1/2% Class A Cumulative
Convertible Participating Preferred Stock of MVE Holdings, Inc.
3.3 Certificate of Designations of the 10% Class B Cumulative Preferred
Stock of MVE Holdings, Inc.
3.4 Bylaws of MVE Holdings, Inc. (1)
3.5 Certificate of Incorporation of MVE, Inc. as amended
3.6 Bylaws of MVE, Inc. as amended
4.1 Indenture with respect to 12 1/2% Senior Secured Notes due 2002 (2)
4.2 Form of 12 1/2% Senior Secured Notes due 2002 (included in Exhibit
4.1) (2)
4.3 Senior Secured Note Pledge Agreements (included in Exhibit 4.1) (2)
4.4 Amendment to Senior Secured Note Pledge Agreements (1)
4.5 Warrant Agreement between MVE Holdings, Inc. and American Bank
National Association, as warrant agent (2)
4.6 Form of Warrant to purchase common stock of MVE Holdings, Inc.
(included in Exhibit 4.5) (2)
10.1 Credit Agreement among Bank One, Milwaukee, National Association,
MVE, Inc. and CAIRE, Inc. (2)
10. Recapitalization Agreement dated July 22, 1996 among MVE Holdings,
Inc., MVE, Inc., MVE Investors LLC and the stockholders of Holdings
named therein
10. First Amendment to Recapitalization agreement dated August 27, 1996
among MVE Holdings, Inc., MVE, Inc., MVE Investors LLC and the
stockholders of Holdings named therein
<PAGE>
10. Joinder Agreement dated August 27, 1996 among MVE Holdings, Inc., MVE,
Inc., MVE Investors LLC and the stockholders of Holdings named therein
10. Stockholders' Agreement dated August 27, 1996 among MVE Holdings, Inc.,
MVE Investors LLC and the continuing stockholders of Holdings named
therein
10. Consulting and Non-Competition Agreement dated August 27, 1996 between
MVE Holdings, Inc. and Robert E. Cieslukowski
10. Non-Competition Agreement dated August 27, 1996 between MVE Holdings,
Inc. and Clemence J. Schoenbauer
10. Employment and Non-Competition Agreement dated August 27, 1996 between
MVE, Inc. and H. Michael Lutgen
10. *Stock Option Agreement dated August 27, 1996 between MVE Holdings, Inc.
and John J. Pint
10. *Loan and Pledge Agreement dated August 27, 1996 between MVE Holdings,
Inc. and John J. Pint
10. *Promissory Note dated August 27, 1996 from John J. Pint to the order of
MVE Holdings, Inc.
10. *1997 Incentive and Stock Option Plan, including form of option
agreement, of MVE Holdings, Inc.
10. *1996 MVE Holdings, Inc. Deferred Stock Bonus Plan
10. [Lease(s) for property described in 10-K]
10. [Loan Agreement with The Burnsville Economic Development Authority]
21 Subsidiaries of Registrants
23 [Consent of Independent Auditors]
* Denotes management contracts and compensatory plans, contracts and
arrangements.
(1) Incorporated by reference to the Registrants' Annual Report or Form
10-K for the fiscal year ended February 29, 1996 (SEC File Number 33-84262)
(2) Incorporated by reference to the Registrants' Annual Report or Form
10-K for the fiscal year ended February 28, 1995 (SEC File Number 33-84262)
