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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
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)
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<S> <C> <C> <C>
Delaware 41-1641718 Delaware 41-1396485
(State or other jurisdiction (I.R.S. employer (State or other jurisdiction (I.R.S. employer
of incorporation or identification no.) of incorporation or identification no.)
organization) organization)
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3505 County Road 42 West
Burnsville, MN 55306
(Address of principal executive offices)
Registrants' telephone number, including area code: (612) 882-5000
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. [X] 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 December 31, 1997: Not
provided.
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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 include 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
- -80degreesF), 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. On February 2, 1998, the Company
purchased all shares of CAIRE common stock owned by a third party. Subsequent
to this transaction, the Company owns 97% of the outstanding shares of CAIRE
capital stock.
The Company and Holdings have the same principal place of business, which is
located at 3505 County Road 42 West, Burnsville, Minnesota 55306-3803, telephone
612-882-5000.
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, environmental test chambers, and transportation
equipment and provides related services to producers, distributors, and end
users of liquid industrial gases such as oxygen, nitrogen, argon, hydrogen,
helium, and CO2. 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. Food processing companies and semiconductor
manufacturers also represent a significant customer base for Industrial
Products' direct sales.
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
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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 CO2
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 CO2 systems. The
Company's beverage systems are sold to fast food franchisers, soft drink
companies, and CO2 distributors.
The Company's primary competitors for its bulk liquid CO2 beverage delivery
systems are producers of high pressure gaseous CO2 systems and sellers of bulk
liquid CO2 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 CO2 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 vacuum
insulated vessels used by hospitals, medical laboratories, and research
facilities to transport and store human organs, tissue samples, and other
temperature-sensitive biological matter.
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, the Company has developed and sells vacuum insulated containers for
liquid natural gas (LNG) storage and fueling systems for centrally fueled fleets
of vehicles powered by LNG (such as fleets operated by metropolitan
transportation authorities, refuse haulers, railroads, and utilities).
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.
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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.
YEAR 2000
The Company has conducted a review of its computer systems to identify those
areas that could be affected by the "Year 2000" issue and is developing an
implementation plan to resolve the issue. The Company presently believes, with
modification to existing software and converting to new software, the Year 2000
problem will not pose significant operational problems. The incremental costs
of this project will not have a material effect on the company's consolidated
financial statements.
ITEM 2. PROPERTIES.
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Not provided.
ITEM 3. LEGAL PROCEEDINGS.
-----------------
Not provided.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
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Not provided.
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PART II
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ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER
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 December 31, 1997 there were fourteen stockholders of
Holdings Common Stock, one stockholder of Holdings Preferred Class A Stock, and
four 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.
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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.
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Holdings
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Fiscal Year Fiscal Year Fiscal Year Ten Months Fiscal Year
Ended Ended Ended Ended Ended
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February 28, February 28, February 29, December 31, December 31,
1994(1)(4) 1995(2)(4) 1996(4) 1996(3)(4) 1997(4)
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(Dollars in Thousands)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net Sales $116,353 $146,480 $179,220 $ 155,746 $192,726
Cost of Sales 80,042 100,394 128,196 113,875 137,736
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Gross profit 36,311 46,086 51,024 41,871 54,990
Selling, general and administrative expenses 17,359 20,500 22,169 25,296 32,150
Research and development 2,827 2,792 4,718 3,047 5,989
Amortization and other nonrecurring expense 6,455 4,915 5,463 26,595 4,193
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Operating income (loss) 9,670 17,879 18,674 (13,067) 12,658
Interest expense 9,930 9,878 16,305 13,742 17,069
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Income (loss) net before income tax expense
(benefit), minority interest, and
extraordinary item (260) 8,001 2,369 (26,809) (4,411)
Income tax expense (benefit) (1,431) 3,112 1,673 (3,197) (3,398)
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Income (loss) before minority interest and
extraordinary item 1,171 4,889 696 (23,612) (1,013)
Minority interest in net income (loss) (26) (172) 5 (949) 48
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Income (loss) before extraordinary item 1,197 5,061 691 (22,663) (1,061)
Extraordinary loss (1,307)
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Net income (loss) $ 1,197 $ 3,754 $ 691 $ (22,663) $ (1,061)
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OTHER DATA:
Gross margin 31.2% 31.5% 28.5% 26.9% 28.5%
EBITDA $ 18,676 $ 25,981 $ 27,619 $ (4,327) $ 20,221
EBITDA Margin 16.1% 17.7% 15.4% (2.8)% 10.5%
Depreciation and amortization $ 8,980 $ 7,930 $ 8,950 $ 7,791 $ 7,611
Capital expenditures $ 1,838 $ 7,594 $ 8,384 $ 12,414 $ 7,010
CONSOLIDATED BALANCE SHEET DATA
(END OF PERIOD):
Total assets $103,195 $118,819 $133,888 $ 142,176 $136,782
Current assets 36,723 48,149 62,518 76,623 67,412
Long-term debt, net of current maturities 73,824 119,952 131,024 143,009 140,669
Holdings Preferred Stock 15,797 57,582 64,438
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_________________________
(1) The Holdings Preferred Stock issued as of February 28, 1994 was redeemed in
Fiscal 1995
(2) 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.
(3) 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.
(4) EBITDA has been adjusted to include minority interest in net income (loss).
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
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SUMMARY
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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 CO2 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 CO2 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 CO2 systems to bulk liquid CO2 systems.
RESULTS OF OPERATIONS
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Years Ended December 31, 1997 and 1996
NET SALES
Net sales for the year ended December 31, 1997 increased 1.0% to $192.7 million
from $190.8 million for the year ended December 31, 1996.
Industrial Products: Net sales for the year ended December 31, 1997 increased
3.9% to $121.2 million from $116.7 million for the year ended December 31, 1996.
The increase is primarily attributable to the Company's acquisitions in August
and November 1996 of subsidiaries located in China and Australia with sales of
$11.3 million and $1.2 million for the years ended December 31, 1997 and 1996,
respectively. Sales of small pressure vessels and vacuum insulated pipe
increased $2.7 million and $1.5 million, respectively. The Orca and
Environmental Chambers product lines were introduced in 1997 which increased
sales $2.0 million and $1.9 million, respectively. These increases were offset
by a $14.5 million decrease in bulk tank sales resulting from the major gas
producers reducing their tank inventory in 1997.
Distributed Products: Net sales for the year ended December 31, 1997 decreased
2.4% to $45.2 million from $46.3 million for the year ended December 31, 1996.
The decrease is primarily attributable to decreases in AURA panel sales. Sales
of AURA panels were $2.2 million and $.1 million in the years ended December 31,
1997 and 1996, respectively. The sales of Aura panels have been discontinued.
Bulk CO2 and liquid natural gas products sales increased approximately $1.6
million and biological storage systems sales decreased $.5 million from 1996 to
1997.
Medical Products: Net sales for the year ended December 31, 1997 decreased 5.4%
to $26.3 million from $27.8 million for the year ended December 31, 1996. The
decrease is primarily attributable to decreases in price resulting from a
competitive market.
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GROSS MARGIN
Gross margin (expressed as a percent of net sales) increased to 28.5% for the
year ended December 31, 1997 from 27.4% for the year ended December 31, 1996.
Industrial Products: Gross margin increased to 24.8% for the year ended December
31, 1997 from 22.9% for the year ended December 31, 1996. The increase is
attributable to changes in the mix of products sold and decreased manufacturing
costs.
Distributed Products: Gross margin increased to 40.4% for the year ended
December 31, 1997 from 40.2% for the year ended December 31, 1996.
Medical Products: Gross margin decreased to 25.2% for the year ended December
31, 1997 from 25.3% for the year ended December 31, 1996.
OPERATING EXPENSES
Operating expenses for the year ended December 31, 1997 were $42.3 million
compared to $58.8 million for the year ended December 31, 1996. The decrease 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 and a $1.5 million decrease
resulting from discontinuing the AURA product line. These decreases were offset
by an increase of $2.1 million associated with the expansion of the Company's
business into the Pacific Rim and Europe, $1.2 million incurred by a company
acquired in 1997 and development of the new Bulk Oil product line. Other net
spending increased approximately $3.7 million.
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 in
1996, operating expenses for the year ended December 31, 1997 increased $5.5
million from the same period one year ago.
OPERATING INCOME
Operating income was $12.7 million for the year ended December 31, 1997 compared
to an operating loss of $(6.6) million for the year ended December 31, 1996. The
increase in operating income is primarily attributable to the factors noted in
the Net Sales and Operating Expense discussions above .
INTEREST EXPENSE
Interest expense was $17.6 million for the year ended December 31, 1997 compared
to $17.4 million in the year ended December 31, 1996.
INCOME TAXES
The benefit from income taxes was $3.4 million for the year ended December 31,
1997 compared to $1.7 million for the year ended December 31, 1996. The
effective tax rate for the years ended December 31, 1997 and 1996 was different
from the statutory rate as a result of various permanent differences (see Note
6 to the Financial Statements).
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NET LOSS
Net loss before preferred dividends for the year ended December 31, 1997 was
$1.1 million compared to a net loss of $20.3 million for the year ended
December 31, 1996.
EBITDA
EBITDA (earnings before interest, income taxes, depreciation and amortization)
was $20.2 million for the year ended December 31, 1997 compared to $4.1 million
or 2.1% of net sales for the year ended December 31, 1996. The increase 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 year ended
December 31, 1996 was $26.1 million.
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 CO2 sales, offset by significant decreases in AURA panel sales.
Sales of AURA panels were $.9 million 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 $22.4 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.
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OPERATING EXPENSES
Operating expenses for the ten months ended December 31, 1996 were $54.9 million
compared to $28.5 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.
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 million 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 $.2 million 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 LOSS
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.
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LIQUIDITY AND CAPITAL RESERVES
- ------------------------------
Cash Flow was $(4.6) million, $9.2 million and $.8 million, respectively for the
periods ended December 31, 1997 and 1996 and February 29, 1996.
CASH FLOW FROM OPERATING ACTIVITIES
Cash flow provided by or (used in) operating activities was approximately $4.6
million, $8.4 million, and $(1.5) million for the periods ended December 31,
1997 and 1996, and Fiscal 1996, respectively. Working capital was $16.9
million, $29.9 million and $27.8 million, respectively at December 31, 1997 and
1996 and February 29, 1996.
CASH FLOW FROM INVESTING ACTIVITIES
For the periods ended December 31, 1997 and 1996 and Fiscal 1996, Holdings had
approximately $6.4 million, $9.8 million and $8.4 million in capital
expenditures, respectively. For the periods ended December 31, 1997 and 1996,
Holdings invested $.4 million and $2.6 million in non-cash capital expenditures.
The expenditures in the periods ended December 31, 1997 and 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 include replacement equipment for existing
manufacturing processes, tooling for new products and capital expenditures
related to the AURA flat vacuum panel project.
CASH FLOW FROM FINANCING ACTIVITIES
Cash flow provided by (used in) financing activities was approximately $(2.6)
million, $10.6 million and $10.9 million in the periods ended December 31, 1997
and 1996 and Fiscal 1996, respectively. Cash flow from financing 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.
The agreement governing the revolving credit facility expires in October 2000
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 EBITDA. 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 with all covenants included in the agreement governing the revolving
credit facility and the indenture as of December 31, 1997.
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 1,061 shares of Common Stock held by certain shareholders,
Holdings issued 13 shares of 10% Series B Redeemable Preferred Stock in 1997.
In 1996, 66,406 shares of Common Stock were exchanged for 833 shares of Series B
Redeemable Preferred Stock.
In 1997, Holdings purchased 430 of its outstanding warrants for $30.10944 per
warrant. In 1996, Holdings purchased 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.
<PAGE>
Holdings accrued, but did not declare or pay, dividends of $9.5 million and $2.3
million to the holders of Holdings Preferred Stock as of December 31, 1997 and
1996.
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 audit of the fiscal year ended February 29, 1996, 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 year ended February 29, 1996, 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
- -------------------
Not provided.
<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, 1997 and 1996
MVE Holdings, Inc. and Subsidiaries Consolidated Statements of Operations for
the Year Ended December 31, 1997, the Ten Months Ended December 31, 1996, and
Year Ended February 29, 1996
MVE Holdings, Inc. and Subsidiaries Consolidated Statements of Stockholders'
Equity (Deficit) for the Year Ended December 31, 1997, the Ten Months Ended
December 31, 1996, and Year Ended February 29, 1996
MVE Holdings, Inc. and Subsidiaries Consolidated Statements of Cash Flows for
the Year Ended December 31, 1997, the Ten Months Ended December 31, 1996, and
Year Ended February 28, 1996
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, 1997
and 1996
MVE, Inc. and Subsidiaries Consolidated Statements of Operations for the Year
Ended December 31, 1997, the Ten Months Ended December 31, 1996, and Year Ended
February 29, 1996
MVE, Inc. and Subsidiaries Consolidated Statements of Stockholder's Equity
(Deficit) for the Year Ended December 31, 1997, the Ten Months Ended December
31, 1996, and Year Ended February 29, 1996
MVE, Inc. and Subsidiaries Consolidated Statements of Cash Flows for the Year
Ended December 31, 1997, the Ten Months Ended December 31, 1996, and Year Ended
February 29, 1996
Notes to MVE, Inc. and Subsidiaries Consolidated Financial Statements
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of MVE Holdings, Inc.
We have audited the accompanying consolidated balance sheets of MVE Holdings,
Inc. and subsidiaries (Holdings) as of December 31, 1997 and 1996 and the
related consolidated statements of operations, stockholders' deficit, and cash
flows for the year ended December 31, 1997 and the ten month period ended
December 31, 1996. 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 audits. The
consolidated financial statements of Holdings for the year ended February 29,
1996 were audited by other auditors whose report, dated April 16, 1996,
expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Holdings as of December 31, 1997
and 1996 and the results of its operations and its cash flows for the periods
then ended in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Minneapolis, Minnesota
March 6, 1998
<PAGE>
MVE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------------- -------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,864 $ 10,505
Accounts receivable, net of allowance for doubtful accounts 28,838 26,958
Inventories 24,774 28,091
Prepaid expenses 1,319 1,227
Income tax refund receivable 1,013 3,102
Deferred income taxes 5,604 6,740
------------------- -------------------
Total current assets 67,412 76,623
PROPERTY, PLANT AND EQUIPMENT 48,640 42,388
Less- Accumulated depreciation and amortization (18,765) (15,376)
------------------- -------------------
Net property, plant and equipment 29,875 27,012
GOODWILL, net 24,471 26,001
DEFERRED INCOME TAXES 3,483
OTHER ASSETS, net 11,541 12,540
------------------- -------------------
Total assets $ 136,782 $ 142,176
=================== ===================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term debt $ 9,858 $ 3,633
Accounts payable 18,297 18,090
Accrued expenses and other liabilities 22,376 24,988
------------------- -------------------
Total current liabilities 50,531 46,711
LONG-TERM DEBT, net of current maturities 140,669 143,009
DEFERRED INCOME TAXES 1,887
OTHER NONCURRENT LIABILITIES 94 42
------------------- -------------------
Total liabilities 191,294 191,649
MINORITY INTEREST 368 320
SERIES A CONVERTIBLE REDEEMABLE PREFERRED STOCK 55,388 48,973
SERIES B REDEEMABLE PREFERRED STOCK 9,050 8,609
STOCKHOLDERS' DEFICIT:
Notes receivable from shareholders (2,225) (2,000)
Common stock, no par value, stated value
$.01 per share, 1,500,000 shares
authorized; 149,068 and 175,502 shares
issued and outstanding, respectively 2 2
Additional paid-in capital 1,417 1,417
Common stock warrants 165 168
Accumulated deficit (118,677) (106,962)
------------------- -------------------
Total stockholders' deficit (119,318) (107,375)
------------------- -------------------
Total liabilities and stockholders' deficit $ 136,782 $ 142,176
=================== ===================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
MVE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Year Ended December 31, 1997, the Ten Months Ended December 31, 1996,
and the Year Ended February 29, 1996
(In Thousands)
<TABLE>
<CAPTION>
December 31, December 31, February 29,
1997 1996 1996
------------------ ---------------- ----------------
<S> <C> <C> <C>
NET SALES $192,726 $155,746 $179,220
COST OF SALES 137,736 113,875 128,196
------------------ ----------------- ------------------
Gross profit 54,990 41,871 51,024
OPERATING EXPENSES:
Selling and marketing 13,925 9,855 11,039
General and administrative 18,225 15,441 11,130
Research and development 5,989 3,047 4,718
Amortization 4,193 4,623 5,463
Other expenses (Note 10) 21,972
------------------ ----------------- ------------------
Total operating expenses 42,332 54,938 32,350
------------------ ----------------- ------------------
Operating income (loss) 12,658 (13,067) 18,674
INTEREST INCOME 562 145 47
INTEREST EXPENSE (17,631) (13,887) (16,352)
------------------ ----------------- ------------------
Income (loss) before income tax
benefit (expense) and minority interest (4,411) (26,809) 2,369
INCOME TAX BENEFIT (EXPENSE) 3,398 3,197 (1,673)
------------------ ----------------- ------------------
Income (loss) before minority interest (1,013) (23,612) 696
MINORITY INTEREST IN NET (INCOME) LOSS (48) 949 (5)
------------------ ----------------- ------------------
Net income (loss) (1,061) (22,663) 691
PREFERRED STOCK DIVIDENDS (7,216) (2,251)
------------------ ----------------- ------------------
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS
$ (8,277) $(24,914) $ 691
================== ================= ==================
</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 Year Ended December 31, 1997, the Ten Months Ended December 31, 1996,
and the Year Ended February 29, 1996
(In Thousands)
<TABLE>
<CAPTION>
Notes Common Stock
Receivable -------------------- Additional Common Accumu- Total Stock-
From Number Paid - In Stock lated holder's
Shareholders of shares Amount Deficit Warrants Deficit Deficit
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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 for preferred stock (66) (1) (8,330) (8,331)
Deferred compensation plan 1,866 1,866
Other 71 71
Net loss (22,663) (22,663)
---------------------------------------------------------------------------------------------
BALANCE, December 31, 1996 (2,000) 176 2 1,417 168 (106,962) (107,375)
Interest on notes receivable from
shareholders (225) (225)
Preferred stock dividend (7,216) (7,216)
Purchase of common stock warrants
(3) (10) (13)
Purchase of treasury stock (26) (3,183) (3,183)
Exchange for preferred stock (1) (133) (133)
Translation adjustment (30) (30)
Excess of additional pension
liability over unrecognized
prior service cost (82) (82)
Net loss (1,061) (1,061)
---------------------------------------------------------------------------------------------
BALANCE, December 31, 1997 $(2,225) 149 $ 2 $1,417 $ 165 $(118,677) $(119,318)
=============================================================================================
</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 Year Ended December 31, 1997, the Ten Months Ended December 31, 1996,
and the Year Ended February 29, 1996
(In Thousands)
<TABLE>
<CAPTION>
December 31, December 31, February 29,
1997 1996 1996
------------------ ----------------- ------------------
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net (loss) income before extraordinary item and
preferred stock dividends $ (1,061) $ (22,663) $ 691
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities-
Depreciation and amortization 7,611 7,791 8,950
Minority interest 48 (949) 5
Interest on exchangeable debt 329 274 329
Deferred income tax benefit (4,234) (2,929) (478)
Loss (gain) on sale of assets, net 22 (323)
Loss on write-off of assets 2,768
Loss on write-off of goodwill 10,824
Loss on debt forgiveness 95 3,722
Changes in other non-current assets and liabilities 672 2,114
Changes in operating assets and liabilities (Note 3) 1,098 7,419 (10,685)
------------------ ----------------- ------------------
Net cash provided by (used in) operating activities 4,580 8,371 (1,511)
INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net (6,372) (9,783) (8,384)
Proceeds from sale of assets 373 107 3,011
Increase in other assets (660) (750) (3,954)
Cash acquired from acquisitions 687
------------------ ----------------- ------------------
Net cash used in investing activities (6,659) (9,739) (9,327)
FINANCING ACTIVITIES:
Borrowings under revolving credit facility 210,673 174,266 197,201
Repayments under revolving credit facility (205,870) (174,121) (191,771)
Repayment of long-term debt (2,876) (2,489) (3,228)
Borrowings of long-term debt 10 4,680 8,299
Deferred closing costs (862) (314)
Proceeds from preferred stock sale 47,000
Purchase of preferred stock (493)
Purchase of treasury stock (3,183) (33,638)
Purchase of common stock warrants (13) (2,638)
Notes receivable from shareholders (2,000)
Changes in other noncurrent assets and liabilities 52 (179) 419
------------------ ----------------- ------------------
Net cash provided by (used in) financing activities (2,562) 10,567 10,920
------------------ ----------------- ------------------
Net increase (decrease) in cash and cash equivalents (4,641) 9,199 82
CASH AND CASH EQUIVALENTS, beginning of year 10,505 1,306 1,224
------------------ ----------------- ------------------
CASH AND CASH EQUIVALENTS, end of year $ 5,864 $ 10,505 $ 1,306
================== ================= ==================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 16,275 $ 9,037 $ 15,846
Cash paid (received) during the year for income taxes $ (1,260) $ 1,626 $ 3,306
</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 Year Ended December 31, 1997, the Ten Months Ended December 31, 1996,
and the Year Ended February 29, 1996
(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. 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 CO2 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 $3,695 and $1,030 at
December 31, 1997 and 1996, respectively.
RECEIVABLES
Accounts receivable, net of allowance for doubtful accounts, consisted of the
following as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
----------------- -----------------
<S> <C> <C>
A/R trade $27,601 $26,785
A/R other 1,776 389
Notes receivable 289 672
----------------- -----------------
29,666 27,846
Allowance (828) (888)
----------------- -----------------
$28,838 $26,958
================= =================
</TABLE>
Allowance for doubtful accounts consisted of the following for the year ended
December 31, 1997, the ten months ended December 31, 1996 and for the year ended
February 29, 1996:
<TABLE>
<CAPTION>
Additions: Write-offs,
Beginning Charged to net of Ending
Balance Expense Recoveries Balance
----------------- ------------------ ------------------ --------------
<S> <C> <C> <C> <C>
February 29, 1996 $769 $221 $(315) $675
December 31, 1996 675 168 45 888
December 31, 1997 888 434 (494) 828
</TABLE>
<PAGE>
INVENTORIES
Inventories include material, labor and overhead at standard cost 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, 1997 December 31, 1996
------------------ ------------------
<S> <C> <C>
Inventories at cost:
Purchased materials and subassemblies $14,710 $17,522
Work in process 6,401 6,591
Finished goods 5,115 6,070
------------------ ------------------
26,226 30,183
Reserves (1,452) (2,092)
------------------ ------------------
$24,774 $28,091
================== ==================
</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:
Years
-------
Buildings and improvements 10 - 30
Machinery and equipment 3 - 8
Furniture, fixtures and office equipment 3 - 8
Property, plant and equipment consisted of:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------ ------------------
<S> <C> <C>
Land $ 1,925 $ 2,058
Buildings and improvements 13,750 11,122
Machinery and equipment 23,086 16,882
Furniture, fixtures and office equipment 8,995 7,118
Construction in progress 884 5,208
------------------ ------------------
48,640 42,388
Less - accumulated depreciation and amortization (18,765) (15,376)
------------------ ------------------
Net property, plant and equipment $ 29,875 $ 27,012
================== ==================
</TABLE>
<PAGE>
OTHER ASSETS
Other assets are being amortized on a straight-line basis over their estimated
useful lives which range from 2 to 30 years. Accumulated amortization was
$10,821 at December 31, 1997 and $8,830 at December 31, 1996. Other assets net
of accumulated amortization consist of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------------- -------------------
<S> <C> <C>
Deferred financing costs $ 3,993 $ 4,030
Patents, trademarks and product lines 491 747
Noncompete agreements 5,480 6,048
Other 1,577 1,715
------------------- -------------------
$11,541 $12,540
=================== ===================
</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 year ended December 31, 1997, one of Holdings' customers represented
approximately 11% of Holdings' net sales. For the ten months ended December 31,
1996, one of Holdings' customers represented approximately 15% of Holdings' net
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 seven 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.
LONG-LIVED ASSETS AND GOODWILL
In fiscal 1996, Holdings 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 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, Holdings 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. Holdings 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 $16,565 at December 31,
1997 and $14,487 at December 31, 1996 (see Note 10).
STOCK OPTION PLAN
In 1997, the Board of Directors approved a stock option plan (the "Plan"). A
total of 100,000 shares of Holdings' common stock were reserved for issuance
pursuant to the exercise of options granted under the Plan. Under the Plan,
options to purchase shares of Holdings' common stock may be granted at a price
not less than 100% of the fair market value of the stock at the date of grant.
All options expire ten years from the date of grant.
<PAGE>
RECLASSIFICATIONS
Certain reclassifications have been made to prior periods' financial statements
to conform to the current year presentation. 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 Holdings from the last day in February
to a calendar year. The change in fiscal year is effective for the ten months
ended December 31, 1996.
2. ACCRUED EXPENSES AND OTHER LIABILITIES:
Accrued expenses and other liabilities consists of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------------ ------------------
<S> <C> <C>
Employee compensation and payroll taxes $ 2,814 $ 4,924
Income taxes 2,892 1,732
Warranty 1,930 1,909
Accrued pension cost 2,374 1,741
Accrued interest 5,422 5,366
Insurance 2,092 1,967
Deposits and rebates 2,429 4,185
Accrued freight 471 567
Other 1,952 2,597
------------------ ------------------
$22,376 $24,988
================== ==================
</TABLE>
3. SUPPLEMENTAL CASH FLOW INFORMATION:
Changes in operating assets and liabilities were as follows:
<TABLE>
<CAPTION>
December 31, December 31, February 29,
1997 1996 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Accounts receivable $(2,840) $ 4,479 $ (7,025)
Inventories 4,042 (2,700) (6,684)
Prepaid expenses and other (89) (329) 56
Income tax refund receivable 3,517 (2,372)
Accounts payable 680 (1,245) 4,176
Accrued expenses and other liabilities (4,212) 9,586 (1,208)
--------------- --------------- ---------------
$ 1,098 $ 7,419 $(10,685)
=============== =============== ===============
</TABLE>
NON-CASH INVESTING AND FINANCING ACTIVITIES
Several lease and note obligations of $364 and $2,131 were incurred when
Holdings entered into leases or notes for new equipment, vehicles and furniture
in 1997 and 1996, respectively.
The Company acquired two companies in 1997 with purchase prices of $1,000 and
$300. In 1996, the Company acquired two companies with purchase prices of
$1,300 and $600. The acquisitions were not significant to the consolidated
statements of cash flows.
In 1996, Holdings entered into a non-compete agreement for a total of $6,257
with a shareholder of the Company.
In 1997 and 1996, 1,061 and 66,406 shares of Common Stock were exchanged for 13
and 833 shares of 10% Class B Preferred Stock, respectively. Each share has a
liquidation preference of $10,000 plus accrued and unpaid dividends.
In 1996, Holdings purchased a building for $500 in exchange for long-term debt.
<PAGE>
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:
Certain assets of Holdings are pledged as collateral for long-term debt. Long-
term debt consists of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------------ ------------------
<S> <C> <C>
12.5% senior secured notes, due February 2002,
interest payable semiannually, net
of unamortized discounts of $458 and $568 $111,542 $111,432
Revolving credit facility, due February 1998,
interest payable monthly at the
reference rate plus .5%, 8.75% at December 31, 1996 0 6,054
Revolving credit facility, due October 2000,
interest payable monthly at LIBOR,
8.375% for the first $10 million and
9% for any additional borrowing 10,857 0
Bonds, due September 2005, semi-annual
principal payments of $345, plus interest
at rates ranging from 2.75% to 9%, 5.85% at December 31, 1997 5,520 6,210
12.5% non-compete agreement, with semi-annual
principal and interest payments, due
November 2006 6,864 6,257
7% exchangeable note, including accrued
interest, with principal and accrued
interest payable August 1, 1998 (see Note 14) 6,155 5,826
Industrial Development Revenue Bonds,
Series 1996, semi-annual principal payments
of $220, plus interest at variable
rates from 3.7% to 12%, 4.25% at December 31,
1997, due June 2011 3,740 4,180
10.25% first mortgage note, payable in monthly
installments of $14, including
interest, with final payment due November 2004 821 899
10% subordinated debentures, interest payable
semiannually, subject to 10% per year
mandatory redemption beginning 1997, balance due May 2001 84 418
Several notes payable with varying principal
and interest payments through April
2012 with interest rates ranging from 6% to 10% 2,129 2,085
Revolving foreign loan, with varying
principal and interest payments through 1998
with interest rates ranging from 5.8% to 10.5% 400 520
Capitalized leases payable in varying
monthly installments through February 2003
with interest rates ranging from 5% to 10.25% 2,415 2,761
------------------ ------------------
Total long-term debt 150,527 146,642
Less- Current maturities 9,858 3,633
------------------ ------------------
Long-term debt, net of current maturities $140,669 $143,009
================== ==================
</TABLE>
The revolving credit facility provides for borrowings and issuances of Letters
of Credit of up to $30,000 subject to a defined borrowing base of qualified
accounts receivable and eligible inventory. The revolving credit facility is
renewable annually for three year periods through October 2000. Holdings is
charged a monthly fee based on an annualized rate of .375% of the unused portion
of the commitment. The interest rate is variable and contains a LIBOR and base
rate option at the election of the Company. At December 31, 1997, $10,000 of the
outstanding balance was subject to a LIBOR based rate of 8.375%. The remaining
$857 carried a base rate of 9%. The credit facility contains certain covenants
with respect to capital expenditures, borrowings and disposition of assets. As
of December 31, 1997, the Company was in compliance with all financial
covenants.
In 1996, the revolving credit facility provided 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 was renewable
for three-year periods through June 2001. Holdings was 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 $112,000 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 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.
<PAGE>
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
- ------------------- -----------------
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, 1997, Holdings was in compliance with
its financial covenants.
The scheduled annual maturities of long-term debt at December 31, 1997 (see Note
14) are as follows:
Year Amount
- ------------------- ----------------
1998 $ 9,858
1999 3,015
2000 13,580
2001 2,832
2002 115,349
Thereafter 5,893
----------------
$150,527
================
Long-term debt, including current maturities, has a carrying value of $150,527
and a fair value of $169,717. The estimated fair value represents the present
value of debt service at rates currently available to the Company for issuance
of debt with similar terms. Except for the above, all financial instruments are
carried at amounts that approximate estimated fair value.
6. INCOME TAXES:
Income tax expense (benefit) consists of the following for the periods ended:
<TABLE>
<CAPTION>
Fiscal Year 10 Months Fiscal Year
----------------- ----------------- ------------------
December 31, December 31, February 29,
1997 1996 1996
----------------- ----------------- ------------------
<S> <C> <C> <C>
Current:
Federal $ 779 $ (198) $1,870
State 57 (70) 281
------------------ ----------------- ------------------
836 (268) 2,151
Deferred (4,234) (2,929) (478)
------------------ ----------------- ------------------
$(3,398) $(3,197) $1,673
================== ================= ==================
</TABLE>
<PAGE>
The differences between income taxes computed using the federal statutory rate
and the expense (benefit) for income taxes were as follows for the periods
ended:
<TABLE>
<CAPTION>
Fiscal Year 10 Months Fiscal Year
----------------- ----------------- -----------------
December 31, December 31, February 29,
1997 1996 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Income tax provision (benefit) at federal
statutory rate $(1,500) $(9,116) $ 804
Increase (reduction) attributable to:
Nondeductible goodwill 672 5,161 1,450
Foreign Sales Corporation benefit (639) (714) (447)
Consent and solicitation fees 422
Recapitalization fees 783
Change in valuation allowance for deferred
tax assets (606)
State taxes, net of federal benefit (547) (132) 293
Other, net (1,384) 399 179
----------------- ----------------- -----------------
$(3,398) $(3,197) $1,673
================= ================= =================
</TABLE>
The tax effects of temporary differences that give rise to the net deferred tax
asset were as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
----------------- -----------------
<S> <C> <C>
Accrued pension $ 1,020 $ 659
Accrued compensation 620 1,417
Accrued self insurance reserve 913 746
Aura write-off 0 522
Deferred compensation 823 725
Intangibles 1,167
Inventory reserves 1,111 1,120
Depreciable assets (1,162) (2,494)
Loss and credit carryforwards 3,638 1,059
Warranty reserve 818 773
Other accruals 576 510
Other 114 367
----------------- -----------------
9,638 5,404
Valuation allowance (551) (551)
----------------- -----------------
Net deferred tax asset $ 9,087 $ 4,853
================= =================
</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 a portion of the carryforwards is deemed more likely than not.
The carryforwards of $3,638 expire in 2012.
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.
<PAGE>
The net periodic cost is computed as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996 February 29, 1996
------------------ ------------------ ------------------
<S> <C> <C> <C>
Service cost $ 748 $ 565 $ 458
Interest cost 771 523 483
Actual return on plan assets (1,302) (950) (1,182)
Net amortization and deferral 671 497 755
------------------ ------------------ ------------------
$ 888 $ 635 $ 514
================== ================== ==================
Expected long-term rate of return on plan assets 8.5% 8.5% 8.5%
Discount rate used to determine the period's
expense and the period end projected benefit
obligation 7.25% 7.5% 7.5%
</TABLE>
Approximately 60% of the plan assets are invested in equity securities and 40%
in bonds as of December 31, 1997.
The following table sets forth the funded status of the plans:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 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 $ 5,373 $2,105 $4,267 $1,647
Nonvested benefits 1,706 285 1,202 154
--------------- --------------- --------------- ---------------
Accumulated Benefit Obligation 7,079 2,390 5,469 1,801
Effect of anticipated future compensation levels 3,031 2,670
--------------- --------------- --------------- ---------------
Projected Benefit Obligation 10,110 2,390 8,139 1,801
Plan assets at fair value 7,179 2,079 6,001 1,656
--------------- --------------- --------------- ---------------
Projected Benefit Obligation in excess of
Plan Assets 2,931 311 2,138 145
Unrecognized prior service cost 89 (171) 96 (191)
Unrecognized net transition (asset) obligation (100) 31 (118) 51
Unrecognized net (loss) gain (857) (113) (519) 115
Adjustment required to recognize minimum
liability 253 24
--------------- --------------- --------------- ---------------
Accrued Pension Cost $ 2,063 $ 311 $1,597 $ 144
=============== =============== =============== ===============
</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. In 1997, Holdings began matching contributions of up to 2% of eligible
employee wages. Prior to this, Holdings made matching contributions at the
discretion of the board of directors. For the year ended December 31, 1997,
Holdings made matching contributions of $315 to the Plan. Holdings did not make
matching contributions to the Plan in the ten months ended December 31, 1996, or
the fiscal year ended February 29, 1996.
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.
<PAGE>
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.
During 1997 and subsequent to 1997, the Company entered into agreements with the
three individuals that effectively terminated each individual's participation in
the deferred compensation plan. Pursuant to the agreements, the Company will
issue 29,750 shares of common stock of MVE to the three individuals upon the
earlier of December 31, 2006 or the occurrence of certain events. As a result
of the Company entering into these agreements, the Company reclassified the
accrued liability related to the deferred compensation plan of $1,866 as of
December 31, 1996 to equity.
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 $718, $702 and $502, for the year ended December 31, 1997 and
for the ten months ended December 31, 1996, and for the fiscal year ended
February 29, 1996. The future minimum rental payments required under these
leases are $470 in 1998, $270 in 1999, $89 in 2000, and $9 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.
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 CO2 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. General corporate assets include cash and cash
equivalents and income taxes.
<PAGE>
Financial information by business segment as of and for the year ended December
31, 1997, the ten months ended December 31, 1996, and the fiscal year ended
February 29, 1996 was as follows:
<TABLE>
<CAPTION>
Industrial Distributed Medical Corporate and
Products Products Products Eliminations Total
---------------- ------------------- ---------------- --------------------- ----------------
<S> <C> <C> <C> <C> <C>
December 31, 1997:
Customer sales $121,161 $45,238 $ 26,327 $192,726
Intersegment sales 2,175 2,932 1 $ (5,108)
---------------- ------------------- ---------------- --------------------- ----------------
Total Sales 123,336 48,170 26,328 (5,108) $192,726
Operating income (loss) 8,921 10,441 (1,595) (5,109) 12,658
Identifiable assets 40,571 25,319 17,326 53,566 136,782
Capital additions 4,490 1,140 281 1,099 7,010
Depreciation 1,350 457 751 860 3,418
Amortization 139 59 42 3,953 4,193
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 29 28 1,445 3,121 4,623
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 2,392 1,178 1,893 5,463
</TABLE>
Export sales from Holdings' U.S. operations for the year ended December 31,
1997, the ten months ended December 31, 1996, and the fiscal year ended February
29, 1996 were as follows:
<TABLE>
<CAPTION>
December 31, December 31, February 29,
1997 1996 1996
------------------ ------------------ ------------------
<S> <C> <C> <C>
Canada and Mexico $10,922 $ 6,957 $ 7,999
Europe 12,164 12,407 13,358
Pacific 29,318 24,868 26,434
Other 8,331 7,271 7,497
------------------ ------------------ ------------------
Total $60,735 $51,503 $55,288
================== ================== ==================
</TABLE>
<PAGE>
10. OTHER EXPENSES:
Other expense recorded in the ten months ended December 31, 1996 include the
following:
Recapitalization Expenses $ 3,545
Deferred compensation plan (Note 7) 1,916
Discontinue AURA product line 1,280
Debt forgiveness 3,722
Goodwill write-offs 10,824
Other 685
---------
$21,972
=========
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
In 1996, 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 $47,000. 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. As of December 31, 1997 and 1996, Holdings had accrued, but
unpaid dividends of $8,388 and $1,973 relating to Series A Preferred Stock,
respectively.
In exchange for 1,061 shares of Common Stock held by certain shareholders,
Holdings issued 13 shares of 10% Series B Redeemable Preferred Stock in 1997.
Each such share has a liquidation preference of $10,000 plus accrued and unpaid
dividends. Also, 49 shares of Series B Redeemable Preferred Stock was purchased
for $10,000 per share. In 1996, 66,406 shares of Common Stock were exchanged
for 833 shares of the Series B Redeemable Preferred Stock. This class of stock
is subject to mandatory redemption. As of December 31, 1997 and 1996, Holdings
had accrued, but unpaid dividends of $1,079 and $278 relating to Series B
Preferred Stock, respectively.
In 1997, Holdings purchased 430 of its outstanding warrants for $30.10944 per
warrant. In 1996, Holdings purchased 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 10,734
Research and development 4,654
Amortization 4,539
------------------
Total operating expenses 28,452
------------------
Operating income 12,230
Interest expense (13,517)
------------------
Income (loss) before income tax provision
(benefit) and minority interest (1,287)
Income tax provision (190)
------------------
Loss before minority interest (1,477)
Minority interest in net income (133)
------------------
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
principal amount at an annual rate of 8%. Principal of $2,000 and accrued
interest of $225 and $56 was outstanding at December 31, 1997 and 1996,
respectively. 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.
Two shareholders have management agreements with the Company which pays a
quarterly fee of $44 each plus expenses. The company paid $401 related to this
agreement in the year ended December 31, 1997.
14. SUBSEQUENT EVENTS
DEBT RESTRUCTURING
On February 2, 1998, CAIRE entered into an agreement whereby a third party
agreed to accept, in full payment of all outstanding indebtedness currently owed
to it by CAIRE, a cash payment of $50 and an option to purchase 28,957 shares of
10% Series AA Cumulative Preferred Stock (Series AA Preferred Stock), par value
$.01 per share, of CAIRE. Concurrent with the above settlement, MVE accepted,
in full payment of all outstanding unsecured indebtedness currently owed to it
by CAIRE, 632 shares of the Series AA Preferred Stock. Additionally, pursuant
to the February 2, 1998 agreement, MVE purchased all shares of CAIRE common
stock owned by the third party for an aggregate purchase price of one hundred
dollars. The Series AA Preferred Stock has a liquidation preference of $10,000
per share and is subject to mandatory redemption. Had the restructuring
occurred at December 31, 1997, unaudited pro forma results for 1997 are:
extraordinary gain from extinguishment of debt, net of tax, $3,695; net income
$2,634 total liabilities $187,579; and equity $(115,603).
ACQUISITION
Effective February 18, 1998, the Company acquired a majority interest in Ferox,
a.s., a manufacturer of bulk tanks and other cryogenic equipment located in the
Czech Republic for $400 in cash and an agreement with the seller to make
additional payments based on certain operational results of Ferox and the
Company. In addition, the Company paid to the seller's parent the sum of $600 in
cash in exchange for an agreement not to compete. The pro forma effect of the
acquisition is not material to the consolidated financial statements.
LOAN DEFAULT
The Company accelerated the maturity of a $1,500 loan, referred to in Note 13,
to January 9, 1998 and the shareholder defaulted. In accordance with the terms
of the loan and pledge agreement, the Company took possession of certain
Holdings' Common Stock equal in value to the principal and unpaid interest on
the loan.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of MVE, Inc.
We have audited the accompanying consolidated balance sheets of MVE, Inc. and
subsidiaries (the Company) as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
the year ended December 31, 1997 and the ten month period ended December 31,
1996. 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 audits. The consolidated
financial statements of the Company for the year ended February 29, 1996 were
audited by other auditors whose report, dated April 16, 1996, expressed an
unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 1997
and 1996, and the results of its operations and its cash flows for the periods
then ended in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Minneapolis, Minnesota
March 6, 1998
<PAGE>
MVE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
---------------- ----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,772 $ 3,054
Accounts receivable, net of allowance for doubtful accounts 28,837 26,958
Inventories 24,774 28,091
Prepaid expenses 1,228 1,227
Income tax refund receivable 1,013 3,102
Deferred income taxes 5,604 6,740
---------------- ----------------
Total current assets 64,228 69,172
PROPERTY, PLANT AND EQUIPMENT 48,640 42,388
Less- Accumulated depreciation and amortization (18,765) (15,376)
---------------- ---------------
Net property, plant and equipment 29,875 27,012
DUE FROM MVE HOLDINGS, INC. 31,903 31,882
GOODWILL, net 24,471 26,001
DEFERRED INCOME TAXES 2,402
OTHER ASSETS, net 6,108 6,492
---------------- ---------------
Total assets $158,987 $160,559
================ ================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term debt $ 9,069 $ 3,031
Accounts payable 18,297 18,071
Accrued expenses and other liabilities 22,371 24,982
---------------- ----------------
Total current liabilities 49,737 46,084
LONG-TERM DEBT, net of current maturities 134,594 137,354
DEFERRED INCOME TAXES 1,887
OTHER NONCURRENT LIABILITIES 113 251
---------------- ----------------
Total liabilities 184,444 185,576
MINORITY INTEREST 368 320
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' 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 12,277 12,277
Accumulated deficit (38,103) (37,615)
---------------- ---------------
Total stockholder's deficit (25,825) (25,337)
---------------- ---------------
Total liabilities and stockholder's deficit $158,987 $160,559
================ ================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
MVE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Year Ended December 31, 1997, the Ten Months Ended December 31, 1996,
and the Year Ended February 29, 1996
(In Thousands)
<TABLE>
<CAPTION>
December 31, December 31, February 29,
1997 1996 1996
------------- ------------ --------------
<S> <C> <C> <C>
NET SALES $192,726 $155,746 $179,220
COST OF SALES 137,736 113,875 128,196
------------- ------------ --------------
Gross profit 54,990 41,871 51,024
OPERATING EXPENSES:
Selling and marketing 13,925 9,855 11,039
General and administrative 18,151 15,441 11,130
Research and development 5,989 3,047 4,718
Amortization 3,578 4,623 5,463
Other expenses (Note 10) 19,668
------------- ------------ --------------
Total operating expenses 41,643 52,634 32,350
------------- ------------ --------------
Operating income (loss) 13,347 (10,763) 18,674
INTEREST INCOME 113 6 47
INTEREST EXPENSE (16,834) (13,887) (16,352)
------------- ------------ --------------
Income (loss) before income tax
benefit (expense) and minority interest (3,374) (24,644) 2,369
INCOME TAX BENEFIT (EXPENSE) 3,046 3,197 (1,673)
------------- ------------ --------------
Income (loss) before minority interest (328) (21,447) 696
MINORITY INTEREST IN NET (INCOME) LOSS (48) 949 (5)
============= ============ ==============
Net income (loss) $ (376) $(20,498) $ 691
============= ============ ==============
</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 Year Ended December 31, 1997, the Ten Months Ended December 31, 1996,
and the Year Ended February 29, 1996
(In Thousands)
<TABLE>
<CAPTION>
Common Stock
----------------------------
Number Additional Total
of Paid-In Accumulated Stockholder's
Shares Amount Capital Deficit Deficit
--------- --------- --------------- -------------------- -----------------
<S> <C> <C> <C> <C> <C>
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)
Deferred compensation plan 1,866 1,866
Other 71 71
Net loss (20,498) (20,498)
------- --------- --------------- -------------------- -------------
BALANCE, December 31, 1996 1 $1 $12,277 $(37,615) $(25,337)
Translation adjustment (30) (30)
Excess of additional pension
liability over unrecognized
prior service cost (82) (82)
Net loss (376) (376)
------- --------- --------------- -------------------- -------------
BALANCE, December 31, 1997 1 $1 $12,277 $(38,103) $(25,825)
======= ========= =============== ==================== =============
</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 Year Ended December 31, 1997, the Ten Months Ended December 31, 1996,
and the Year Ended December 31, 1996
(In Thousands)
<TABLE>
<CAPTION>
December 31, December 31, February 29,
1997 1996 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) before extraordinary item $ (376) $ (20,498) $ 691
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities-
Depreciation and amortization 6,996 7,791 8,950
Minority interest 48 (949) 5
Interest on exchangeable debt 329 274 329
Deferred income tax benefit (3,153) (2,929) (478)
Loss (gain) on sale of assets, net 22 (323)
Loss on write-off of assets 2,768
Loss on write-off of goodwill 10,824
Loss on debt forgiveness 95 3,722
Changes in other non-current assets and liabilities 160 2,114
Changes in operating assets and liabilities (Note 3) 1,219 7,394 (10,685)
--------------- --------------- ---------------
Net cash provided by (used in) operating activities 5,340 10,511 (1,511)
INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net (6,372) (9,783) (8,384)
Proceeds from sale of assets 373 107 3,011
Increase in other assets (659) (750) (3,954)
Cash acquired from acquisitions 687
--------------- --------------- ---------------
Net cash used in investing activities (6,658) (9,739) (9,327)
FINANCING ACTIVITIES:
Borrowings under revolving credit facility 210,673 174,266 197,201
Repayments under revolving credit facility (205,870) (174,121) (191,771)
Repayment of long-term debt (2,756) (2,489) (3,228)
Borrowings of long-term debt 10 4,680 8,299
Advance to MVE Holdings, Inc. (21) (867)
Deferred closing costs (862) (314)
Changes in other noncurrent assets and liabilities (138) (179) 419
--------------- --------------- ---------------
Net cash provided by financing activities 1,036 976 10,920
--------------- --------------- ---------------
Net increase (decrease) in cash and cash equivalents (282) 1,748 82
CASH AND CASH EQUIVALENTS, beginning of year 3,054 1,306 1,224
-------------- --------------- ---------------
CASH AND CASH EQUIVALENTS, end of year $ 2,772 $ 3,054 $ 1,306
=============== =============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 16,275 $ 9,037 $ 15,846
Cash paid (received) during the year for income taxes $ (1,260) $ 1,626 $ 3,306
</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 Year Ended December 31, 1997, the Ten Months Ended December 31, 1996,
and the Year Ended February 29, 1996
(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 CO2 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 $3,695 and $1,030 at
December 31, 1997 and 1996, respectively.
RECEIVABLES
Accounts receivable, net of allowance for doubtful accounts, consisted of the
following as of December 31, 1997 and 1996:
December 31, December 31,
1997 1996
----------------- ----------------
A/R trade $27,601 $26,785
A/R other 1,775 389
Notes receivable 289 672
----------------- ----------------
29,665 27,846
Allowance (828) (888)
----------------- ----------------
$28,837 $26,958
================= ================
Allowance for doubtful accounts consisted of the following for the year ended
December 31, 1997, the ten months ended December 31, 1996 and for the year ended
February 29, 1996:
Additions: Write-offs,
Beginning Charged to net of Ending
Balance Expense Recoveries Balance
-------------- ------------- ------------- ---------
February 29, 1996 $769 $221 $(315) $675
December 31, 1996 675 168 45 888
December 31, 1997 888 434 (494) 828
<PAGE>
INVENTORIES
Inventories include material, labor and overhead at standard cost 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:
December 31, December 31,
1997 1996
--------------- ---------------
Inventories at cost:
Purchased materials and subassemblies $14,710 $17,522
Work in process 6,401 6,591
Finished goods 5,115 6,070
--------------- ---------------
26,226 30,183
Reserves (1,452) (2,092)
--------------- ---------------
$24,774 $28,091
=============== ===============
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:
YEARS
-----
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, December 31,
1997 1996
--------------- ------------
Land $ 1,925 $ 2,058
Building and improvements 13,750 11,122
Machinery and equipment 23,086 16,882
Furniture, fixtures and office equipment 8,995 7,118
Construction in progress 884 5,208
----------- ------------
48,640 42,388
Less - accumulated
depreciation and amortization (18,765) (15,376)
----------- ------------
Net property, plant and equipment $29,875 $27,012
=========== ============
OTHER ASSETS
Other assets are being amortized on a straight-line basis over their estimated
useful lives which range from 2 to 30 years. Accumulated amortization was
$10,821 and $8,830 at December 31, 1997 and 1996, respectively. Other assets net
of accumulated amortization consist of the following:
December 31, December 31,
1997 1996
----------------- -----------------
Deferred financing costs $3,993 $ 4,030
Patents, trademarks and product
lines 491 657
Non-compete agreement 47
Other 1,577 1,805
----------------- -----------------
$6,108 $6,492
================= =================
<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 year ended December 31, 1997, one of the Company's customers represented
11% of the Company's net sales. For the ten months ended December 31, 1996, one
of the Company's customers represented approximately 15% of the Company's net
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.
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
$16,565 and $14,487 at December 31, 1997 and 1996, respectively (See Note 10).
RECLASSIFICATIONS
Certain reclassifications have been made to prior periods' financial statements
to conform to the current year presentation. 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 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 ten
months ended December 31, 1996.
<PAGE>
2. ACCRUED EXPENSES AND OTHER LIABILITIES:
Accrued expenses and other liabilities consists of the following:
December 31, December 31,
1997 1996
--------------- ---------------
Employee compensation and payroll taxes $ 2,814 $ 4,924
Income taxes 2,892 1,732
Warranty 1,930 1,909
Accrued pension cost 2,374 1,741
Accrued interest 5,422 5,366
Insurance 2,092 1,967
Deposits and rebates 2,429 4,185
Accrued freight 471 567
Other 1,947 2,591
--------------- ---------------
$22,371 $24,982
=============== ===============
3. SUPPLEMENTAL CASH FLOW INFORMATION:
Changes in operating assets and liabilities were as follows:
<TABLE>
<CAPTION>
December 31, December 31, February 29,
1997 1996 1996
---------------- ---------------- ---------------
<S> <C> <C> <C>
Accounts receivable $(2,840) $ 4,479 $ (7,025)
Inventories 4,042 (2,700) (6,684)
Prepaid expenses and other 1 (329) 56
Income tax refund receivable 3,517 (2,372) -
Accounts payable 700 (1,264) 4,176
Accrued expenses and other liabilities (4,201) 9,580 (1,208)
---------------- --------------- ----------------
$ 1,219 $ 7,394 $(10,685)
================ =============== ================
</TABLE>
NON-CASH INVESTING AND FINANCING ACTIVITIES
The Company acquired two companies in 1997 with purchase prices of $1,000 and
$300. In 1996, the Company acquired two companies with purchase prices of $1,300
and $600. The acquisitions were not significant to the consolidated statements
of cash flows.
Several lease and note obligations of $364 and $2,131 were incurred when the
Company entered into leases or notes for new equipment, vehicles and furniture
in 1997 and 1996, respectively.
In 1996, the Company purchased a building for $500 in exchange for long-term
debt.
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:
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.
<PAGE>
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, December 31,
1997 1996
---------------- ----------------
<S> <C> <C>
12.5% senior secured notes, due February 2002, interest payable semiannually, net
of unamortized discounts of $458 and $568 $111,542 $111,432
Revolving credit facility, due February 1998, interest payable monthly at the
reference rate plus .5%, 8.75% at December 31, 1996 0 6,054
Revolving credit facility, due October 2000, interest payable monthly at LIBOR,
8.375% for the first $10 million and 9% for any additional borrowing 10,857
Bonds, due September 2005, semi-annual principal payments of $345, plus interest
at rates ranging from 2.75% to 9%, 5.85% at December 31, 1997 5,520 6,210
7% exchangeable note, including accrued interest, with principal and accrued
interest payable August 1, 1998 (see Note 13) 6,155 5,826
Industrial Development Revenue Bonds, Series 1996, semi-annual principal
payments of $220, plus interest at variable rates from 3.7% to 12%, 4.25% at
December 31, 1997, due June 2011 3,740 4,180
10.25% first mortgage note, payable in monthly installments of $14, including
interest, with final payment due July 2003 821 899
10% subordinated debentures, interest payable semiannually, subject to 10% per year
mandatory redemption beginning 1997, balance due May 2001 84 418
Several notes payable with varying principal and interest payments through April
2012 with interest rates ranging from 6% to 9% 2,129 2,085
Revolving foreign loan, with varying principal and interest payments through
1998 with interest rates ranging from 5.8% to10.5% 400 520
Capitalized leases payable in varying monthly installments through February 2003
with interest rates ranging from 5% to 10.25% 2,415 2,761
---------------- ----------------
Total long-term debt 143,663 140,385
Less- Current maturities 9,069 3,031
---------------- ----------------
Long-term debt, net of current maturities $134,594 $137,354
================ ================
</TABLE>
The revolving credit facility provides for borrowings and issuances of Letters
of Credit of up to $30,000 subject to a defined borrowing base of qualified
accounts receivable and eligible inventory. The revolving credit facility is
renewable annually for three year periods through October 2000. Holdings is
charged a monthly fee based on an annualized rate of .375% of the unused portion
of the commitment. The interest rate is variable and contains a LIBOR and base
rate option at the election of the Company. At December 31, 1997, $10,000 of the
outstanding balance was subject to a LIBOR based rate of $8.375%. The remaining
$857 carried a base rate of 9%. The credit facility contains certain covenants
with respect to capital expenditures, borrowings and disposition of assets. As
of December 31, 1997, the Company was in compliance with all financial
covenants.
In 1996, the revolving credit facility provided 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 was renewable for
three-year periods through June 2001. The Company was charged a monthly fee
based on an annualized rate of .5% of the unused portion of the commitment.
<PAGE>
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 Redeemable Preferred Stock
($100 par value per share), and all outstanding warrants to purchase Holdings
common stock.
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:
YEAR PERCENTAGE
- ---- ----------
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 the Company to maintain certain liquidity and
debt coverage ratios. As of December 31, 1997, the Company was in compliance
with its financial covenants.
The scheduled annual maturities of long-term debt at December 31, 1997 (see Note
13) are as follows:
YEAR AMOUNT
- ---- --------------
1998 $ 9,069
1999 2,124
2000 12,575
2001 1,697
2002 113,766
Thereafter 4,432
--------------
$143,663
==============
Long-term debt, including current maturities, has a carrying value of $143,663
and a fair value of $161,151. The estimated fair value represents the present
value of debt service at rates currently available to the Company for issuance
of debt with similar terms. Except for the above, all financial instruments are
carried at amounts that approximate estimated fair value.
6. INCOME TAXES:
Income tax expense (benefit) consists of the following for the periods ended:
Fiscal Year Ten Months Fiscal Year
---------------- ---------------- ----------------
December 31, December 31, February 29,
1997 1996 1996
---------------- ---------------- ----------------
Current:
Federal $ 887 $ (198) $1,870
State 31 (70) 281
---------------- ---------------- ---------------
918 (268) 2,151
Deferred (3,964) (2,929) (478)
---------------- --------------- ---------------
$(3,046) $(3,197) $1,673
================ =============== ===============
<PAGE>
The differences between income taxes computed using the federal statutory rate
and the expense (benefit) for income taxes were as follows for the periods
ended:
<TABLE>
<CAPTION>
Fiscal Year Ten Months Fiscal Year
---------------- ---------------- -------------
December 31, December 31, February 29,
1997 1996 1996
---------------- ---------------- -------------
<S> <C> <C> <C>
Income tax provision (benefit) at federal statutory rate $(1,147) $(8,333) $ 804
Increase (reduction) attributable to:
Amortization of goodwill 672 5,161 1,450
Foreign Sales Corporation benefit (639) (714) (447)
Consent and solicitation fees 422
Change in valuation allowance for deferred tax asset (606)
State taxes, net of federal benefit (547) (132) 293
Other, net (1,385) 399 179
---------------- ---------------- -------------
$(3,046) $(3,197) $1,673
================ ================ =============
</TABLE>
The tax effects of temporary differences that give rise to the net deferred tax
asset were as follows:
December 31, December 31,
1997 1996
--------------- ---------------
Accrued Pension $ 1,020 $ 659
Accrued Compensation 620 1,417
Accrued Self Insurance Reserve 913 746
Aura Write-off 0 522
Deferred compensation 823 725
Intangibles 208
Inventory reserves 1,111 1,120
Depreciable assets (1,162) (2,494)
Loss and credit carryforwards 3,535 1,059
Warranty reserve 818 773
Other accruals 557 510
Other 114 367
--------------- ---------------
8,557 5,404
Valuation allowance (551) (551)
--------------- ---------------
Net deferred tax asset $ 8,006 $ 4,853
=============== ===============
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 a portion of the carryforwards is deemed more likely than not.
The carryforwards of $3,535 expire in 2012.
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.
<PAGE>
The net periodic cost is computed as follows:
<TABLE>
<CAPTION>
December 31, December 31, February 29,
1997 1996 1995
----------- ------------ ------------
<S> <C> <C> <C>
Service cost $ 748 $ 565 $ 458
Interest cost 771 523 483
Actual return on plan assets (1,302) (950) (1,182)
Net amortization and deferral 671 497 755
----------- ------------ ------------
$ 888 $ 635 $ 514
=========== ============ ============
Expected long-term rate of return on
plan assets 8.5% 8.5% 8.5%
Discount rate used to determine the
period's expense and the period end 7.25% 7.5% 7.5%
projected benefit obligation
</TABLE>
Approximately 60% of the plan assets are invested in equity securities and 40%
in bonds as of December 31, 1997.
The following table sets forth the funded status of the plans:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 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 $ 5,373 $2,105 $4,267 $1,647
Nonvested benefits 1,706 285 1,202 154
------------- ------------- ------------- -------------
Accumulated Benefit Obligation 7,079 2,390 5,469 1,801
Effect of Anticipated future compensation levels 3.031 2,670
------------- ------------- ------------- -------------
Projected Benefit Obligation 10,110 2,390 8,139 1,801
Plan assets at fair value 7,179 2,079 6,001 1,656
------------- ------------- ------------- -------------
Projected Benefit Obligation in excess of
Plan Assets 2,931 311 2,138 145
Unrecognized prior service cost 89 (171) 96 (191)
Unrecognized net transition (asset) obligation (100) 31 (118) 51
Unrecognized net (loss) gain (857) (113) (519) 115
Adjustment required to recognize minimum
liability 253 24
------------- ------------- ------------- -------------
Accrued Pension Cost $ 2,063 $ 311 $1,597 $ 144
============= ============= ============= =============
</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. In 1997, the Company began matching contributions of up to 2% of eligible
employee wages. Prior to this, the Company made matching contributions at the
discretion of the Board of Directors. For the year ended December 31, 1997, the
Company made matching contributions of $315 to the Plan. The Company did not
make matching contributions to the Plan in the ten months ended December 31,
1996, or the fiscal year ended February 29, 1996.
<PAGE>
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.
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.
During 1997 and subsequent to 1997, the Company entered into agreements with the
three individuals that effectively terminated each individual's participation in
the deferred compensation plan. Pursuant to the agreements, the Company will
issue 29,750 shares of common stock of MVE to the three individuals upon the
earlier of December 31, 2006 or the occurrence of certain events. As a result of
the Company entering into these agreements, the Company reclassified the accrued
liability related to the deferred compensation plan of $1,866 as of December 31,
1996 to equity.
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 $718, $702, and $502 for the year ended December 31, 1997 and for
the ten months ended December 31, 1996 and for the fiscal year ended February
29, 1996. The future minimum rental payments required under these leases are
$470 in 1998, $270 in 1999, $89 in 2000, and $9 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 CO2 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. General corporate assets include cash and cash
equivalents and income taxes.
<PAGE>
Financial information by business segment as of and for the year ended December
31, 1997, the ten months ended December 31, 1996 and the fiscal year ended
February 29, 1996 was as follows:
<TABLE>
<CAPTION>
Industrial Distributed Medical Corporate and
Products Products Products Eliminations Total
------------- -------------- ------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
December 31, 1997:
Customer sales $121,161 $45,238 $26,327 $192,726
Intersegment sales 2,175 2,932 1 $(5,108)
----------- -------------- ------------- ----------------- -------------
Total sales 123,336 48,170 26,328 (5,108) 192,726
Operating income (loss) 8,921 10,441 (1,595) (4,420) 13,347
Identifiable assets 40,571 25,319 17,326 75,771 158,987
Capital additions 4,490 1,140 281 1,099 7,010
Depreciation 1,350 457 751 860 3,418
Amortization 139 59 42 3,338 3,578
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)
Identifiable assets 40,281 24,211 17,382 78,685 160,559
Capital additions 5,286 1,145 2,616 3,367 12,414
Depreciation 751 774 682 962 3,169
Amortization 29 28 1,445 3,121 4,623
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 2,392 1,178 1,893 5,463
</TABLE>
Export sales from the Company's U.S. operations for the year ended December 31,
1997, the ten months ended December 31, 1996 and the fiscal year ended February
29, 1996 were as follows:
December 31, December 31, February 29,
1997 1996 1996
---------------- ---------------- ----------------
Canada and Mexico $10,922 $ 6,957 $ 7,999
Europe 12,164 12,407 13,358
Pacific 29,318 24,868 26,434
Other 8,331 7,271 7,497
---------------- ---------------- ----------------
Total 60,735 $51,503 $55,288
================ ================ ================
<PAGE>
10. OTHER EXPENSE:
Other expense recorded in the ten months ended December 31, 1996 include the
following:
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
================
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
In 1996, 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.
<PAGE>
11. FISCAL RESULTS FOR THE TEN MONTHS ENDED DECEMBER 31, 1995 (UNAUDITED)
December 31,
1995
---------------
Net sales $144,183
Cost of sales 103,501
---------------
Gross profit 40,682
Operating expenses:
Selling and Marketing 8,525
General and administrative 10,734
Research and development 4,654
Amortization 4,539
---------------
Total operating expenses 28,452
---------------
Operating income 12,230
Interest expense (13,517)
----------------
Income (loss) before income tax provision
(benefit) and minority interest (1,287)
Income tax provision (190)
----------------
Loss before minority interest (1,477)
Minority interest in net income (133)
----------------
Net loss (1,610)
================
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.
13. SUBSEQUENT EVENTS
DEBT RESTRUCTURING
On February 2, 1998, CAIRE entered into an agreement whereby a third party
agreed to accept, in full payment of all outstanding indebtedness currently owed
to it by CAIRE, a cash payment of $50 and an option to purchase 28,957 shares of
10% Series AA Cumulative Preferred Stock (Series AA Preferred Stock), par value
$.01 per share, of CAIRE. Concurrent with the above settlement, MVE accepted, in
full payment of all outstanding unsecured indebtedness currently owed to it by
CAIRE, 632 shares of the Series AA Preferred Stock. Additionally, pursuant to
the February 2, 1998 agreement, MVE purchased all shares of CAIRE common stock
owned by the third party for an aggregate purchase price of one hundred dollars.
The Series AA Preferred Stock has a liquidation preference of $10,000 per share
and is subject to mandatory redemption. Had the restructuring occurred at
December 31, 1997, unaudited pro forma results for 1997 are: extraordinary gain
from extinguishment of debt, net of tax, $3,695; net income $3,319; total
liabilities $180,729; and equity $(22,110).
