<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For Annual Period Ended December 31, 1998
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)
Delaware 41-1641718 Delaware 41-1396485
(State or other (I.R.S. employer (State or other (I.R.S. employer
jurisdiction of identification no.) jurisdiction identification no.)
incorporation or of incorporation or
organization) organization)
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.____ 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, 1998: 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 (the "Company"), 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.
2
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PART I
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Item 1. BUSINESS.
MVE, Inc., a Delaware corporation (the "Company"), develops, manufactures and
distributes vacuum insulated containers and equipment used to transport and
store liquid cryogens (gases that enter a liquid state at temperatures below
- -80(degree)F), biological matter and other substances. Substantially all of the
products of the Company's four 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"). On February 2, 1998, the Company purchased all shares
of CAIRE common stock owned by a third party. Subsequent to this transaction,
on a fully diluted basis, the Company would own 97% of the shares.
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 four business segments: Industrial Products, Distributed
Products, Medical Respiratory Products and Applied Technologies.
Industrial Products
The Industrial Products business segment develops, manufactures and markets
cryogenic storage tanks and transportation equipment and provides related
services to producers, distributors and end users of liquid industrial gases
such as oxygen, nitrogen, argon, hydrogen, helium and CO2. The cryogenic storage
tanks and transportation equipment range in storage capacity from approximately
40 to 80,000 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.
Distributed Products
The Distributed Products business segment 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
food franchisers, soft drink companies and CO2 distributors. The Company also
manufactures cooking oil management systems which provide restaurant owners with
a new method to store, filter and dispense frying oils.
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.
3
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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 respiratory 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
sells 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. In 1998, the company exited the oxygen
concentrator and nebulizer markets to focus on its liquid oxygen market using
its cryogenic resources.
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 or physician usually selects which type of oxygen
system to recommend to its customers: liquid oxygen systems, oxygen
concentrators or high pressure oxygen cylinders. 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.
Applied Technologies
The Applied Technologies business segment consists of various product lines
including biological storage systems, vacuum insulated containers for liquid
natural gas (LNG) storage, environmental test chambers for rapid heat/cold
testing, vacuum insulated pipe and other end user 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.
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.
Liquid Natural Gas (LNG) Storage
This product line consists of 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.
4
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Vacuum Insulated Pipe
This product line specializes in the design and fabrication of custom cryogenic
piping (VIP) for liquid nitrogen, oxygen, argon, helium and hydrogen in pipe
sizes ranging from 1/4" to 8". The configuration of VIP is built to order and is
restricted only by shipping and installation constraints. Competition for VIP is
based on technology (foam vs. vacuum insulation), price and delivery lead times.
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 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.
The Company is currently participating in environmental investigations and
assessments under these regulations at some if its current and former sites. In
1997, Holdings submitted a site investigation report and Response Action Plan
(RAP) to the Minnesota Pollution Control Agency (MPCA). The soil RAP has been
conditionally approved by the MPCA. The groundwater RAP is subject to further
review. These plans include possible obligations to remove or mitigate the
effects of hazardous substances from the environment. The amount of such future
costs will depend on factors such as the unknown nature or extent of
contamination, the extent and method of the remedial actions which may be
required and the magnitude of clean-up costs. 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. 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.
5
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Year 2000
The Year 2000 Problem is the result of the inability of hardware, software and
control systems to properly recognize and process two-digit references to
specific years, beginning with the year 2000. The Year 2000 Problem could result
in system failures or miscalculations causing disruptions of the operations of
Holdings, its suppliers and its customers.
In early 1998, Holdings began a plan which includes identification, assessment,
remediation and testing of its critical software systems. Holdings has completed
the identification and assessment phases.
Holdings produces a limited number of products utilizing control systems with
embedded chip technology, and is contacting the vendors who provide these
embedded chips to determine compliance. Holdings is also undergoing its own
internal testing and assessment of all of its products. This project will be
completed in the 2nd quarter of 1999.
Based upon Holdings' review of systems using embedded chip technology within its
existing facilities, Holdings is reasonably sure that its facilities are
materially year 2000 compliant.
Holdings' Year 2000 plan also considers the readiness of significant customers
and suppliers. Holdings believes that the third parties whose Year 2000 problems
pose the greatest risks for Holdings include its suppliers of the major
materials used in production processes and its providers of freight services.
Holdings has been reviewing and continues to review with its critical suppliers
and major customers the status of their Year 2000 readiness. Holdings has
established plans for ongoing monitoring of suppliers during 1999. However,
Holdings provides no assurance that these third parties will be Year 2000
compliant or that their noncompliance will not have a material adverse effect on
the Company.
Holdings does not expect the costs associated with its Year 2000 efforts to be
substantial. The estimated total cost for the Year 2000 project is not
significant to the consolidated financial statements, including costs already
incurred. Holdings has not deferred any projects as a result of the
implementation of the Year 2000 project.
Holdings believes that completed and planned modifications and conversions of
its internal systems and equipment will allow it to be Year 2000 compliant in a
timely manner. There can be no assurance, however, that Holdings' internal
systems or equipment or those of third parties on which Holdings relies will be
Year 2000 compliant in a timely manner or that Holdings' or third parties'
contingency plans will mitigate the effects of any noncompliance. The failure of
the systems or equipment of Holdings or third parties could result in some
reduction of the Company's operations which could have a material adverse effect
on Holdings' business or consolidated financial statements. Holdings believes
that the third parties whose Year 2000 Problems pose the greatest risks for
Holdings include its banks that maintain depository accounts, its payroll
processing company, its suppliers of the major materials used in production
processes, its utility providers and its providers of freight services.
Holdings has not completed its systems integration testing, and, accordingly,
has not fully assessed its risks from potential year 2000 failures. Holdings has
not yet developed year 2000 specific contingency plans, however, plans will be
developed if the results of systems integration testing identifies a business
segment at risk.
The preceding "Year 2000" discussion contains various forward-looking
statements, which represent Holdings beliefs or expectations regarding future
events. When used in this discussion, the words "believes", "expects",
"estimates", and similar expressions are intended to identify forward-looking
statements. Forward-looking statements include, without limitation, Holdings'
expectations as to when it will complete the remediation and testing phases of
its Year 2000 program as well as contingency plans; its estimated costs of
achieving Year 2000 related readiness; and Holdings' belief that its internal
systems and equipment will be compliant in a timely manner. All forward-looking
statements involve a number of risks and uncertainties that could cause the
actual results to differ materially from the projected results. Factors that may
cause these differences include, but are not limited to, the availability of
qualified personnel and other IS resources; the ability to identify and
remediate all date-sensitive computer coding or replacability of embedded
computer chips in affected systems or equipment; and the actions of governmental
agencies or other third parties with respect to Year 2000 problems.
6
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The Euro Conversion
On January 1, 1999, eleven of the fifteen member countries of the European Union
(EU) established fixed conversion rates through the European Central Bank (ECB)
between their existing local currencies and the Euro, the EU's single currency.
The participating countries have agreed to adopt the Euro as their common legal
currency on that date, the Euro now trades on currency exchanges and will be
available for non-cash transactions.
Holdings is reviewing the Euro's impact on Holdings' business and pricing
strategies. Holdings' European business units have made the necessary
investments in their information services systems in order to be able to handle
transactions in Euros, as requested. The introduction of the Euro is not
expected to have a material impact on Holdings' overall currency risk or its
ability to transact business.
Forward-Looking Statements
Holdings is making this statement in order to satisfy the "safe harbor"
provisions contained in the Private Securities Litigation Reform Act of 1995.
This Annual Report on Form 10-K includes forward-looking statements relating to
the business of Holdings. Forward-looking statements contained herein or in
other statements made by Holdings are based on management's expectations and
beliefs concerning future events impacting Holdings and are subject to
uncertainties and factors relating to Holdings' operations and business
environment, all of which are difficult to predict and many of which are beyond
the control of Holdings, that could cause actual results of Holdings to differ
materially from those matters expressed or implied by forward-looking
statements. Holdings believes that the following factors, among others, could
affect its future performance and cause actual results of Holdings to differ
materially from those expressed or implied by forward-looking statements made by
or on behalf of Holdings: (a) general economic, business and market conditions;
(b) competition; (c) decreases in spending by its industrial customers; (d) the
loss of a major customer or customers; (e) ability of Holdings to identify,
consummate and integrate the operations of suitable acquisition targets; (f)
ability of Holdings to manage its fixed-price contract exposure; (g) Holdings'
relations with its employees; (h) the extent of product liability claims
asserted against Holdings; (i) variability in Holdings' operating results; (j)
the ability of Holdings to attract and retain key personnel; (k) the costs of
compliance with environmental matters; (l) the ability of Holdings to protect
its proprietary information; and (m) disruption of Holdings' business or
operations resulting from the Year 2000 Problem.
Subsequent Event - Agreement and Plan of Merger
On February 16, 1999, Holdings entered into a merger agreement with Chart
Industries, Inc. (Chart). Under the agreement, Holdings shall become a wholly
owned subsidiary of Chart. The transaction is expected to be complete within 60
days. The closing is subject to certain regulatory approvals and satisfaction of
usual and customary closing conditions. The purchase price is approximately $240
million including assumed debt. As part of the merger agreement, Chart will
retain 20% of the stock of the cooking oil management business. The remaining
80% of the stock will be distributed to the current shareholders of Holdings.
Item 2. PROPERTIES.
Not provided.
Item 3. LEGAL PROCEEDINGS.
Not provided.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
Not provided.
7
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PART II
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Item 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
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, 1998 there were twenty-five 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.
8
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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. The financial data
set forth below should be read in conjunction with the historical consolidated
financial statements and related notes thereto of Holdings and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained elsewhere herein.
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Ten Months Fiscal Year Fiscal Year
Ended Ended Ended Ended Ended
----------------------------------------------------------------------------
February 28, February 29, December 31, December 31, December 31,
1995(2) 1996 1996(3) 1997 1998(5)
----------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Net Sales $ 146,480 $ 179,220 $ 155,746 $ 192,726 $ 207,751
Cost of Sales 100,394 128,196 113,875 137,736 148,096
--------- --------- --------- --------- ---------
Gross profit 46,086 51,024 41,871 54,990 59,655
Selling, general and administrative 20,500 22,169 25,296 32,150 32,088
expenses
Research and development 2,792 4,718 3,047 5,989 5,301
Amortization 4,915 5,463 4,623 4,193 4,715
Other nonrecurring expense 21,972 1,042
--------- --------- --------- --------- ---------
Operating income (loss) 17,879 18,674 (13,067) 12,658 16,509
Interest expense 9,878 16,305 13,742 17,069 18,915
--------- --------- --------- --------- ---------
Net income (loss) before income tax
provision (benefit), minority interest,
and extraordinary items 8,001 2,369 (26,809) (4,411) (2,406)
Income tax provision (benefit) 3,112 1,673 (3,197) (3,398) 1,336
--------- --------- --------- --------- ---------
Net income (loss) before minority
interest and extraordinary items 4,889 696 (23,612) (1,013) (3,742)
Minority interest in net income (loss) (172) 5 (949) 48 165
--------- --------- --------- --------- ---------
Net income (loss) before 5,061 691 (22,663) (1,061) (3,907)
extraordinary items
Extraordinary loss (gain) 1,307 (6,118)
--------- --------- --------- --------- ---------
Net income (loss) $ 3,754 $ 691 $ (22,663) $ (1,061) $ 2,211
========= ========= ========= ========= =========
Other Data:
Gross margin 31.5% 28.5% 26.9% 28.5% 28.7%
EBITDA(4) $ 25,981 $ 27,619 $ (4,327) $ 20,221 $ 26,030(1)
EBITDA Margin 17.7% 15.4% (2.8)% 10.5% 12.5%
Net cash provided by (used in) 8,449 (1,516) 8,371 4,580 711
operating activities
Net cash used in investing activities (7,062) (9,327) (9,739) (6,659) (4,826)
Net cash provided by (used in) (384) 10,925 10,567 (2,562) 7,976
financing activities
Depreciation and amortization $ 7,930 $ 8,950 $ 7,791 $ 7,611 $ 9,480
Capital expenditures $ 7,594 $ 8,384 $ 12,414 $ 7,010 $ 4,465
Consolidated Balance Sheet Data (end of period):
Total assets $ 118,819 $ 133,888 $ 142,176 $ 136,782 $ 153,561
Current assets 48,149 62,518 76,623 67,412 77,828
Long-term debt, net of current maturities 119,952 131,024 143,009 140,669 156,024
Holdings Preferred Stock 57,582 64,438 72,598
</TABLE>
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(1) Loss on sale of assets of $639 was excluded from EBITDA as a result of bank
covenant requirements. Also, EBITDA was adjusted for the interest of the
minority shareholders of Ferox in Ferox's interest, taxes, depreciation and
amortization expense.
(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 revaluation of certain
business units and product lines including $3.5 million relating to the
recapitalization of Holdings in August 1996.
(See Note 11)
(4) Management calculates EBITDA as earnings before interest, taxes,
depreciation, amortization and extraordinary items. EBITDA has been adjusted
to include minority interest in net income (loss). Management reports EBITDA
as it is required for bank covenant purposes. EBITDA is not intended to
represent cash flow from operations for the period nor has it been presented
as an alternative to either (1) operating income (as determined by GAAP) as
an indicator of operating performance or (2) cash flow from operating,
investing and financing activities (as determined by GAAP). EBITDA is
therefore susceptible to varying calculations and as presented may not be
comparable to other similarly titled measures of other companies.
(5) The extraordinary gain in 1998 of $6,118 is due to the gain realized upon
extinguishment of debt (See Note 6).
9
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
SUMMARY
- -------
During 1989, Holdings was formed to acquire the Company. Since that time,
Holdings has followed a strategy of acquiring complementary businesses, internal
sales growth and alignment with key customers through long-term sourcing
agreements.
Holdings develops, manufactures, markets and sells products which are grouped
according to four business segments: industrial, distributed, medical
respiratory and applied technologies. 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. The distributed products segment also
includes the cooking oil management business. The medical respiratory products
segment develops, manufactures and markets a limited range of medical
respiratory products, including liquid oxygen systems, oxygen concentrators and
medication nebulizers, all of which are used primarily for the in-home treatment
of patients. The applied technologies segment includes storage systems for
temperature-sensitive agricultural and biological products, liquid natural gas
(LNG) storage, test chambers for rapid heat/cold testing, vacuum insulated pipe
and other emerging products.
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. Sales in the LNG market
are sensitive to government regulations.
RESULTS OF OPERATIONS
- ---------------------
Years Ended December 31, 1998 and 1997
Net Sales
Net sales for the year ended December 31, 1998 increased 7.8% to $207.8 million
from $192.7 million for the year ended December 31, 1997.
Industrial Products: Net sales for the year ended December 31, 1998 increased
1.6% to $116.5 million from $114.7 million for the year ended December 31, 1997.
The change in net sales is due to the acquisition in February 1998 of a majority
interest in Ferox a.s., a cryogenic tank manufacturer located in the Czech
Republic, which increased net sales by $18.0 million. This increase was offset
by approximately $15.0 million of reduced revenues due to continued softness in
Asia, primarily for liquid cylinder products.
Distributed Products: Net sales increased 22.2% to $34.2 million in 1998 from
$27.9 million in the comparable period in 1997. This increase is due to
continued penetration of restaurant CO2 applications by the major distributors
and expansion of the cooking oil management business.
Medical Respiratory Products: Net sales for the year ended December 31, 1998
increased 3.0% to $27.1 million from $26.3 million for the year ended December
31, 1997. The change resulted from growth in international sales offset by
weakness in the domestic market caused by reductions in the Medicare
reimbursement rates that were effective January 1, 1998. Also, during the year,
MVE exited the oxygen concentrator and nebulizer markets to focus on its liquid
oxygen market using its cryogenic resources.
10
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Applied Technologies: Net sales for this group of products increased 26.1% to
$30.0 million in 1998 from $23.8 million in 1997. MVE was awarded several
contracts that used the LNG cylinder and fuel station technology that increased
sales in 1998.
Gross Margin
Gross margin, expressed as a percent of net sales, remained virtually unchanged
at 28.7 % in 1998 compared to 28.5% in 1997.
Industrial Products: Gross margin decreased 2.4% to 22.5% for the year ended
December 31, 1998 from 24.9% for the year ended December 31, 1997. This
reduction is due to poor economic conditions in Asia, lower margins as a result
of spreading fixed U.S. overhead costs over a lower volume of sales and the
acquisition of Ferox in the Czech Republic that has lower margins than the
existing business.
Distributed Products: Margins remained fairly consistent at 44.0% in 1998 and
44.6% in 1997 as the Company was able to offset pricing pressure with
improvements in manufacturing costs.
Medical Respiratory Products: Reductions in the Medicare reimbursement rates for
patients with Chronic Obstructive Pulmonary Disease (COPD), and the push down in
pricing to COPD equipment suppliers resulted in reduced margins for the
Company's domestic business. Offsetting this decline in the U.S. market were
increased sales to the international markets, which have higher margins. The
combination of these two factors, coupled with greater manufacturing
efficiencies, enabled margins to increase 2.4% to 26.7% for the year ended
December 31, 1998 from 24.3% in 1997.
Applied Technologies: Gross profit margins increased 5.6% to 37.4% in 1998 from
31.8% in 1997 due to more favorable product mix and strong demand for LNG
products.
Operating Expenses
Operating expenses for the year ended December 31, 1998 were $43.1 million in
1998, compared to $42.3 million in 1997. During the year, Holdings acquired a
majority interest in Ferox a.s., in the Czech Republic, and continued
development of its cooking oil management systems, which increased operating
expenses by $3.0 million in 1998. In addition, as the Company exited the oxygen
concentrator product line, it incurred costs of $1.0 million to write-off the
value of net assets used for this product line. These increases were offset by
structural changes that reduced operating costs by $4.0 million in 1998.
Operating Income
Operating income was $16.5 million in 1998, compared to $12.7 million in the
same period in 1997 for the reasons identified earlier.
Interest Expense
Interest expense increased $1.7 million to $19.3 million in 1998 from $17.6
million in 1997 resulting from the acquisition debt and related interest expense
of the Ferox a.s. acquisition.
Income Taxes
The provision for income taxes was $1.3 million for the year ended December 31,
1998 compared to a $3.4 million benefit for the year ended December 31, 1997.
The effective tax rates for the years ended December 31, 1997 and 1996 were
different from the statutory rates as a result of various permanent differences.
Net Loss
As a result of the above, net loss before extraordinary gain was $3.9 million in
1998 compared to $1.1 million in 1997. (See Note 6)
11
<PAGE>
EBITDA
Earnings before interest, income taxes, depreciation and amortization (EBITDA)
increased to $26.0 million, or 12.5% of net sales in 1998, from $20.2 million or
10.5% of net sales in 1997. This increase is due to reasons mentioned above as
well as cost reduction programs affecting the organization and its manufacturing
plants.
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
1.5% to $114.7 million from $113.0 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 increased $2.7 million. The Orca
product line was introduced in 1997 which increased sales $2.0 million. 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
4.1% to $27.9 million from $29.1 million for the year ended December 31, 1996.
The decrease is primarily attributable to decreases in AURA panel sales. Sales
of AURA panels were $0.1 million and $2.2 million in the years ended
December 31, 1997 and 1996, respectively. The sales of Aura panels were
discontinued in 1997.
Medical Respiratory 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.
Applied Technologies: Net sales for this group of products increased 13.9% to
$23.8 million in 1997 from $20.9 million in 1996. Vacuum insulated pipe
increased $1.5 million offset by reduced sales in biological storage systems.
The environmental chambers product line was introduced in 1997 which increased
sales $1.9 million.
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 2.5% to 24.9% for the year ended
December 31, 1997 from 22.4% 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 1.1% to 44.6% for the year ended
December 31, 1997 from 43.5% for the year ended December 31, 1996.
Medical Respiratory Products: Gross margin decreased 0.6% to 24.3% for the year
ended December 31, 1997 from 24.9% for the year ended December 31, 1996.
Applied Technologies: Gross profit margins decreased 3.3% to 31.8% in 1997 from
35.1% in 1996.
12
<PAGE>
Operating Expenses
Operating expenses for the year ended December 31, 1997 were $42.3 million
compared to $58.7 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 $1.3 million 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 cooking oil management system. 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 respiratory 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 11 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 $5.6
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 $6.5 million for the year ended December 31, 1996. The
increase in operating income is primarily attributable to the factors noted in
discussions above.
Interest Expense
Interest expense was $17.6 million for the year ended December 31, 1997 compared
to $16.5 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 $1.6 million for the year ended December 31, 1996. The
effective tax rates for the years ended December 31, 1997 and 1996 were
different from the statutory rates as a result of various permanent differences.
Net Loss
Net loss for the year ended December 31, 1997 was $1.1 million compared to
$20.4 million for the year ended December 31, 1996.
EBITDA
EBITDA (earnings before interest, income taxes, depreciation and amortization)
was $20.2 million or 10.5% of net sales 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 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.
13
<PAGE>
LIQUIDITY AND CAPITAL RESERVES
- ------------------------------
Cash Flow From Operating Activities
Cash flow provided by operating activities was approximately $0.7 million, $4.6
million, and $8.4 million for the years ended December 31, 1998 and 1997, and
the ten months ended December 31, 1996, respectively. Working capital was $29.5
million, $16.9 million and $29.9 million, respectively at December 31, 1998,
1997, and 1996. Cash increased as a result of the issuance of the 14.125% senior
subordinated notes. Additionally, the current maturities of long term debt of a
subsidiary was restructured and a majority interest in Ferox a.s. in the Czech
Republic was obtained.
Cash Flow From Investing Activities
For the years ended December 31, 1998 and 1997 and the ten months ended December
31, 1996, Holdings had approximately $4.3 million, $6.4 million and $9.8 million
in capital expenditures, respectively. For the periods ended December 31, 1998
and 1997, Holdings invested $0.2 million and $0.4 million in non-cash capital
expenditures. Holdings reduced the dollars spent on capital expenditures from
1997 as most of the modernization and investments in capacity changes were
completed previously. The expenditures in the periods ended December 31, 1997
and 1996 were primarily due to the expansion of Holdings' New Prague operations,
the construction of the Caire facility and normal equipment acquisition and
replacement.
Cash Flow From Financing Activities
Cash flow provided by (used in) financing activities was approximately $8.0
million, $(2.6) million and $10.6 million in the years ended December 31, 1998
and 1997 and the ten months ended December 31, 1996, respectively. In 1998, $6.3
million was received from the issuance of 14.125% senior subordinated notes.
Also, in 1997, Holdings purchased $3.2 million of treasury stock and $0.5
million of preferred stock. 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 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 that the Company maintain
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. Holdings
expects that the cash generated by operations and borrowings under its revolving
credit agreement that expires on October 2000 will be sufficient to satisfy its
working capital and debt service requirements through the period the current
credit agreement is in place. Holdings expects that it may require waivers of
certain quarterly financial covenants under this credit agreement from the
lending institutions. While Holdings meets regularly with its lending
institutions and keeps them advised of Holdings ongoing performance, no
assurance can be given that the lending institutions will grant these covenant
waivers, in which case Holdings would have to reduce its indebtedness
significantly or negotiate changes to, or relief from, covenants in the credit
facility. Holdings was in compliance with all covenants included in the
agreement governing the revolving credit facility and the indenture as of
December 31, 1998.
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.
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.
Holdings accrued, but did not declare or pay, dividends of $8.2 million, $7.2
million, and $2.3 million to the holders of Holdings Preferred Stock for the
years ended December 31, 1998 and 1997 and the ten months ended December 31,
1996, respectively.
14
<PAGE>
To the extent that operating cash flows are insufficient to repay borrowings
under the Senior Secured Notes, the revolving credit agreement and the IRB
financing at their respective maturities, Holdings 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 Holdings would be able to refinance such indebtedness.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY.
See Appendix A.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
15
<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.
16
<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.
17
<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, 1998 and 1997
MVE Holdings, Inc. and Subsidiaries Consolidated Statements of Operations for
the Years Ended December 31, 1998 and 1997 and the Ten Months Ended December 31,
1996
MVE Holdings, Inc. and Subsidiaries Consolidated Statements of Stockholders'
Deficit for the Years Ended December 31, 1998 and 1997, and the Ten Months Ended
December 31, 1996
MVE Holdings, Inc. and Subsidiaries Consolidated Statements of Cash Flows for
the Years Ended December 31, 1998 and 1997, and the Ten Months Ended December
31, 1996
MVE Holdings, Inc. and Subsidiaries Consolidated Statements of Comprehensive
Income for the Years Ended December 31, 1998 and 1997, and the Ten Months Ended
December 31, 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, 1998
and 1997
MVE, Inc. and Subsidiaries Consolidated Statements of Operations for the Years
Ended December 31, 1998 and 1997, and the Ten Months Ended December 31, 1996
MVE, Inc. and Subsidiaries Consolidated Statements of Stockholder's Deficit for
the Years Ended December 31, 1998 and 1997, and the Ten Months Ended December
31, 1996
MVE, Inc. and Subsidiaries Consolidated Statements of Cash Flows for the Years
Ended December 31, 1998 and 1997, and the Ten Months Ended December 31, 1996
MVE, Inc. and Consolidated Statement of Comprehensive Income for the Year Ended
December 31, 1998 and 1997, and the Ten Months Ended December 31, 1996
Notes to MVE, Inc. and Subsidiaries Consolidated Financial Statements
18
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of MVE Holdings, Inc.
We have audited the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholder's deficit, cash flows and
comprehensive income of MVE Holdings, Inc. and subsidiaries (Holdings) as of
December 31, 1998 and 1997. 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.
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, 1998
and 1997 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 12, 1999
19
<PAGE>
MVE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
--------- ---------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 9,922 $ 5,864
Accounts receivable, net of allowance for doubtful accounts 32,883 28,838
Inventories 27,120 24,774
Prepaid expenses 2,637 1,319
Income tax refund receivable 1,013
Deferred income taxes 5,266 5,604
--------- ---------
Total current assets 77,828 67,412
PROPERTY, PLANT AND EQUIPMENT 69,705 48,640
Less- Accumulated depreciation and amortization (30,512) (18,765)
--------- ---------
Net property, plant and equipment 39,193 29,875
GOODWILL, net 22,327 24,471
DEFERRED INCOME TAXES 3,555 3,483
OTHER ASSETS, net 10,658 11,541
--------- ---------
Total assets $ 153,561 $ 136,782
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term debt $ 7,524 $ 9,858
Accounts payable 15,346 18,297
Accrued expenses and other liabilities 25,422 22,376
--------- ---------
Total current liabilities 48,292 50,531
LONG-TERM DEBT, net of current maturities 156,024 140,669
OTHER NONCURRENT LIABILITIES 656 94
--------- ---------
Total liabilities 204,972 191,294
MINORITY INTEREST 1,212 368
SERIES A CONVERTIBLE REDEEMABLE PREFERRED STOCK 62,643 55,388
SERIES B REDEEMABLE PREFERRED STOCK 9,955 9,050
STOCKHOLDERS' DEFICIT:
Notes receivable from shareholders (653) (2,225)
Common stock, no par value, stated value $.01 per share, 1,500,000
shares authorized; 125,708 and 149,068 shares issued and 1 2
outstanding, respectively
Additional paid-in capital 1,470 1,417
Common stock warrants 165 165
Accumulated other comprehensive income (11) (112)
Accumulated deficit (126,193) (118,565)
--------- ---------
Total stockholders' deficit (125,221) (119,318)
--------- ---------
Total liabilities and stockholders' deficit $ 153,561 $ 136,782
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
20
<PAGE>
MVE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31, 1998 and 1997,
and the Ten Months Ended December 31, 1996
(In Thousands)
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
NET SALES $ 207,751 $ 192,726 $ 155,746
COST OF SALES 148,096 137,736 113,875
--------- --------- ---------
Gross profit 59,655 54,990 41,871
OPERATING EXPENSES:
Selling and marketing 13,686 13,925 9,855
General and administrative 18,402 18,225 15,441
Research and development 5,301 5,989 3,047
Amortization 4,715 4,193 4,623
Other expenses (Note 11) 1,042 21,972
--------- --------- ---------
Total operating expenses 43,146 42,332 54,938
--------- --------- ---------
Operating income (loss) 16,509 12,658 (13,067)
INTEREST INCOME 430 562 145
INTEREST EXPENSE (19,345) (17,631) (13,887)
--------- --------- ---------
Net loss before income tax (provision) benefit,
minority interest and extraordinary gain (2,406) (4,411) (26,809)
INCOME TAX (PROVISION) BENEFIT (1,336) 3,398 3,197
--------- --------- ---------
Net loss before minority interest and (3,742) (1,013) (23,612)
extraordinary gain
MINORITY INTEREST IN NET (INCOME) LOSS (165) (48) 949
--------- --------- ---------
Net loss before extraordinary gain (3,907) (1,061) (22,663)
EXTRAORDINARY GAIN FROM EARLY EXTINGUISHMENT OF DEBT 6,118
--------- --------- ---------
Net income (loss) 2,211 (1,061) (22,663)
PREFERRED STOCK DIVIDENDS (8,160) (7,216) (2,251)
--------- --------- ---------
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS $ (5,949) $ (8,277) $ (24,914)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
21
<PAGE>
MVE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Deficit
For the Years Ended December 31, 1998 and 1997,
and the Ten Months Ended December 31, 1996
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Notes
Receivable Common Stock Total
From ------------------------ Additional Common Accumu- Stock-
Share- Number Paid - In Stock lated holder's
holders of shares Amount Capital Warrants Deficit Deficit
------------ ---------- ---------- ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, February 29, 1996 510,000 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 (602) (2,036) (2,638)
warrants
Purchase of treasury stock (268,100) (2) (33,636) (33,638)
Exchange for preferred stock (66,398) (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) 175,502 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 (25,373) (3,183) (3,183)
Exchange for preferred stock (1,061) (133) (133)
Foreign currency 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) 149,068 2 1,417 165 (118,677) (119,318)
Default on note receivable 1,680 (24,793) (1) (1,679) 0
Interest on notes receivable
from Shareholders (58) (58)
Notes receivable from
Shareholder (50) (50)
Restricted stock issued 1,433
Preferred stock dividend (8,160) (8,160)
Options issued 53 53
Foreign currency translation
Adjustment 259 259
Excess of additional pension
liability over unrecognized
prior service cost (158) (158)
Net income 2,211 2,211
------ ------- -- ------ ---- ---------- ---------
BALANCE, December 31, 1998 $ (653) 125,708 $1 $1,470 $165 $(126,204) $(125,221)
====== ======= == ====== ==== ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
22
<PAGE>
MVE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1998 and 1997,
and the Ten Months Ended December 31, 1996
(In Thousands)
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 2,211 $ (1,061) $ (22,663)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities-
Depreciation and amortization 9,480 7,611 7,791
Minority interest 165 48 (949)
Interest on exchangeable debt 63 329 274
Deferred income tax benefit 266 (4,234) (2,929)
(Gain) loss on sale of assets, net (337) 22
Loss on write-off of assets 1,042 2,768
Loss on write-off of goodwill 10,824
(Gain) loss on debt forgiveness (6,118) 95 3,722
Changes in operating assets and liabilities (Note 5) (7,164) 1,098 7,419
Changes in other non-current operating assets and liabilities 1,103 672 2,114
--------- --------- ---------
Net cash provided by operating activities 711 4,580 8,371
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (4,300) (6,372) (9,783)
Proceeds from sale of assets 839 373 107
Payment for purchase of Ferox, net of cash acquired (1,015)
Increase in other assets (350) (660) (750)
Cash acquired from acquisitions 687
--------- --------- ---------
Net cash used in investing activities (4,826) (6,659) (9,739)
FINANCING ACTIVITIES:
Borrowings under revolving credit facility 196,477 210,673 174,266
Repayments under revolving credit facility (190,779) (205,870) (174,121)
Repayments of long-term debt (4,110) (2,876) (2,489)
Borrowings of long-term debt 6,300 10 4,680
Deferred closing costs (390) (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 (50) (2,000)
Changes in other noncurrent assets and liabilities 528 52 (179)
--------- --------- ---------
Net cash provided by (used in) financing activities 7,976 (2,562) 10,567
Effect of foreign currency exchange rate changes on cash
and cash equivalents 197
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 4,058 (4,641) 9,199
CASH AND CASH EQUIVALENTS, beginning of year 5,864 10,505 1,306
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of year $ 9,922 $ 5,864 $ 10,505
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 17,292 $ 16,275 $ 9,037
Cash paid (received) during the year for income taxes $ 2,013 $ (1,260) $ 1,626
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
23
<PAGE>
MVE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 1998 and 1997,
and the Ten Months Ended December 31, 1996
(In Thousands)
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net Income (loss) $ 2,211 $(1,061) $(22,663)
Other comprehensive income, before tax:
Foreign currency translation adjustments 259 (30)
Minimum pension liability adjustment (158) (82)
------- ------- --------
Other comprehensive income (loss), before tax 101 (112) (22,663)
Income tax (expense) benefit related to items of other
comprehensive Income (36) 86
------- ------- --------
Other comprehensive income (loss), net of tax $ 2,276 $(1,087) $(22,663)
======= ======= ========
Related tax (expense)/benefit of other comprehensive income:
Foreign currency translation adjustments $ (93) $ 23
Minimum pension liability 57 63
------- ------- --------
Total tax (expense) benefit related to items of
comprehensive income $ (36) $ 86
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
24
<PAGE>
MVE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1998 and 1997,
and the Ten Months Ended December 31, 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 and majority 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 four business segments: industrial, distributed, medical
respiratory and applied technologies. 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 and cooking oil management systems which
provides a new and enhanced method to store and handle frying oils. Medical
respiratory products include a range of respiratory products such as liquid
oxygen systems, ambulatory oxygen systems, oxygen concentrators and nebulizers.
Applied technologies includes specialized products using cryogenic technology
for use with liquid natural gas (LNG) storage, test chambers for rapid heat/cold
testing, storage systems used to store and transport temperature-sensitive
agricultural and biological products, vacuum insulated pipe and other end user
applications.
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 depreciable lives, tax provisions and reserves, uncollectible
accounts receivable, inventory 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 $994 and $3,695 at December
31, 1998 and 1997, respectively.
Receivables
Accounts receivable (A/R), net of allowance for doubtful accounts, consisted of
the following as of December 31, 1998 and 1997:
December 31, December 31,
1998 1997
-------------- -------------
A/R trade $31,667 $27,601
A/R other 2,361 1,776
Notes receivable 106 289
------- -------
34,134 29,666
Allowance (1,251) (828)
------- -------
$32,883 $28,838
======= =======
25
<PAGE>
Allowance for doubtful accounts consisted of the following for the years ended
December 31, 1998 and 1997, and the ten months ended December 31, 1996:
Additions: Write-offs,
Beginning Charged to net of Ending
Balance Expense Recoveries Balance
--------- ---------- ----------- -------
December 31, 1996 $675 $168 $45 $888
December 31, 1997 888 434 (494) 828
December 31, 1998 828 550 (127) 1,251
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:
December 31, December 31,
1998 1997
----------- -----------
Inventories at cost:
Purchased materials and subassemblies $15,517 $14,710
Work in process 8,581 6,401
Finished goods 6,352 5,115
------- -------
30,450 26,226
Reserves (3,330) (1,452)
------- -------
$27,120 $24,774
======= =======
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, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Land $ 2,865 $ 1,925
Buildings and improvements 26,011 13,750
Machinery and equipment 31,463 23,086
Furniture, fixtures and office equipment 8,746 8,995
Construction in progress 620 884
-------- --------
69,705 48,640
Less - accumulated depreciation and amortization (30,512) (18,765)
-------- --------
Net property, plant and equipment $ 39,193 $ 29,875
======== ========
</TABLE>
26
<PAGE>
Other Assets
Other assets are being amortized on a straight-line basis over their estimated
useful lives which range from 1 to 30 years. Accumulated amortization was
$13,407 and $10,821 at December 31, 1998 and 1997 respectively. Other assets net
of accumulated amortization consist of the following:
December 31, December 31,
1998 1997
------------ ------------
Deferred financing costs $3,330 $3,993
Patents and trademarks 418 491
Noncompete agreements 4,930 5,480
Other 1,980 1,577
------------ ------------
$10,658 $11,541
============ ============
Foreign Currency Translation
Translation gains or losses resulting from translating foreign currency
financial statements are reported as a component of stockholders' deficit. Gains
and losses resulting from foreign currency transactions are included in earnings
as incurred.
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, 1998, two of Holdings' customers represented
approximately 12% and 10%, respectively of Holdings' net sales. For the year
ended December 31, 1997, one of Holdings' customers represented approximately
11% 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
27
<PAGE>
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 the fair value
of net assets and is being amortized on a straight-line basis over 5 to 20
years. Accumulated amortization was $18,684 and $16,565 at December 31, 1998 and
1997, respectively (see Note 11).
Restricted Stock Plan
In 1998, the Board of Directors approved a restricted stock plan (the "Plan"). A
total of 10,000 shares of Holdings' common stock are reserved for issuance upon
the exercise of options under the Plan. Under the Plan, the awards and
expiration of the awards are granted based on determination of the Plan
Committee. The Plan will terminate on July 15, 2008 unless terminated sooner by
the Board of Directors.
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.
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. New Accounting Standards:
FAS 130 establishes standards for the reporting of comprehensive income and its
components. Comprehensive income is defined as the change in equity during the
period from transactions and other events and circumstances from non-owner
sources.
FAS 131 requires Holdings to report information about its operating segments
based on how Holdings manages its operations. Holdings manages its business in
four operating segments and has restated its external reporting to reflect this
change in structure. The four reportable segments are industrial, distributed,
medical respiratory and applied technologies. See also Note 10.
In 1998, Holdings adopted the following new accounting standard: Statement of
Financial Accounting Standard (FAS) No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits". FAS 132 revises and standardizes
disclosures for pensions and other postretirement benefits. (See Note 8)
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities." Holdings must adopt this standard no later than January
1, 2000. Holdings expects that this standard will not materially affect its
financial position and results of operations.
28
<PAGE>
3. Acquisitions:
Effective February 18, 1998, Holdings, through a subsidiary, acquired a majority
interest in Ferox, a.s., a manufacturer of cryogenic bulk storage 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 Holdings. The purchase price has been allocated
to the assets acquired and liabilities assumed based on their estimated fair
market values at the date of acquisition. In addition, Holdings paid to the
seller's parent the sum of $600 in cash in exchange for an agreement not to
compete. Subsequently, in various transactions, Holdings acquired additional
interests in Ferox. At December 31, 1998, Holdings owned 90% of the outstanding
capital stock of Ferox. The acquisition was accounted for under the purchase
method of accounting. The affect of the acquisition was not significant to the
Holdings financial statements.
In 1997, Holdings acquired two companies with purchase prices of $1,000 and
$300. In 1996, Holdings acquired two companies with purchase prices of $1,300
and $600. The effect of these acquisitions is not significant to Holdings'
financial statements.
4. Accrued Expenses and Other Liabilities:
Accrued expenses and other liabilities consists of the following:
December 31, December 31,
1998 1997
------------ ------------
Employee compensation and payroll taxes $4,556 $2,814
Income taxes 1,416 2,892
Warranty 3,564 1,930
Accrued pension liability 2,657 2,374
Accrued interest 5,772 5,422
Insurance 1,872 2,092
Deposits and rebates 3,119 2,429
Accrued professional fees 839 348
Accrued freight 322 471
Other 1,305 1,604
------- -------
$25,422 $22,376
======= =======
5. Supplemental Cash Flow Information:
Changes in operating assets and liabilities were as follows:
December 31, December 31, December 31,
1998 1997 1996
----------- ----------- -----------
Accounts receivable $(1,774) $(2,840) $ 4,479
Inventories 2,211 4,042 (2,700)
Prepaid expenses and other (1,253) (89) (329)
Income tax refund receivable 1,013 3,517 (2,372)
Accounts payable (7,977) 680 (1,245)
Accrued expenses and other liabilities 616 (4,212) 9,586
------- ------- -------
$(7,164) $ 1,098 $ 7,419
======= ======= =======
29
<PAGE>
Non-cash Investing and Financing Activities
A $1,500 loan in favor of a shareholder matured on January 9, 1998 and the
shareholder defaulted. In accordance with the terms of the loan and pledge
agreement, Holdings satisfied the defaulted loan by taking possession of certain
Holdings' common stock that served as collateral for payment of the loan.
Several lease and note obligations of $148 and $364 were incurred when Holdings
entered into leases or notes for new equipment and vehicles in 1998 and 1997,
respectively.
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.
30
<PAGE>
6. Long-Term Debt:
Certain assets of Holdings, i.e.: subsidiary stock, accounts receivable
inventory, selected real estate and equipment, are pledged as collateral for
long-term debt. Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
12.5% senior secured notes, due February 2002, interest payable
semiannually, net of unamortized discounts of $348 and $458 at $111,652 $111,542
December 31, 1998 and 1997 respectively.
Revolving credit facility, due October 2000, average interest rate of
7.91% at December 31, 1998 16,556 10,857
12.5% non-compete agreement, with semi-annual principal and interest
payments, due November 2006 7,557 6,864
14.125% senior subordinated notes, interest and principal due May 5, 6,885 0
2005
Bonds, Series 1996, due September 2005, semi-annual principal payments
of $345, plus interest at variable rates from 3.7% to 12%, 5.57% 4,830 5,520
at December 31, 1998
Term loan, due April 2009, variable annual payments based on calculations
as specified in the agreement, interest accrued annually at 10% 3,954 0
Industrial Development Revenue Bonds, Series 1996, semi-annual principal
payments of $220, plus interest at variable rates from 2%
to 9%, 3.171% at December 31, 1998, due June 2011 3,300 3,740
Note payable, due January 1999, interest payable monthly at 4.2% 1,775 0
Term loan, due August 2002, monthly payments of $36, plus interest
payable monthly at 16.2% 1,601 0
Note payable, due, March 1999, interest payable monthly at 13.9% 862 0
Capitalized leases payable in varying monthly installments through
February 2003 with interest rates ranging from 5% to 10.25% 2,047 2,415
Several notes payable with varying principal and interest payments
through April 2012 with interest rates ranging from 6% to 13.5% 2,529 2,129
7% exchangeable note, including accrued interest, with principal and
accrued interest payable August 1, 1998 0 6,155
10.25% first mortgage note, payable in monthly installments of $14,
including interest, with final payment due November 2004 0 821
Revolving foreign loan, with varying principal and interest payments
through 1998 with interest rates ranging from 5.8% to 10.5% 0 400
10% subordinated debentures, interest payable semiannually, subject to
10% per year mandatory redemption beginning 1997, balance due May 2001 0 84
------------- ------------
Total long-term debt $163,548 150,527
Less- Current maturities 7,524 9,858
------------- ------------
Long-term debt, net of current maturities $156,024 $140,669
============= ============
</TABLE>
On February 2, 1998, CAIRE Inc. (CAIRE), a subsidiary of Holdings, 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 820 shares of 10% Series AA Cumulative Preferred Stock
(Series AA Preferred Stock), par value $.01 per share, of CAIRE. Concurrent with
the above settlement, Holdings accepted, in full payment of all outstanding
unsecured indebtedness currently owed to it by CAIRE, 632 shares of the Series
AA Preferred Stock. Additionally, Holdings 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 per
share and is subject to mandatory redemption. As a result of this restructuring,
Holdings incurred an extraordinary gain of $6,118.
31
<PAGE>
On May 5, 1998, Holdings issued 14.125%, senior subordinated notes in the amount
of $6,300 and two common stock purchase warrants, each allowing the holder to
purchase 4,000 shares of Holdings common stock at $0.01 per share. The proceeds
from these notes will be used for working capital and general corporate
purposes. The senior subordinated notes are redeemable at the option of
Holdings, in whole or in part, on May 5, 2005, plus accrued and unpaid interest.
The senior subordinated notes contain certain covenants which restrict, among
other things, payment of dividends and additional equity issuances.
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 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 Holdings. The rate is determined based on MVE, Inc.'s EBITDA
(earnings before interest, income taxes, depreciation and amortization) to total
of Inc. debt as calculated quarterly. The outstanding balance was subject to a
weighted average borrowing rate of 7.91% and 8.375% at December 31, 1998 and
1997, respectively. The credit facility contains certain covenants with respect
to capital expenditures, borrowings and disposition of assets. As of December
31, 1998, Holdings was in compliance with all covenants governing the revolving
credit facility.
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 note agreement contains 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, 1998, Holdings was in compliance with its financial covenants.
The scheduled annual maturities of long-term debt at December 31, 1998 are as
follows:
Year Amount
----------------- -----------
1999 $7,524
2000 20,373
2001 3,946
2002 117,809
2003 1,262
Thereafter 12,634
-----------
$163,548
===========
Long-term debt, including current maturities, has a carrying value at December
31, 1998 of $163,548 and a fair value of $183,489. The estimated fair value
represents the present value of debt service at rates currently available to
Holdings for issuance of debt with similar terms. Except for the above, all
financial instruments are carried at amounts that approximate estimated fair
value.
32
<PAGE>
7. Income Taxes:
Income tax expense (benefit) consists of the following for the periods ended:
Fiscal Year Fiscal Year 10 Months
December 31, December 31, December 31,
1998 1997 1996
------------- ------------ ------------
Current:
Federal $ 803 $ 779 $ (198)
State 267 57 (70)
------------- ------------ -------------
1,070 836 (268)
Deferred 266 (4,234) (2,929)
------------- ------------- -------------
$1,336 $(3,398) $(3,197)
============= ============= =============
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 Fiscal Year 10 Months
December 31, December 31, December 31,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Income tax provision (benefit) at federal statutory rate $ 1,262 $(1,500) $(9,116)
Increase (reduction) attributable to:
Nondeductible goodwill 685 672 5,161
Foreign Sales Corporation benefit (238) (639) (714)
Consent and solicitation fees 422
Recapitalization fees 783
State taxes, net of federal benefit 465 (547) (132)
Debt forgiveness (2,090)
Other, net 1,252 (1,384) 399
------- ------- -------
$ 1,336 $(3,398) $(3,197)
======= ======= =======
</TABLE>
33
<PAGE>
The tax effects of temporary differences that give rise to the net deferred tax
asset were as follows:
December 31, December 31,
1998 1997
----------- ----------
Accrued pension $1,033 $1,020
Accrued compensation 570 620
Accrued self insurance reserve 739 913
Deferred compensation 728 823
Intangibles 1,777 1,167
Inventory reserves 973 1,111
Depreciable assets (1,360) (1,162)
Loss and credit carryforwards 3,062 3,638
Warranty reserve 804 818
Other accruals 637 576
Other 409 114
------ ------
9,372 9,638
Valuation allowance (551) (551)
------ ------
Net deferred tax asset $8,821 $9,087
====== ======
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 not deemed more likely than
not. The carryforwards of $3,062 expire as follows: $551 in 2007, $207 in 2011,
$2,156 in 2012 and $148 in 2013.
8. Employee Benefit Plans:
Pension Plan
Holdings maintains two noncontributory defined benefit pension plans covering
substantially all employees of its U.S. subsidiaries. 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.
34
<PAGE>
Weighted Average assumptions as of December 31:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------- ------------
<S> <C> <C> <C>
Discount rate 7.0% 7.25% 7.5%
Expected return on plan assets 8.5% 8.5% 8.5%
Rate of compensation increase 4.0% 4.5% 5.0%
The components of net periodic benefit cost are as follows:
Service cost $ 912 $ 748 $ 565
Interest cost 987 771 $ 523
Expected return on plan assets (784) (650) (462)
Amortization of transition obligation (2) (2) (2)
Amortization of prior service cost 13 13 11
Amortization of net actuarial loss 67 8 0
------ ----- -----
$1,193 $ 888 $ 635
====== ===== =====
Change in benefit obligation
Benefit obligation-
Beginning of year $12,501 $ 9,940
Service cost 912 748
Interest cost 987 771
Actuarial (gain) loss 1,605 1,226
Benefit payments (198) (184)
------- -------
Benefit obligation-
End of year $15,807 $12,501
======= =======
Change in plan assets
Fair value of plan assets-
Beginning of year $ 9,258 $ 7,657
Actual return on plan assets 954 1,302
Employer contributions 1,048 483
Benefit payments (198) (184)
------- -------
Fair value of plan assets-
End of year $11,062 $ 9,258
======= =======
Funded status $(4,745) $(3,243)
Unrecognized transition obligation 70 69
Unrecognized prior service cost 69 82
Unrecognized actuarial loss 2,340 971
------- -------
Net amount recognized $(2,266) $(2,121)
======= =======
Amounts recognized in the balance sheet consist of:
Accrued benefit liability $(2,657) $(2,374)
Intangible asset 150 171
Accumulated other comprehensive income 241 82
------- -------
Net amount recognized $(2,266) $(2,121)
======= =======
</TABLE>
35
<PAGE>
Approximately 88% of the plan assets are invested in equity securities and 12%
in cash equivalents as of December 31, 1998.
Savings Plan
Holdings has a 401(k) savings plan (the Plan) which covers all employees of its
U.S. subsidiaries 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 years ended
December 31, 1998 and 1997, Holdings made matching contributions of $536 and
$315 to the Plan. Holdings did not make matching contributions to the Plan in
the fiscal year ended December 31, 1996.
Deferred Compensation Plan
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, Holdings entered into agreements with the
three individuals that effectively terminated each individual's participation in
the deferred compensation plan. Pursuant to the agreements, Holdings 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.
9. 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 $716, $718 and $702, for the years ended December 31, 1998 and
1997 and for the ten months ended December 31, 1996. The future minimum rental
payments required under these leases are $722 in 1999, $462 in 2000, $303 in
2001 and $88 in 2002.
Litigation
Various lawsuits, claims and proceedings of a nature considered normal to its
businesses are pending against Holdings and certain of its subsidiaries. Most
significant legal proceedings are related to matters covered by insurance. The
most significant contingencies are described below.
In 1997, a former officer of a subsidiary of Holdings and a related limited
partnership company filed a lawsuit against Holdings and certain of its
affiliates and others alleging breach of contract and other claims arising out
of such officer's separation from the subsidiary for which he was employed.
In 1997, a designer and marketer of an alternative beverage CO2 technology filed
a lawsuit against MVE, Inc. and certain other providers of cryogenic mini-bulk
carbonated systems in Johnson County, Texas, alleging business disparagement,
violations of Texas antitrust lawsuits and related claims. With respect to this
lawsuit, MVE, Inc.'s insurer has accepted coverage, subject to a reservation of
rights.
For both of these lawsuits, extensive discovery has been conducted and Holdings
believes that the claims are without merit and that the outcome of these
lawsuits will not have a material adverse effect on its operating results, cash
flow or financial position.
36
<PAGE>
Environmental Matters
Holdings' past and present operations include activities which are subject to
extensive federal and state environmental regulations. As a result, Holdings is
currently participating in environmental investigations and assessments under
these regulations at some of its current and former sites. In 1997, Holdings
submitted a site investigation report and Response Action Plan (RAP) to the
Minnesota Pollution Control Agency (MPCA). The soil RAP has been conditionally
approved by the MPCA. The groundwater RAP is subject to further review. These
plans include possible obligations to remove or mitigate the effects of
hazardous substances from the environment. The amount of such future costs will
depend on factors such as the unknown nature or extent of contamination, the
extent and method of the remedial actions which may be required and the
magnitude of clean-up costs.
Ongoing environmental costs are expensed as incurred. Costs incurred to date as
of the year ended December 31, 1998 were $849, of which, $666 are to be
indemnified. In accordance with the recapitalization agreement, Holdings is to
be indemnified of most environmental claims. Based upon this and subject to the
difficulty in estimating these future costs, Holdings expects that the amount it
may be required to pay in connection with environmental matters would be
indemnified and also would not have a material adverse effect on the financial
condition or results of operations.
37
<PAGE>
10. Segment Reporting and Export Sales:
The operations of Holdings are divided into four 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. The medical respiratory products segment
develops, manufactures and markets a broad range of medical respiratory
products, including liquid oxygen systems, oxygen concentrators and medication
nebulizers, all of which are used primarily for the in-home treatment of
patients. The applied technologies segment includes storage systems for
temperature-sensitive agricultural and biological products, liquid natural gas
(LNG) storage, test chambers for rapid heat/cold testing, vacuum insulated pipe
and other emerging products. General corporate assets include cash and cash
equivalents and income taxes.
Other expenses recorded in the ten months ended December 31, 1996 are included
in operating income as follows: industrial $5,435, distributed $1,280, medical
respiratory $9,796 and corporate $5,461 (see Note 11). Financial information by
business segment as of and for the years ended December 31, 1998 and 1997, and
the ten months ended December 31, 1996 was as follows:
<TABLE>
<CAPTION>
Medical Applied
Industrial Distributed Respiratory Technologies Corporate Total
---------- ----------- ----------- ------------ --------- ----------
1998
----
<S> <C> <C> <C> <C> <C> <C>
Customer sales $116,542 $34,111 $27,078 $30,020 $207,751
Intersegment sales 6,105 2,483 1,563 1,938 (12,089)
---------- ----------- ---------- ------------ ---------- ---------
Total sales 122,647 36,594 28,641 31,958 (12,089) 207,751
Operating income (loss) 6,672 8,201 436 4,948 (3,748) 16,509
Identifiable assets 57,152 19,087 13,774 10,111 53,437 153,561
Capital expenditures 2,033 1,459 46 90 837 4,465
Depreciation and 3,695 681 769 587 3,748 9,480
amortization
1997
----
Customer sales $114,728 $27,901 $26,317 $23,780 $192,726
Intersegment sales 2,165 2,075 11 857 (5,108)
---------- ----------- ---------- ------------ ---------- ---------
Total sales 116,893 29,976 26,328 24,637 (5,108) $192,726
Operating income (loss) 8,777 7,437 (1,449) 1,847 (3,954) 12,658
Identifiable assets 41,257 13,346 17,145 10,054 54,980 136,782
Capital expenditures 4,473 1,090 281 67 1,099 7,010
Depreciation and 1,885 507 794 471 3,954 7,611
amortization
10 months 1996
--------------
Customer sales $93,848 $23,522 $22,467 $15,909 $155,746
Intersegment sales 1,480 (1,480)
---------- ----------- ---------- ------------ ---------- --------
Total sales 95,328 23,522 22,467 15,909 (1,480) 155,746
Operating income (loss) 4,849 3,356 (14,188) 1,499 (8,583) (13,067)
Identifiable assets 38,969 15,491 16,692 10,172 60,852 142,176
Capital additions 5,288 1,134 2,616 9 3,367 12,414
Depreciation and 1,130 749 2,363 404 3,145 7,791
amortization
</TABLE>
38
<PAGE>
Export sales from Holdings' U.S. operations for the years ended December 31,
1998 and 1997, and the ten months ended December 31, 1996 were as follows:
December 31, December 31, December 31,
1998 1997 1996
------------- ------------- ------------
Canada and Mexico $12,653 $10,922 $ 6,957
Europe 16,454 12,164 12,407
Pacific 12,497 29,318 24,868
Other 9,386 8,331 7,271
------------- ------------- ------------
Total $50,990 $60,735 $51,503
============= ============= ============
11. Other Expenses:
In 1998, MVE exited the oxygen concentrator market to focus on its liquid oxygen
market using its cryogenic resources. As a result, Holdings incurred a $1,042
loss on the write-off of the assets associated with this product line.
Other expense recorded in the ten months ended December 31, 1996 include the
following:
Recapitalization Expenses $ 3,545
Deferred compensation plan (Note 9) 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, Holdings incurred $3,545 of expenses related to recapitalization of
Holdings. 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, Holdings
had an agreement with a third party to participate in a joint venture to produce
and market its AURA product line. In December 1996, Holdings 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, Holdings recorded a goodwill write-down of $10,824 ($4,750 in
industrial products and $6,074 in the medical respiratory 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 respiratory and industrial business units and Holdings' inability to
generate future operating income from these business units. Moreover,
anticipated future cash flow of these business units indicates that the
recoverability of the goodwill is not reasonably assured. Prior to December of
1996, goodwill was amortized using the
39
<PAGE>
straight-line method over twenty years.
12. 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. Each share has a liquidation preference of
$10,000 plus accrued and unpaid dividends. The shareholders shall be entitled to
one vote for each share of Common Stock assuming conversion of the preferred
stock to common.
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 74.9% of the Common Stock outstanding on a fully
diluted basis. As of December 31, 1998 and 1997, Holdings had accrued, but
unpaid dividends of $15,643 and $8,388 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 and is non-voting. As of December 31, 1998 and
1997, Holdings had accrued, but unpaid dividends of $1,984 and $1,079 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.
13. Fiscal Results for the Year Ended December 31, 1996 (Unaudited)
December 31,
1996
------------
Net sales $190,782
Cost of sales 138,578
--------
Gross profit 52,204
Operating expenses:
Selling and Marketing 11,789
General and administrative 15,910
Research and development 3,510
Amortization 5,548
Other expenses 21,972
--------
Total operating expenses 58,729
--------
Operating loss (6,525)
Interest expense (16,530)
--------
Net loss before income tax benefit and minority interest (23,055)
Income tax benefit 1,616
--------
Net loss before minority interest (21,439)
Minority interest in net loss 1,077
--------
Net loss $(20,362)
========
14. Related Party Transactions
Holdings purchased from MVE, Inc. 850 shares of $.01 par common stock in MVE
Restaurant Services, Inc. for $500.
On November 11, 1998, Holdings loaned a shareholder $50 to be repaid on or
before July 1, 2005. Interest accrues quarterly at 8%. The loan is secured by
Holdings Common Stock owned by the shareholder.
40
<PAGE>
Holdings loaned two shareholders $2,000 on August 27, 1996, to be repaid to
Holdings on or before August 27, 2003. On January 9, 1998, one of the notes
matured and the shareholder defaulted. In accordance with the terms of the loan
and pledge agreement, Holdings satisfied the defaulted loan by taking possession
of certain Holdings' common stock that served as collateral for payment of the
loan. Simple interest accrues on the principal amount at an annual rate of 8%.
Principal of $500 and $2,000 and accrued interest of $102 and $225 was
outstanding at December 31, 1998 and 1997, respectively. The loan is secured by
Holdings Common Stock owned by the shareholder.
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 pay a
quarterly fee of $44 each plus expenses. The company paid $387 and $401 related
to these agreements in the years ended December 31, 1998 and 1997.
15. Subsequent Events
Agreement and plan of merger
On February 16, 1999, Holdings entered into a merger agreement with Chart
Industries, Inc. (Chart). Under the agreement, Holdings shall become a wholly
owned subsidiary of Chart. The transaction is expected to be complete within 60
days. The closing is subject to certain regulatory approvals and satisfaction of
usual and customary closing conditions. The purchase price is approximately $240
million including assumed debt. As part of the merger agreement, Chart will
retain 20% of the stock of the cooking oil management business. The remaining
80% of the stock will be distributed to the current shareholders of Holdings.
41
<PAGE>
MVE, INC.
Items 1 - 5 see MVE Holdings, Inc. reporT.
42
<PAGE>
Item 6. SELECTED FINANCIAL DATA.
The following table sets forth selected consolidated financial data with respect
to the Company as of the dates and for the periods indicated. The financial data
set forth below should be read in conjunction with the historical consolidated
financial statements and related notes thereto of the Company, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained elsewhere herein.
<TABLE>
<CAPTION>
----------------------------------------------------------------------
Fiscal Year Fiscal Year Ten Months Fiscal Year Fiscal Year
Ended Ended Ended Ended Ended
----------------------------------------------------------------------
February 28, February 29, December 31, December 31, December 31,
1995(2) 1996 1996(3) 1997 1998(1)
----------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Net Sales $ 146,480 $ 179,220 $ 155,746 $ 192,726 $ 189,215
Cost of Sales 100,394 128,196 113,875 137,736 132,882
--------- --------- --------- --------- ---------
Gross profit 46,086 51,024 41,871 54,990 56,333
Selling, general and administrative expenses 20,500 22,169 25,296 32,076 30,087
Research and development 2,792 4,718 3,047 5,989 5,081
Amortization and other nonrecurring expense 4,915 5,463 24,291 3,578 4,583
--------- --------- --------- --------- ---------
Operating income (loss) 17,879 18,674 (10,763) 13,347 16,582
Interest expense 9,878 16,305 13,881 16,721 16,758
--------- --------- --------- --------- ---------
Net income (loss) before income tax provision
(benefit) minority interest and extraordinary items 8,001 2,369 (24,644) (3,374) (176)
Income tax provision (benefit) 3,112 1,673 (3,197) (3,046) 2,749
--------- --------- --------- --------- ---------
Net income (loss) before minority interest and
extraordinary items 4,889 696 (21,447) (328) (2,925)
Minority interest in net income (loss) (172) 5 (949) 48 76
--------- --------- --------- --------- ---------
Net income (loss) before extraordinary items 5,061 691 (20,498) (376) (3,001)
Extraordinary (gain) loss 1,307 (6,118)
--------- --------- --------- --------- ---------
Net income (loss) $ 3,754 $ 691 $ (20,498) $ (376) $ 3,117
========= ========= ========= ========= =========
Other Data:
Gross margin 31.5% 28.5% 26.9% 28.5% 29.8%
EBITDA(4) $ 25,981 $ 27,619 $ (2,023) $ 20,295 $ 24,697
EBITDA Margin 17.7% 15.4% (1.3)% 10.5% 13.1%
Depreciation and amortization $ 7,930 $ 8,950 $ 7,791 $ 6,996 $ 7,517
Capital expenditures $ 7,594 $ 8,384 $ 12,414 $ 7,010 $ 3,533
Consolidated Balance Sheet Data (end of period):
Total assets $ 118,819 $ 133,888 $ 142,176 $ 158,987 $ 149,006
Current assets 48,149 62,518 76,623 64,228 62,256
Long-term debt, net of current maturities 119,952 131,024 143,009 134,594 137,582
</TABLE>
- -------------------------
(1) Loss on sale of assets of $674 was excluded from EBITDA as a result of bank
covenant requirements.
(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 revaluation of certain
business units and product lines including $3.5 million relating to the
recapitalization of Holdings in August 1996.
(4) Management calculates EBITDA as earnings before interest, taxes,
depreciation, amortization and extraordinary items. EBITDA has been adjusted
to include minority interest in net income (loss). Management reports EBITDA
as it is required for bank covenant purposes. EBITDA is not intended to
represent cash flow from operations for the period nor has it been presented
as an alternative to either (1) operating income (as determined by GAAP) as
an indicator of operating performance or (2) cash flow from operating,
investing and financing activities (as determined by GAAP). EBITDA is
therefore susceptible to varying calculations and as presented may not be
comparable to other similarly titled measures of other companies.
(5) The extraordinary gain in 1998 of $6,118 is due to the gain realized upon
extinguishment of debt (See Note 6)
43
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
SUMMARY
- -------
See MVE Holdings, Inc. report
RESULTS OF OPERATIONS
- ---------------------
Years Ended December 31, 1998 and 1997
Net Sales
Net sales for the year ended December 31, 1998 decreased 1.8% to $189.2 million
from $192.7 million for the year ended December 31, 1997.
Industrial Products: Net sales for the year ended December 31, 1998 decreased
14.0% to $98.6 million from $114.7 million for the year ended December 31, 1997.
The change in net sales is due, primarily, to approximately $15.0 million of
reduced revenues due to continued softness in Asia, primarily for liquid
cylinder products.
Distributed Products: Net sales increased 20.1% to $33.5 million in 1998 from
$27.9 million in the comparable period in 1997. This increase is due to
continued penetration of restaurant CO2 applications by the major distributors
and expansion of the cooking oil management business.
Medical Respiratory Products: Net sales for the year ended December 31, 1998
increased 3.0% to $27.1 million from $26.3 million for the year ended December
31, 1997. The change resulted from growth in international sales offset by
weakness in the domestic market caused by reductions in the Medicare
reimbursement rates that were effective January 1, 1998. Also, during the year,
MVE exited the oxygen concentrator and nebulizer markets to focus on its liquid
oxygen market using its cryogenic resources.
Applied Technologies: Net sales for this group of products increased 26.0% to
$30.0 million in 1998 from $23.8 million in 1997. MVE was awarded several
contracts that used the LNG cylinder and fuel station technology that increased
sales in 1998.
Gross Margin
Gross margin, expressed as a percent of net sales, increased 1.3% to 29.8% in
1998 compared to 28.5% in 1997.
Industrial Products: Gross margin decreased 1.5% to 23.4% for the year ended
December 31, 1998 from 24.9% for the year ended December 31, 1997. This
reduction is due to poor economic conditions in Asia and lower margins as a
result of spreading fixed U.S. overhead costs over a lower volume of sales.
Distributed Products: Margins remained fairly consistent at 44.2% in 1998 and
44.6% in 1997 as the Company was able to offset pricing pressure with
improvements in manufacturing costs.
Medical Respiratory Products: Reductions in the Medicare reimbursement rates for
patients with Chronic Obstructive Pulmonary Disease (COPD) and the push down in
pricing to COPD equipment suppliers resulted in reduced margins for the
Company's domestic business. Offsetting this decline in the U.S. market were
increased sales to the international markets, which have higher margins. The
combination of these two factors, coupled with greater manufacturing
efficiencies, enabled margins to increase 2.4% to 26.7% for the year ended
December 31, 1998 from 24.3% in 1997.
Applied Technologies: Gross profit margins increased 5.6% to 37.4% in 1998 from
31.8% in 1997 due to a more favorable product mix and strong demand for LNG
products.
44
<PAGE>
Operating Expenses
Operating expenses for the year ended December 31, 1998 were $39.8 million in
1998, compared to $41.6 million in 1997. The Company exited the oxygen
concentrator product line incurring costs of $1.0 million to write-off the value
of net assets used for this product line. In addition, the Company continued
development of its cooking oil management systems. These increases were offset
by structural changes that reduced operating costs in 1998.
Operating Income
Operating income was $16.6 million in 1998, compared to $13.3 million in the
same period in 1997 for the reasons identified earlier.
Interest Expense
Interest expense was $16.8 million in 1998 compared to $16.7 million in 1997.
Income Taxes
The provision for income taxes was $2.7 million for the year ended December 31,
1998 compared to a benefit of $3.0 million for the year ended December 31, 1997.
The effective tax rates for the years ended December 31, 1998 and 1997 were
different from the statutory rates as a result of various permanent differences.
Net Loss
As a result of the above, net loss before extraordinary gain was $3.0 million in
1998 compared to $0.4 million in 1997.
EBITDA
Earnings before interest, income taxes, depreciation and amortization (EBITDA)
increased to $24.7 million, or 13.1% of net sales in 1998, from $20.3 million or
10.5% of net sales in 1997. This increase is due to reasons mentioned above as
well as cost reduction programs affecting the organization and its manufacturing
plants.
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
1.5% to $114.7 million from $113.0 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 increased $2.7 million. The Orca
product line was introduced in 1997 which increased sales $2.0 million. 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
4.1% to $27.9 million from $29.1 million for the year ended December 31, 1996.
The decrease is primarily attributable to decreases in AURA panel sales. Sales
of AURA panels were $0.1 million and $2.2 million in the years ended
December 31, 1997 and 1996, respectively. The sales of Aura panels were
discontinued in 1997.
45
<PAGE>
Medical Respiratory 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.
Applied Technologies: Net sales for this group of products increased 13.9% to
$23.8 million in 1997 from $20.9 million in 1996. Vacuum insulated pipe
increased $1.5 million offset by reduced sales in biological storage systems.
The environmental chambers product line was introduced in 1997 which increased
sales $1.9 million.
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 2.5% to 24.9% for the year ended
December 31, 1997 from 22.4% 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 1.1% to 44.6% for the year ended
December 31, 1997 from 43.5% for the year ended December 31, 1996.
Medical Respiratory Products: Gross margin decreased 0.6% to 24.3% for the year
ended December 31, 1997 from 24.9% for the year ended December 31, 1996.
Applied Technologies: Gross profit margins decreased 3.3% to 31.8% in 1997 from
35.1% in 1996.
Operating Expenses
Operating expenses for the year ended December 31, 1997 were $41.6 million
compared to $56.0 million for the year ended December 31, 1996. The decrease in
operating expenses is primarily attributable to one-time, primarily non-cash
charges of $19.7 million in 1996, including expenses of $1.2 million relating to
the recapitalization of Holdings and the Company in August 1996 and $1.3 million
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 cooking oil management system. Other net
spending increased approximately $2.0 million.
In connection with the change of ownership of Holdings and the Company in August
1996, management, at the direction of the 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 respiratory and industrial product lines
and discontinued its AURA product line. One-time charges of $19.7 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 $5.3
million from the same period one year ago.
Operating Income
Operating income was $13.3 million for the year ended December 31, 1997 compared
to an operating loss of $3.8 million for the year ended December 31, 1996. The
increase in operating income is primarily attributable to the factors noted in
discussions above.
46
<PAGE>
Interest Expense
Interest expense was $16.7 million for the years ended December 31, 1997 and
1996.
Income Taxes
The benefit from income taxes was $3.0 million for the year ended December 31,
1997 compared to $1.7 million for the year ended December 31, 1996. The
effective tax rates for the years ended December 31, 1997 and 1996 were
different from the statutory rates as a result of various permanent differences.
Net Loss
Net loss for the years ended December 31, 1997 and 1996 were $0.4 million and
$17.8 million.
EBITDA
EBITDA (earnings before interest, income taxes, depreciation and amortization)
was $20.3 million or 10.5% of net sales for the year ended December 31, 1997
compared to $6.5 million or 3.4% of net sales for the year ended December 31,
1996. The increase in EBITDA is attributable to the factors noted above.
Adjusting for nonrecurring expenses of $19.7 million including expenses relating
to the recapitalization of Holdings and the Company in August 1996, EBITDA for
the year ended December 31, 1996 was $26.2 million.
LIQUIDITY AND CAPITAL RESERVES
Cash Flow From Operating Activities
Cash flow provided by operating activities was approximately $0.5 million, $5.3
million, and $10.5 million for the years ended December 31, 1998 and 1997, and
the ten months ended December 31, 1996, respectively. Working capital was $25.8
million, $14.5 million and $23.1 million, respectively at December 31, 1998,
1997, and 1996. Working capital increased as a result of the current maturities
of long term debt of a subsidiary being restructured and decreased inventory
purchases.
Cash Flow From Investing Activities
For the years ended December 31, 1998 and 1997 and the ten months ended December
31, 1996, the Company had approximately $3.4 million, $6.4 million and $9.8
million in capital expenditures, respectively. For the periods ended December
31, 1998 and 1997, the Company invested $0.1 million and $0.4 million in
non-cash capital expenditures. The Company reduced the dollars spent on capital
expenditures from 1997 as most of the modernization and investments in capacity
changes were completed previously. 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.
Cash Flow From Financing Activities
Cash flow provided by financing activities was approximately $1.7 million, $1.0
million and $1.0 million in the years ended December 31, 1998 and 1997 and the
ten months ended December 31, 1996, respectively.
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 that the Company maintain
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 Company
expects that the cash generated by operations and borrowings under its revolving
credit agrement that expires in October 2000 will be sufficient to satisfy its
working capital and debt service requirements through the period the current
agreement is in place. The Company expects that it may require waivers of
certain quarterly financial covenants under this credit agreement from the
lending institutions. While the Company meets regularly with its lending
institutions and keeps them advised of the company's ongoing performance, no
assurance can be given that the lending institutions will grant these covenant
waivers, in which case the Company would have to reduce its indebtedness
significantly or negotiate changes to, or relief from, covenants in the credit
facility. The Company was in compliance with all covenants included in the
agreement governing the revolving credit facility and the indenture as of
December 31, 1998.
47
<PAGE>
To the extent that operating cash flows are insufficient to repay borrowings
under the Senior Secured Notes, the revolving credit agreement and the IRB
financing at their respective maturities, the Company expects that it will be
required to refinance all or substantially all of the Senior Secured Notes, the
revolving credit agreement and the IRB financing or sell equity or assets to
fund the repayment of all or substantially all of the Senior Secured Notes, the
revolving credit and the IRB financing at or prior to their respective
maturities, or effect a combination of the foregoing; however, there can be no
assurance that the Company would be able to refinance such indebtedness.
Items 8 - 14 FOR MVE, INC. PLEASE SEE MVE HOLDINGS, INC. REPORT.
48
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of MVE, Inc.
We have audited the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholder's deficit cash flows and
comprehensive income as of December 31, 1998 and 1997 of MVE, Inc. and
subsidiaries (the Company). 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.
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, 1998
and 1997, 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 12, 1999
49
<PAGE>
MVE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
--------- ---------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,999 $ 2,772
Accounts receivable, net of allowance for doubtful accounts 30,097 28,837
Inventories 23,171 24,774
Prepaid expenses 1,764 1,228
Income tax refund receivable 1,013
Deferred income taxes 5,225 5,604
--------- ---------
Total current assets 62,256 64,228
PROPERTY, PLANT AND EQUIPMENT 47,422 48,640
Less- Accumulated depreciation and amortization (20,130) (18,765)
--------- ---------
Net property, plant and equipment 27,292 29,875
DUE FROM MVE HOLDINGS, INC 31,980 31,903
GOODWILL, net 22,327 24,471
DEFERRED INCOME TAXES 808 2,402
OTHER ASSETS, net 4,343 6,108
--------- ---------
Total assets $ 149,006 $ 158,987
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term debt $ 2,268 $ 9,069
Accounts payable 11,672 18,297
Accrued expenses and other liabilities 22,523 22,371
--------- ---------
Total current liabilities 36,463 49,737
LONG-TERM DEBT, net of current maturities 137,582 134,594
OTHER NONCURRENT LIABILITIES 77 113
--------- ---------
Total liabilities 174,122 184,444
MINORITY INTEREST 444 368
STOCKHOLDERS' DEFICIT:
Notes receivable from shareholders (50)
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 12,328 12,277
Accumulated other comprehensive income (433) (112)
Accumulated deficit (37,406) (37,991)
--------- ---------
Total stockholder's deficit (25,560) (25,825)
--------- ---------
Total liabilities and stockholder's deficit $ 149,006 $ 158,987
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
50
<PAGE>
MVE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31, 1998 and 1997,
and the Ten Months Ended December 31, 1996
(In Thousands)
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
NET SALES $ 189,215 $ 192,726 $ 155,746
COST OF SALES 132,882 137,736 113,875
--------- --------- ---------
Gross profit 56,333 54,990 41,871
OPERATING EXPENSES:
Selling and marketing 13,041 13,925 9,855
General and administrative 17,046 18,151 15,441
Research and development 5,081 5,989 3,047
Amortization 3,541 3,578 4,623
Other expenses (Note 10) 1,042 19,668
--------- --------- ---------
Total operating expenses 39,751 41,643 52,634
--------- --------- ---------
Operating income (loss) 16,582 13,347 (10,763)
INTEREST EXPENSE (16,758) (16,721) (13,881)
--------- --------- ---------
Net loss before income tax (provision) benefit,
minority interest and extraordinary gain (176) (3,374) (24,644)
INCOME TAX (PROVISION) BENEFIT (2,749) 3,046 3,197
--------- --------- ---------
Net loss before minority interest and (2,925) (328) (21,447)
extraordinary gain
MINORITY INTEREST IN NET (INCOME) LOSS (76) (48) 949
--------- --------- ---------
Net loss before extraordinary gain (3,001) (376) (20,498)
EXTRAORDINARY GAIN FROM EARLY EXTINGUISHMENT
OF DEBT 6,118
--------- --------- ---------
Net income (loss) $ 3,117 $ (376) $ (20,498)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
51
<PAGE>
MVE, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholder's Deficit
For the Years Ended December 31, 1998 and 1997,
and the Ten Months Ended December 31, 1996
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Notes
Receivable Common Stock Addi- Total
From ---------------------- tional Accumu- Stock-
Share- Number Paid-In lated Holder's
holders of shares Amount Capital Deficit Deficit
------- --------- ------ ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, February 29, 1996 1,000 $ 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 1,000 1 12,277 (37,615) (25,337)
Foreign currency translation (30) (30)
adjustment
Excess of additional pension
liability over unrecognized
prior service cost (82) (82)
Net loss (376) (376)
------- ------- ------- ------- -------- --------
BALANCE, December 31, 1997 1,000 1 12,277 (38,103) (25,825)
Notes receivable from shareholder (50) (50)
Options Issued 51 51
Foreign currency translation
adjustment (163) (163)
Excess of additional pension
liability over unrecognized
prior service cost (158) (158)
Intercompany gain on sale of stock 499 499
Forgiveness of intercompany debt (4,114) (4,114)
Transfer to Holdings, Inc. 1,083 1,083
Net loss 3,117 3,117
------- ------- ------- ------- -------- --------
BALANCE, December 31, 1998 $ (50) 1,000 $ 1 $12,328 $(37,839) $(25,560)
======= ======= ======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
52
<PAGE>
MVE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1998 and 1997,
and the Ten Months Ended December 31, 1996
(In Thousands)
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 3,117 $ (376) $ (20,498)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities-
Depreciation and amortization 7,517 6,996 7,791
Minority interest 76 48 (949)
Interest on exchangeable debt 63 329 274
Deferred income tax (benefit) liability 1,973 (3,153) (2,929)
(Gain) loss on sale of assets, net (370) 22
Loss on write-off of assets 1,042 2,768
Loss on write-off of goodwill 10,824
(Gain) loss on debt forgiveness (6,118) 95 3,722
Changes in operating assets and liabilities (Note 4) (6,724) 1,219 7,394
Changes in other non-current assets and liabilities (91) 160 2,114
--------- --------- ---------
Net cash provided by operating activities 485 5,340 10,511
INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net (3,403) (6,372) (9,783)
Proceeds from sale of assets 773 373 107
Increase in other assets (377) (659) (750)
Cash acquired from acquisitions 687
--------- --------- ---------
Net cash used in investing activities (3,007) (6,658) (9,739)
FINANCING ACTIVITIES:
Borrowings under revolving credit facility 196,477 210,673 174,266
Repayments under revolving credit facility (190,779) (205,870) (174,121)
Repayments of long-term debt (3,285) (2,756) (2,489)
Borrowings of long-term debt 10 4,680
Advance to MVE Holdings, Inc. (1,011) (21) (867)
Deferred closing costs (862) (314)
Notes receivable from shareholders (50)
Changes in other noncurrent assets and liabilities 358 (138) (179)
--------- --------- ---------
Net cash provided by financing activities 1,710 1,036 976
Effect of foreign currency exchange rate changes on
cash and cash equivalents 39
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (773) (282) 1,748
CASH AND CASH EQUIVALENTS, beginning of year 2,772 3,054 1,306
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of year $ 1,999 $ 2,772 $ 3,054
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 16,559 $ 16,275 $ 9,037
Cash paid (received) during the year for income taxes $ 2,013 $ (1,260) $ 1,626
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
53
<PAGE>
MVE, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 1998 and 1997,
and the Ten Months Ended December 31, 1996
(In Thousands)
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1998 1997 1996
------- ------- --------
<S> <C> <C> <C>
Net Income (loss) $ 3,117 $ (376) $(20,498)
Other comprehensive income, before tax:
Foreign currency translation adjustments (163) (30)
Minimum pension liability adjustment (158) (82)
------- ------- --------
Other comprehensive income (loss), before tax (321) (112)
Income tax (expense) benefit related to items of other
comprehensive income 115 86
------- ------- --------
Other comprehensive income (loss), net of tax $ 2,911 $ (402) $(20,498)
======= ======= ========
Related tax (expense)/benefit of other comprehensive income:
Foreign currency translation adjustments $ 58 $ 23
Minimum pension liability 57 63
------- ------- --------
Total tax (expense) benefit related to items of comprehensive income $ 115 $ 86
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
54
<PAGE>
MVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1998 and 1997,
and the Ten Months Ended December 31, 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
wholly 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 four business segments:
industrial, distributed, medical respiratory and applied technologies.
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 and cooking
oil management systems which provide a new and enhanced method to store and
handle frying oils. Medical respiratory products include a range of respiratory
products such as liquid oxygen systems, ambulatory oxygen systems, oxygen
concentrators and nebulizers. Applied technologies includes specialized products
using cryogenic technology for use with liquid natural gas (LNG) storage, test
chambers for rapid heat/cold testing, storage systems used to store and
transport temperature-sensitive agricultural and biological products, vacuum
insulated pipe and other end user applications. 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 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 depreciable lives, tax provisions and reserves, uncollectible
accounts receivable, inventory 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 $994 and $3,695 at
December 31, 1998 and 1997, respectively.
Receivables
Accounts receivable (A/R), net of allowance for doubtful accounts, consisted of
the following as of December 31, 1998 and 1997:
December 31, December 31,
1998 1997
-------------- -------------
A/R trade $28,460 $27,601
A/R other 2,355 1,775
Notes receivable 106 289
-------------- -------------
30,921 29,665
Allowance (824) (828)
-------------- -------------
$30,097 $28,837
============== =============
55
<PAGE>
Allowance for doubtful accounts consisted of the following for the years ended
December 31, 1998 and 1997, and the ten months ended December 31, 1996:
Additions: Write-offs,
Beginning Charged to net of Ending
Balance Expense Recoveries Balance
--------- ---------- ----------- -------
December 31, 1996 $675 168 45 $888
December 31, 1997 888 434 (494) 828
December 31, 1998 828 112 (116) 824
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,
1998 1997
----------- -------------
Inventories at cost:
Purchased materials and subassemblies $12,403 $14,710
Work in process 6,303 6,401
Finished goods 5,878 5,115
------- -------
24,584 26,226
Reserves (1,413) (1,452)
======= =======
$23,171 $24,774
======= =======
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, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Land $ 1,942 $ 1,925
Building and improvements 14,547 13,750
Machinery and equipment 23,028 23,086
Furniture, fixtures and office equipment 7,482 8,995
Construction in progress 423 884
-------- --------
47,422 48,640
Less - accumulated depreciation and amortization (20,130) (18,765)
-------- --------
Net property, plant and equipment $ 27,292 $ 29,875
======== ========
</TABLE>
56
<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
$11,503 and $10,103 at December 31, 1998 and 1997, respectively. Other assets
net of accumulated amortization consist of the following:
December 31, December 31,
1998 1997
------------- --------------
Deferred financing costs $2,974 $3,993
Patents, trademarks and product
lines 348 491
Non-compete agreement 12 47
Other 1,009 1,577
------------- --------------
$4,343 $6,108
============= ==============
Foreign Currency Translation
Translation gains or losses resulting from translating foreign currency
financial statements are reported as a component of stockholders' deficit. Gains
and losses resulting from foreign currency transactions are included in earnings
as incurred.
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, 1998, two of the Company's customers represented
approximately 13% and 11%, respectively of the Company's net sales. For the year
ended December 31, 1997, one of the Company's customers represented
approximately 11% 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 seven 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.
57
<PAGE>
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 the fair value of net assets and is
being amortized on a straight-line basis over 5 to 20 years. Accumulated
amortization was $18,684 and $16,565 at December 31, 1998 and 1997, 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.
2. New Accounting Standards:
FAS 130 establishes standards for the reporting of comprehensive income and its
components. Comprehensive income is defined as the change in equity during the
period from transactions and other events and circumstances from non-owner
sources.
FAS 131 requires the Company to report information about its operating segments
based on how the Company manages its operations. The Company manages its
business in four operating segments and has restated its external reporting to
reflect this change in structure. The four reportable segments are industrial,
distributed, medical respiratory and applied technologies. See also Note 9.
In 1998, the Company adopted the following new accounting standard: Statement of
Financial Accounting Standard (FAS) No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits". FAS 132 revises and standardizes
disclosures for pensions and other postretirement benefits (see Note 7).
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The Company must adopt this standard no later than
January 1, 2000. The Company expects that this standard will not materially
affect its financial position and results of operations.
58
<PAGE>
3. Accrued Expenses and Other Liabilities:
Accrued expenses and other liabilities consists of the following:
December 31, December 31,
1998 1997
----------- -----------
Accrued interest $5,443 $ 5,422
Employee compensation and payroll taxes 3,901 2,814
Deposits and rebates 3,119 2,429
Accrued pension cost 2,657 2,374
Warranty 2,067 1,930
Insurance 1,872 2,092
Income taxes 1,433 2,892
Accrued Professional Fees 409 348
Accrued freight 322 471
Other 1,300 1,599
----------- -----------
$22,523 $22,371
=========== ===========
4. Supplemental Cash Flow Information:
Changes in operating assets and liabilities were as follows:
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1998 1997 1996
------------- ------------ -------------
<S> <C> <C> <C>
Accounts receivable $(1,759) $(2,840) $ 4,479
Inventories 1,328 4,042 (2,700)
Prepaid expenses and other (931) 1 (329)
Income tax refund receivable 1,013 3,517 (2,372)
Accounts payable (6,552) 700 (1,264)
Accrued expenses and other liabilities 177 (4,201) 9,580
------------- ------------ -------------
$ (6,724) $ 1,219 $ 7,394
============= ============= ============
</TABLE>
Non-cash Investing and Financing Activities
Several lease and note obligations of $148 and $364 were incurred when the
Company entered into leases or notes for new equipment, vehicles and furniture
in 1998 and 1997, respectively.
In 1996, the Company purchased a building for $500 in exchange for long-term
debt.
59
<PAGE>
5. Long-Term Debt:
Certain assets of the Company, i.e.: subsidiary stock, accounts receivable
inventory, selected real estate and equipment are pledged as collateral for
long-term debt. Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ -------------
<S> <C> <C>
12.5% senior secured notes, due February 2002, interest payable
semiannually, net of unamortized discounts of $348 and $458
at December 31, 1998 and 1997, respectively $111,652 $111,542
Revolving credit facility, due October 2000, average interest rate of
7.91% at December 31, 1998 16,556 10,857
Bonds, Series 1996, due September 2005, semi-annual principal payments
of $345, plus interest at variable rates from 3.7% to 12%, 5.57%
at December 31, 1998 4,830 5,520
Industrial Development Revenue Bonds, Series 1996, semi-annual principal
payments of $220, plus interest at variable rates from 2% to 9%,
3.171% at December 31, 1997, due June 2011 3,300 3,740
Capitalized leases payable in varying monthly installments through
February 2003 with interest rates ranging from 5% to 10.25% 2,011 2,415
Several notes payable with varying principal and interest payments
through April 2012 with interest rates ranging from 6% to 10% 1,501 2,129
7% exchangeable note, including accrued interest, with principal and
accrued interest payable August 1, 1998 0 6,155
10.25% first mortgage note, payable in monthly installments of $14,
including interest, with final payment due November 2004 0 821
Revolving foreign loan, with varying principal and interest payments
through 1998 with interest rates ranging from 5.8% to10.5% 0 400
10% subordinated debentures, interest payable semiannually, subject to
10% per year mandatory redemption beginning 1997, balance due May 2001 0 84
------------ -------------
Total long-term debt 139,850 143,663
Less- Current maturities 2,268 9,069
------------ -------------
Long-term debt, net of current maturities $137,582 $134,594
============ =============
</TABLE>
On February 2, 1998, CAIRE Inc. (CAIRE), a subsidiary of the Company 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 820 shares of 10% Series AA Cumulative Preferred Stock
(Series AA Preferred Stock), par value $.01 per share of CAIRE. Concurrent with
the above settlement, the Company accepted, in full payment of all outstanding
unsecured indebtedness currently owed to it by CAIRE, 632 shares of the Series
AA Preferred Stock. Additionally, the Company 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 per share and is subject to mandatory redemption. As a result of this
restructuring, the Company incurred an extraordinary gain of $6,118.
The senior subordinated notes are redeemable at the option of Holdings, in whole
or in part, on May 5, 2005, plus accrued and unpaid interest. The senior
subordinated notes contain certain covenants which restrict, among other things,
payment of dividends and additional equity issuances.
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 through October 2000. The Company is charged a monthly fee
based on an annualized rate of 0.375% 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. The rate is determined based on the Company's EBITDA
(earnings before interest, income taxes, depreciation and amortization) to total
debt as calculated quarterly. The outstanding balance was subject to a weighted
average borrowing rate of 7.91% and 8.375% at December 31, 1998 and 1997,
respectively. The credit facility contains covenants with respect to capital
expenditures, borrowings and disposition of assets. As of December 31, 1998, the
Company was in compliance with all covenants governing the revolving credit
facility.
60
<PAGE>
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, 1998, the Company was in compliance
with all covenants.
The scheduled annual maturities of long-term debt at December 31, 1998 are as
follows:
Year Amount
---- ------
1999 $ 2,268
2000 18,141
2001 1,585
2002 113,674
2003 178
Thereafter 4,004
--------
$139,850
========
Long-term debt, including current maturities, has a carrying value of $139,850
and a fair value of $155,809. 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 Fiscal Year Ten Months
------------ ------------- ------------
December 31, December 31, December 31,
1998 1997 1996
------------ ------------- ------------
Current:
Federal $ 406 $ 887 $ (198)
State 370 31 (70)
------ ------- -------
776 918 (268)
Deferred 1,973 (3,964) (2,929)
------ ------- -------
$2,749 $(3,046) $(3,197)
====== ======= =======
61
<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 Fiscal Year Ten Months
------------ ------------- ------------
December 31, December 31, December 31,
1998 1997 1996
------------ ------------- ------------
<S> <C> <C> <C>
Income tax provision (benefit) at federal statutory rate $2,020 $(1,147) $(8,333)
Increase (reduction) attributable to:
Nondeductible goodwill 672 672 5,161
Foreign Sales Corporation benefit (238) (639) (714)
Consent and solicitation fees 422
State taxes, net of federal benefit 650 (547) (132)
Debt forgiveness (2,090)
Other, net 1,735 (1,385) 399
------------ ------------- ------------
$2,749 $(3,046) $(3,197)
============ ============= =============
</TABLE>
The tax effects of temporary differences that give rise to the net deferred tax
asset were as follows:
December 31, December 31,
1998 1997
----------- -----------
Accrued pension $1,033 $1,020
Accrued compensation 570 620
Accrued self insurance reserve 739 913
Deferred compensation 728 823
Intangibles 405 208
Inventory reserves 962 1,111
Depreciable assets (1,246) (1,162)
Loss and credit carryforwards 1,603 3,535
Warranty reserve 789 818
Other accruals 637 557
Other 364 114
----------- -----------
6,584 8,557
Valuation allowance (551) (551)
----------- -----------
Net deferred tax asset $6,033 $8,006
=========== ===========
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 not 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 its U.S. subsidiaries. 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.
62
<PAGE>
Weighted Average assumptions as of December 31:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------- ------------
<S> <C> <C> <C>
Discount rate 7.0% 7.25% 7.5%
Expected return on plan assets 8.5% 8.5% 8.5%
Rate of compensation increase 4.0% 4.5% 5.0%
The components of net periodic benefit cost are as follows:
Service cost $ 912 $ 748 $565
Interest cost 987 771 $523
Expected return on plan assets (784) (650) (462)
Amortization of transition obligation (2) (2) (2)
Amortization of prior service cost 13 13 11
Amortization of net actuarial loss 67 8 0
------------ ------------- ------------
$1,193 $888 $635
============ ============= ============
Change in benefit obligation
Benefit obligation-
Beginning of year $12,501 $9,940
Service cost 912 748
Interest cost 987 771
Actuarial (gain) loss 1,605 1,226
Benefit payments (198) (184)
------------- ------------
Benefit obligation-
End of year $15,807 $12,501
============= ============
Change in plan assets
Fair value of plan assets-
Beginning of year $9,258 $7,657
Actual return on plan assets 954 1,302
Employer contributions 1,048 483
Benefit payments (198) (184)
------------- ------------
Fair value of plan assets-
End of year $11,062 $9,258
============= ============
Funded status $(4,745) $(3,243)
Unrecognized transition obligation 70 69
Unrecognized prior service cost 69 82
Unrecognized actuarial loss 2,340 971
------------- ------------
Net amount recognized $(2,266) $(2,121)
============= =============
Amounts recognized in the balance sheet consist of:
Accrued benefit liability $(2,657) $(2,374)
Intangible asset 150 171
Accumulated other comprehensive income 241 82
------------- ------------
Net amount recognized $(2,266) $(2,121)
============= =============
</TABLE>
Approximately 88% of the plan assets are invested in equity securities and 12%
in cash equivalents as of December 31, 1998.
63
<PAGE>
Savings Plan
The Company has a 401(k) savings plan (the Plan) which covers all employees of
its U.S. subsidiaries 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 years ended
December 31, 1998 and 1997, the Company made matching contributions of $536 and
$315 to the Plan. The Company did not make matching contributions to the Plan in
the fiscal year ended December 31, 1996.
Deferred Compensation Plan
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 ten months 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 $684, $718, and $702 for the years ended December 31, 1998 and
1997 and for the ten months ended December 31, 1996. The future minimum rental
payments required under these leases are $635 in 1999, $376 in 2000, $217 in
2001 and $2 in 2002.
Litigation
Various lawsuits, claims and proceedings of a nature considered normal to its
businesses are pending against the Company and certain of its subsidiaries. Most
significant legal proceedings are related to matters covered by insurance. The
most significant contingencies are described below.
In 1997, a former officer of a subsidiary of the Company and a related limited
partnership company filed a lawsuit against the Company and certain of its
affiliates and others alleging breach of contract and other claims arising out
of such officer's separation from the subsidiary for which he was employed.
In 1997, a designer and marketer of an alternative beverage CO2 technology filed
a lawsuit against the Company and certain other providers of cryogenic mini-bulk
carbonated systems in Johnson County, Texas, alleging business disparagement,
violations of Texas antitrust lawsuits and related claims. With respect to this
lawsuit, the Company's insurer has accepted coverage, subject to a reservation
of rights.
For both of these lawsuits, extensive discovery has been conducted and the
Company believes that the claims are without merit and that the outcome of these
lawsuits will not have a material adverse effect on its operating results, cash
flow or financial position.
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Environmental Matters
The Company's past and present operations include activities which are subject
to extensive federal and state environmental regulations. As a result, the
Company is currently participating in environmental investigations and
assessments under these regulations at some of its current and former sites. In
1997, the Company submitted a site investigation report and Response Action Plan
(RAP) to the Minnesota Pollution control Agency (MPCA). The soil RAP has been
conditionally approved by the MPCA. The groundwater RAP is subject to further
review. These plans include possible obligations to remove or mitigate the
effects of hazardous substances from the environment. The amount of such future
costs will depend on factors such as the unknown nature or extent of
contamination, the extent and method of the remedial actions which may be
required and the magnitude of clean-up costs.
Ongoing environmental costs are expensed as incurred. Costs incurred to date as
of the year ended December 31, 1998 were $849, of which, $666 are to be
indemnified. In accordance with the recapitalization agreement, the Company is
to be indemnified of most environmental claims. Based upon this and subject to
the difficulty in estimating these future costs, the Company expects that the
amount it may be required to pay in connection with environmental matters would
be indemnified and also would not have a material adverse effect on the
financial condition or results of operations.
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9. Segment Reporting and Export Sales:
The operations of the Company are divided into four 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. The medical respiratory products
segment develops, manufactures and markets a broad range of medical respiratory
products, including liquid oxygen systems, oxygen concentrators and medication
nebulizers, all of which are used primarily for the in-home treatment of
patients. The applied technologies segment includes storage systems for
temperature-sensitive agricultural and biological products, liquid natural gas
(LNG) storage, test chambers for rapid heat/cold testing, vacuum insulated pipe
and other emerging products. General corporate assets include cash and cash
equivalents and income taxes.
Other expenses recorded in the ten months ended December 31, 1996 are included
in operating income as follows: industrial $5,432, distributed $1,280, medical
respiratory $9,796 and corporate $3,157 (see Note 10). Financial information by
business segment as of and for the years ended December 31, 1998 and 1997, and
the ten months ended December 31, 1996 was as follows:
<TABLE>
<CAPTION>
Medical Applied
Industrial Distributed Respiratory Technologies Corporate Total
---------- ----------- ---------- ------------ --------- ----------
1998
----
<S> <C> <C> <C> <C> <C>
Customer sales $98,575 $33,542 $27,078 $30,020 $189,215
Intersegment sales 5,438 2,483 1,563 1,938 (11,422)
---------- ----------- ---------- ------------ ---------- ---------
Total sales 104,013 36,025 28,641 31,958 (11,422) 189,215
Operating income (loss) 5,423 8,848 436 4,971 (3,096) 16,582
Identifiable assets 38,401 15,286 13,774 10,111 71,434 149,006
Capital expenditures 1,461 1,099 46 90 837 3,533
Depreciation and 2,437 628 769 587 3,096 7,517
amortization
1997
----
Customer sales $114,728 $27,901 $26,317 $23,780 $192,726
Intersegment sales 2,165 2,075 11 857 (5,108)
---------- ----------- ---------- ------------ ---------- ---------
Total sales 116,893 29,976 26,328 24,637 (5,108) $192,726
Operating income (loss) 8,829 7,449 (1,449) 1,856 (3,338) 13,347
Identifiable assets 41,257 11,576 17,145 10,054 78,955 158,987
Capital expenditures 4,473 1,090 281 67 1,099 7,010
Depreciation and amortization 1,885 508 794 471 3,338 6,996
10 months 1996
--------------
Customer sales $93,848 $23,522 $22,467 $15,909 $155,746
Intersegment sales 1,480 (1,480)
---------- ----------- ---------- ------------ ---------- --------
Total sales 95,328 23,522 22,467 15,909 (1,480) 155,746
Operating income (loss) 4,849 3,356 (14,188) 1,499 (6,279) (10,763)
Identifiable assets 38,969 14,889 16,692 10,172 79,837 160,559
Capital additions 5,288 1,134 2,616 9 3,367 12,414
Depreciation and amortization 1,130 749 2,386 404 3,122 7,791
</TABLE>
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<PAGE>
Export sales from the Company's U.S. operations for the years ended December 31,
1998 and 1997, and the ten months ended December 31, 1996 were as follows:
December 31, December 31, December 31,
1998 1997 1996
------------ ------------ ------------
Canada and Mexico $12,653 $10,922 $6,957
Europe 16,412 12,164 12,407
Pacific 12,497 29,318 24,868
Other 9,386 8,331 7,271
------------ ------------ ------------
Total $50,948 $60,735 $51,503
============ ============ ============
10. Other Expense:
In 1998, MVE exited the concentrator market to focus on its liquid market using
its cryogenic resources. As a result, Holdings incurred a $1,042 loss on the
write-off of the assets associated with this product line.
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
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 Writedown
In December 1996, the Company recorded a goodwill writedown of $10,824 ($4,750
in industrial products and $6,074 in the medical respiratory 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 respiratory 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.
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11. Fiscal Results for the Year Ended December 31, 1996 (Unaudited)
December 31,
1996
-----------
Net sales $190,782
Cost of sales 138,578
-----------
Gross profit 52,204
Operating expenses:
Selling and Marketing 11,789
General and administrative 15,523
Research and development 3,510
Amortization 5,548
Other expenses 19,668
-----------
Total operating expenses 56,038
-----------
Operating loss (3,834)
Interest expense (16,669)
-----------
Net loss before income tax benefit and
minority interest (20,503)
Income tax benefit 1,663
-----------
Net loss before minority interest (18,840)
Minority interest in net loss 1,077
-----------
Net loss $ (17,763)
===========
12. Related-Party Transaction
On November 11, 1998, Holdings loaned a sharebolder $50 to be repaid on or
before July 1, 2005. Interest accrues quarterly at 8%. The loan is secured by
Holdings Common Stock owned by the shareholder.
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.
The Company sold 850 shares of $.01 par common stock in MVE Restaurant Services,
Inc. to Holdings for $500,000. Prior to the sale, an intercompany receivable of
$4,114 was forgiven.
13. Subsequent Events
Agreement and plan of merger
On February 16, 1999, Holdings entered into a merger agreement with Chart
Industries, Inc. (Chart). Under the agreement, Holdings and the Company shall
become a wholly owned subsidiary of Chart. The transaction is expected to be
complete within 60 days. The closing is subject to certain regulatory approvals
and satisfaction of usual and customary closing conditions. The purchase price
is approximately $240 million including assumed debt.
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