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 - -80degreesF), biological matter, and other substances. Substantially all of the products of the Company's three business segments are based on its vacuum insulation technology, which enables the Company to produce containers with extremely high insulation characteristics. MVE Holdings, Inc. ("Holdings") owns all of the outstanding capital stock of the Company.
The Company owns all of the outstanding shares of Series A Participating Convertible Preferred Stock, $.01 par value per share, of CAIRE, Inc. (the "CAIRE Preferred Stock"), which comprises 91% of the outstanding shares of CAIRE capital stock. On a fully diluted basis, assuming conversion of the CAIRE Preferred Stock and exchange of a note held by a third party for CAIRE common stock, the Company would own 85% of the shares. On February 2, 1998, the Company purchased all shares of CAIRE common stock owned by a third party. Subsequent to this transaction, the Company owns 97% of the outstanding shares of CAIRE capital stock.
The Company and Holdings have the same principal place of business, which is located at 3505 County Road 42 West, Burnsville, Minnesota 55306-3803, telephone 612-882-5000.
The Company has three business segments: Industrial Products, Medical Respiratory Products, and Distributed Products.
INDUSTRIAL PRODUCTS
The Industrial Products business segment develops, manufactures, and markets cryogenic storage tanks, environmental test chambers, and transportation equipment and provides related services to producers, distributors, and end users of liquid industrial gases such as oxygen, nitrogen, argon, hydrogen, helium, and CO2. The cryogenic storage tanks and transportation equipment range in storage capacity from approximately 40 to 40,000 gallons.
The Industrial Products business segment serves a wide variety of customers. Industrial gas producers, as a group, are the Company's largest source of revenue. These customers produce and distribute industrial gases and purchase the Company's products for their own use and for rent or resale to third party distributors and end users. Food processing companies and semiconductor manufacturers also represent a significant customer base for Industrial Products' direct sales.
The Industrial Products business segment sells its products and services worldwide. The Company's competitors include a number of other companies, some of which are larger (in the aggregate) and have greater financial resources than the Company. The Company believes that competition is based primarily upon product design, dependability, and customer support and service.
MEDICAL RESPIRATORY PRODUCTS
The Medical Respiratory Products business segment, which is operated through CAIRE, Inc., develops, manufactures, assembles, and markets a limited range of medical products, including liquid oxygen systems, ambulatory oxygen systems, and oxygen concentrators, all of which are used for the in-home supplemental oxygen treatment of patients with chronic obstructive pulmonary diseases ("COPD"), such as bronchitis, emphysema, and asthma. In addition, CAIRE manufactures nebulizers that are used for the oral, inhaled delivery of medication for a wide variety of respiratory ailments, particularly asthma. It also manufactures and markets patient information systems, consisting of both electronic hardware and software, that allow its customers to monitor system performance and patient compliance.
Individuals for whom supplemental oxygen is prescribed generally purchase or rent an oxygen system from a home healthcare provider or medical equipment dealer. The provider/dealer usually selects which type of oxygen system to recommend to its
customers: liquid oxygen systems, oxygen concentrators, or high pressure oxygen cylinders. Physicians can also prescribe the method. The three methods are currently believed to be therapeutically equivalent.
The Company's primary competitors in the sale of liquid oxygen systems, oxygen concentrators, and nebulizers include a number of other companies, some of which are larger and have greater financial resources than the Company. The Company believes that competition for liquid oxygen systems and oxygen concentrators is based primarily upon product performance, reliability, ease-of-service, and price. The Company believes that competition in the nebulizer market is based primarily upon product pricing and reliability and focuses its marketing strategies on these considerations.
DISTRIBUTED PRODUCTS
The Distributed Products business segment consists of three product lines: restaurant products, biological storage systems, and new applications.
Restaurant Products
This product line consists primarily of vacuum-insulated, bulk liquid CO2 containers used for beverage carbonation in restaurants, convenience stores, and cinemas. The Company also manufactures and markets non-insulated bulk flavored syrup containers for side-by-side installation with its CO2 systems. The Company's beverage systems are sold to fast food franchisers, soft drink companies, and CO2 distributors.
The Company's primary competitors for its bulk liquid CO2 beverage delivery systems are producers of high pressure gaseous CO2 systems and sellers of bulk liquid CO2 beverage systems, some of which are larger (in the aggregate) and have greater financial resources than the Company. The Company believes that competition for bulk liquid CO2 beverage systems is based primarily on service and price.
Biological Storage Systems
This product line consists of vacuum insulated vessels used by the beef and dairy cattle breeding industry to transport frozen semen and embryos and vacuum insulated vessels used by hospitals, medical laboratories, and research facilities to transport and store human organs, tissue samples, and other temperature-sensitive biological matter.
These products are sold through laboratory product original equipment manufacturers ("OEMs"), laboratory products distributors, industrial gas distributors, and breeding service providers. Many of these distributors provide a single source for many different types of products to hospitals, medical laboratories, and research facilities.
The Company's competitors for biological storage systems include a few companies inside and outside the United States, some of which are larger and have greater financial resources than the Company. Competition for biological storage systems is based primarily on product design, reliability, and price. Alternatives to vacuum insulated vessels include mechanical, electrically powered refrigeration for storage of biological matter.
New Applications
This area of the Company's activity focuses on the development of new markets and new applications for the Company's existing and developing technologies. For example, the Company has developed and sells vacuum insulated containers for liquid natural gas (LNG) storage and fueling systems for centrally fueled fleets of vehicles powered by LNG (such as fleets operated by metropolitan transportation authorities, refuse haulers, railroads, and utilities). Competition for LNG fueling and storage systems is based primarily on product design, customer support and service, dependability, and price. Although there are alternatives to LNG fuel, the Company is not aware of any alternatives to vacuum insulated containers for LNG fueling and storage systems. The Company is also pursuing a number of other applications for its vacuum insulation technology and other related technologies.
SUPPLIES AND MATERIALS
The Company's primary raw materials for its vacuum insulated containers are carbon, stainless, and nickel alloy steel. Aluminum is also a significant component of its biological products line. The Company is not dependent on any sole source for its supply of these materials. Certain major components of the Company's other products are purchased from a single source of supply, an interruption of which could cause a disruption of product availability; however, the Company believes that the strategic and operational advantages of working with certain key suppliers on a single source basis outweigh the risks of this dependence.
PATENTS AND TRADEMARKS
The Company owns various domestic and foreign patents and trademarks. The registered processes and products were either purchased by the Company in connection with the acquisition of one of its businesses or developed by the Company through research and development activities.
Regulation
The Company is subject to a wide variety of federal, state, and local environmental laws and regulations ("Environmental Laws"), which continue to be adopted and amended. The Environmental Laws regulate, among other things: air and water emissions and discharges at the Company's manufacturing facilities; the safety and health of employees in the production areas of its manufacturing facilities; the generation, storage, treatment, transportation, and disposal of solid and hazardous waste by the Company; the release of toxic substances, pollutants, and contaminants into the environment at properties owned or operated by the Company and at other sites; and, in some circumstances, the environmental condition of property prior to a transfer or sale.
To date, the costs of compliance with Environmental Laws have not had a material adverse effect on the financial condition or results of operations of the Company. It should be recognized, however, that a number of the Company's present and past facilities have been in operation for many years. Although future costs related to compliance with Environmental Laws could be significant, the Company does not believe that such costs will have a material adverse effect on the Company's financial condition or results of operations.
The manufacturing and marketing of CAIRE's products are subject to regulation by the Food and Drug Administration (the "FDA") under the Federal Food, Drug and Cosmetic Act. These regulations subject manufacturers to certain controls to provide reasonable assurance of the safety and effectiveness of medical devices, including labeling requirements, registration with the FDA as a manufacturer, listing with the FDA of devices in commercial distribution, pre-market notification to the FDA of changes in a listed device or manner of production or of other devices proposed to be marketed, conformity to specified current "good manufacturing practices," and conformity to certain record keeping requirements. Similarly, many of the Company's vacuum insulated containers are made to conform to various pressure vessel design codes around the world including those of the Department of Transportation, American Society of Mechanical Engineers, ASTM, BS 5500, and A.D. Merkblatter.
YEAR 2000
The Company has conducted a review of its computer systems to identify those areas that could be affected by the "Year 2000" issue and is developing an implementation plan to resolve the issue. The Company presently believes, with modification to existing software and converting to new software, the Year 2000 problem will not pose significant operational problems. The incremental costs of this project will not have a material effect on the company's consolidated financial statements.
ITEM 2.
ITEM 2. PROPERTIES. ----------
Not provided.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS. -----------------
Not provided.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS. ---------------------------------------------------
Not provided.
PART II -------
ITEM 5.
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, 1997 there were fourteen stockholders of Holdings Common Stock, one stockholder of Holdings Preferred Class A Stock, and four stockholders of Holdings Preferred Class B Stock on record. Holdings owns all of the outstanding Common Stock of the Company. The agreement governing the Company's revolving credit facility and the indenture governing the Senior Secured Notes restrict the Company's ability to pay dividends to Holdings.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA. -----------------------
The following table sets forth selected consolidated financial data with respect to Holdings as of the dates and for the periods indicated. Since its formation, Holdings has engaged in no operations independent from those of the Company. As a result, the historical consolidated financial statements of Holdings and the Company are substantially the same. The financial data set forth below should be read in conjunction with the historical consolidated financial statements and related notes thereto of Holdings and the Company, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained elsewhere herein.
_________________________
(1) The Holdings Preferred Stock issued as of February 28, 1994 was redeemed in Fiscal 1995
(2) The extraordinary loss in 1995 of $1,307 is due to losses realized upon extinguishment of debt, net of an income tax benefit of $871.
(3) Operating loss for the ten months ended December 31, 1996 included non recurring charges of $22.0 million relating to the reevaluation of certain business units and product lines including $3.5 million relating to the recapitalization of Holdings in August 1996.
(4) EBITDA has been adjusted to include minority interest in net income (loss).
Item 7.
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 three business segments: Industrial, Distributed and Medical. Industrial products include cryogenic storage tanks and transportation equipment sold to producers, distributors and end users of industrial gases. Distributed products include bulk CO2 containers used for beverage carbonization, biological storage systems used to store and transport temperature-sensitive biological matter and insulated storage of liquid natural gas. Medical products include a broad range of respiratory products such as liquid oxygen systems, ambulatory oxygen systems, oxygen concentrators and nebulizers.
Holdings' sales are sensitive to changes in the economy and government. Vacuum insulated cryogenic tanks, particularly in the industrial market, represent capital expenditures for Holdings' major customers. Sales to the medical industry are strongly dependent on healthcare reimbursement policies. Sales of bulk liquid CO2 beverage systems depend on growth in the restaurant and fast food industries and the extent and timing of such industries' change from high pressure gaseous CO2 systems to bulk liquid CO2 systems.
RESULTS OF OPERATIONS - ---------------------
Years Ended December 31, 1997 and 1996
NET SALES
Net sales for the year ended December 31, 1997 increased 1.0% to $192.7 million from $190.8 million for the year ended December 31, 1996.
Industrial Products: Net sales for the year ended December 31, 1997 increased 3.9% to $121.2 million from $116.7 million for the year ended December 31, 1996. The increase is primarily attributable to the Company's acquisitions in August and November 1996 of subsidiaries located in China and Australia with sales of $11.3 million and $1.2 million for the years ended December 31, 1997 and 1996, respectively. Sales of small pressure vessels and vacuum insulated pipe increased $2.7 million and $1.5 million, respectively. The Orca and Environmental Chambers product lines were introduced in 1997 which increased sales $2.0 million and $1.9 million, respectively. These increases were offset by a $14.5 million decrease in bulk tank sales resulting from the major gas producers reducing their tank inventory in 1997.
Distributed Products: Net sales for the year ended December 31, 1997 decreased 2.4% to $45.2 million from $46.3 million for the year ended December 31, 1996. The decrease is primarily attributable to decreases in AURA panel sales. Sales of AURA panels were $2.2 million and $.1 million in the years ended December 31, 1997 and 1996, respectively. The sales of Aura panels have been discontinued. Bulk CO2 and liquid natural gas products sales increased approximately $1.6 million and biological storage systems sales decreased $.5 million from 1996 to 1997.
Medical Products: Net sales for the year ended December 31, 1997 decreased 5.4% to $26.3 million from $27.8 million for the year ended December 31, 1996. The decrease is primarily attributable to decreases in price resulting from a competitive market.
GROSS MARGIN
Gross margin (expressed as a percent of net sales) increased to 28.5% for the year ended December 31, 1997 from 27.4% for the year ended December 31, 1996.
Industrial Products: Gross margin increased to 24.8% for the year ended December 31, 1997 from 22.9% for the year ended December 31, 1996. The increase is attributable to changes in the mix of products sold and decreased manufacturing costs.
Distributed Products: Gross margin increased to 40.4% for the year ended December 31, 1997 from 40.2% for the year ended December 31, 1996.
Medical Products: Gross margin decreased to 25.2% for the year ended December 31, 1997 from 25.3% for the year ended December 31, 1996.
OPERATING EXPENSES
Operating expenses for the year ended December 31, 1997 were $42.3 million compared to $58.8 million for the year ended December 31, 1996. The decrease in operating expenses is primarily attributable to one-time, primarily non-cash charges of $22.0 million in 1996, including expenses of $3.5 million relating to the recapitalization of Holdings in August 1996 and a $1.5 million decrease resulting from discontinuing the AURA product line. These decreases were offset by an increase of $2.1 million associated with the expansion of the Company's business into the Pacific Rim and Europe, $1.2 million incurred by a company acquired in 1997 and development of the new Bulk Oil product line. Other net spending increased approximately $3.7 million.
In connection with the change of ownership of Holdings in August 1996, management, at the direction of Holdings' Board of Directors, undertook a strategic review of all business units. This review was completed and presented to the Board of Directors in December 1996. As a result of this review, the Company revised various estimates used in the valuation of assets and liabilities related to various medical and industrial product lines and discontinued its AURA product line. One-time charges of $22 million were taken in the ten months ended December 31, 1996 as a direct result of this review and the recapitalization (see Note 10 to the Financial Statements).
After adjusting for one-time charges, including recapitalization expenses in 1996, operating expenses for the year ended December 31, 1997 increased $5.5 million from the same period one year ago.
OPERATING INCOME
Operating income was $12.7 million for the year ended December 31, 1997 compared to an operating loss of $(6.6) million for the year ended December 31, 1996. The increase in operating income is primarily attributable to the factors noted in the Net Sales and Operating Expense discussions above .
INTEREST EXPENSE
Interest expense was $17.6 million for the year ended December 31, 1997 compared to $17.4 million in the year ended December 31, 1996.
INCOME TAXES
The benefit from income taxes was $3.4 million for the year ended December 31, 1997 compared to $1.7 million for the year ended December 31, 1996. The effective tax rate for the years ended December 31, 1997 and 1996 was different from the statutory rate as a result of various permanent differences (see Note 6 to the Financial Statements).
NET LOSS
Net loss before preferred dividends for the year ended December 31, 1997 was $1.1 million compared to a net loss of $20.3 million for the year ended December 31, 1996.
EBITDA
EBITDA (earnings before interest, income taxes, depreciation and amortization) was $20.2 million for the year ended December 31, 1997 compared to $4.1 million or 2.1% of net sales for the year ended December 31, 1996. The increase in EBITDA is attributable to the factors noted in "Operating Income" above. Adjusting for nonrecurring expenses of $22.0 million including expenses relating to the recapitalization of Holdings in August 1996, EBITDA for the year ended December 31, 1996 was $26.1 million.
Ten Months Ended December 31, 1996 and 1995
NET SALES
Net sales for the ten months ended December 31, 1996 increased 8.0% to $155.7 million from $144.2 million for the ten months ended December 31, 1995.
Industrial Products: Net sales for the ten months ended December 31, 1996 increased 24.4% to $96.5 million from $77.6 million for the ten months ended December 31, 1995. The increase is primarily attributable to sales to the Japanese market of liquid cylinders, and increased demand for electronic-grade and liquid hydrogen tanks.
Distributed Products: Net sales for the ten months ended December 31, 1996 increased 4.8% to $36.8 million from $35.1 million for the ten months ended December 31, 1995. The increase is primarily attributable to increased restaurant CO2 sales, offset by significant decreases in AURA panel sales. Sales of AURA panels were $.9 million and $4.4 million in the ten months ended December 31, 1996 and 1995, respectively, and will be discontinued after March 31, 1997.
Medical Products: Net sales for the ten months ended December 31, 1996 decreased 28.6% to $22.4 million from $31.5 million for the ten months ended December 31, 1995. The decrease is primarily attributable to continued uncertainty in oxygen reimbursement caused by the review of Medicare/Medicaid expenditures and the delayed introduction of a new concentrator product.
GROSS MARGIN
Gross margin (expressed as a percent of net sales) decreased to 26.9% for the ten months ended December 31, 1996 from 28.2% for the ten months ended December 31, 1995.
Industrial Products: Gross margin increased to 23.4% for the ten months ended December 31, 1996 from 23.3% for the ten months ended December 31, 1995. The increase was primarily attributable to reduced material costs and improved manufacturing efficiencies offset by increased discounts and allowances.
Distributed Products: Gross margin increased to 37.6% for the ten months ended December 31, 1996 from 34.4% for the ten months ended December 31, 1995. The increase is primarily attributable to improved manufacturing efficiencies as a result of increased volumes for restaurant products, improved unit manufacturing costs for biological products, and decreased sales of AURA flat vacuum panels.
Medical Products: Gross margin decreased to 24.5% for the ten months ended December 31, 1996 from 33.6% for the ten months ended December 31, 1995. The decrease is primarily attributable to lower volumes, increased levels of obsolete and excess inventories, and a less profitable product mix.
OPERATING EXPENSES
Operating expenses for the ten months ended December 31, 1996 were $54.9 million compared to $28.5 million for the ten months ended December 31, 1995. The increase in operating expenses is primarily attributable to one-time, primarily non-cash charges of $22.0 million in 1996, including expenses of $3.5 million relating to the recapitalization of Holdings in August 1996.
In connection with the change of ownership of Holdings in August 1996, management, at the direction of Holdings Board of Directors, undertook a strategic review of all business units. This review was completed and presented to the Board of Directors in December 1996. As a result of this review, the Company revised various estimates used in the valuation of assets and liabilities, related to various medical and industrial product lines, and discontinued its AURA product line. One-time charges of $22 million were taken in the ten months ended December 31, 1996 as a direct result of this review and the recapitalization (see Note 10 to the Financial Statements).
After adjusting for one-time charges, including recapitalization expenses, operating expenses for the ten months ended December 31, 1996 increased $4.4 million from the same period one year ago.
OPERATING INCOME
Operating loss was $(13.1) million for the ten months ended December 31, 1996 compared to income of $12.1 million for the ten months ended December 31, 1995. The decrease in operating income is primarily attributable to nonrecurring expenses (see Note 10 of the Financial Statements), the recapitalization of Holdings in August 1996 and the decline in Medical product sales. Adjusting for the nonrecurring and recapitalization expenses, operating income would have decreased 26.4% to $8.9 million.
INTEREST EXPENSE
Interest expense was $13.9 million for the ten months ended December 31, 1996 compared to $13.5 million in the ten months ended December 31, 1995.
INCOME TAXES
The benefit from income taxes was $3.2 million for the ten months ended December 31, 1996 compared to a provision of $.2 million for the ten months ended December 31, 1995. The decrease is attributable to the decrease in pre-tax income. The effective tax rate for the ten months ended December 31, 1996 and 1995 was different from the statutory rate as a result of various permanent differences (see Note 6 to the Financial Statements).
NET LOSS
Net loss before preferred dividends for the ten months ended December 31, 1996 was $(22.6) million compared to a net loss of $(1.6) million for the ten months ended December 31, 1995.
EBITDA
EBITDA (earnings before interest, income taxes, depreciation and amortization) was a loss of $(4.3) million for the ten months ended December 31, 1996 compared to income of $19.5 million or 13.5% of net sales for the ten months ended December 31, 1995. The decrease in EBITDA is attributable to the factors noted in "Operating Income" above. Adjusting for nonrecurring expenses of $22.0 million including expenses relating to the recapitalization of Holdings in August 1996, EBITDA for the ten months ended December 31, 1996 was $17.7 million.
LIQUIDITY AND CAPITAL RESERVES - ------------------------------
Cash Flow was $(4.6) million, $9.2 million and $.8 million, respectively for the periods ended December 31, 1997 and 1996 and February 29, 1996.
CASH FLOW FROM OPERATING ACTIVITIES
Cash flow provided by or (used in) operating activities was approximately $4.6 million, $8.4 million, and $(1.5) million for the periods ended December 31, 1997 and 1996, and Fiscal 1996, respectively. Working capital was $16.9 million, $29.9 million and $27.8 million, respectively at December 31, 1997 and 1996 and February 29, 1996.
CASH FLOW FROM INVESTING ACTIVITIES
For the periods ended December 31, 1997 and 1996 and Fiscal 1996, Holdings had approximately $6.4 million, $9.8 million and $8.4 million in capital expenditures, respectively. For the periods ended December 31, 1997 and 1996, Holdings invested $.4 million and $2.6 million in non-cash capital expenditures. The expenditures in the periods ended December 31, 1997 and 1996 were primarily due to the expansion of the Company's New Prague operations, the construction of the Caire facility, and normal equipment acquisition and replacement. The expenditures in Fiscal 1996 include replacement equipment for existing manufacturing processes, tooling for new products and capital expenditures related to the AURA flat vacuum panel project.
CASH FLOW FROM FINANCING ACTIVITIES
Cash flow provided by (used in) financing activities was approximately $(2.6) million, $10.6 million and $10.9 million in the periods ended December 31, 1997 and 1996 and Fiscal 1996, respectively. Cash flow from financing activities during the ten months ended December 31, 1996 was primarily attributable to the recapitalization of Holdings in August 1996 described below. The increase in Fiscal 1996 resulted primarily from borrowings, net of repayments under the Company's credit facilities.
The agreement governing the revolving credit facility expires in October 2000 and contains numerous financial and operating covenants and prohibitions that impose limitations on the liquidity of the Company, including requirements that the Company satisfy certain financial ratios and maintain certain specific levels of EBITDA. The indenture governing the Senior Secured Notes, as amended in connection with the recapitalization of Holdings in August 1996, also imposes limitations on the incurrence of additional indebtedness. The ability of the Company to meet its debt service requirements and to comply with such covenants will be dependent upon its future operating performance and financial results, which will be subject to financial, economic, competitive and other factors affecting the Company, many of which are beyond its control. The Company was in compliance with all covenants included in the agreement governing the revolving credit facility and the indenture as of December 31, 1997.
On August 28, 1996, MVE Investors, LLC purchased 4,700 shares of Holdings 12.5% Class A Cumulative Convertible Participating Preferred Stock, par value $100 per share, for the purchase price of $47 million. Holdings used the proceeds of this transaction to redeem a substantial portion of certain shareholders' Common Stock. MVE Investors, LLC's shares of Class A Preferred Stock are immediately convertible into 374,633 shares of Holdings Common Stock, or approximately 67.4% of the Common Stock on a fully diluted basis.
In exchange for 1,061 shares of Common Stock held by certain shareholders, Holdings issued 13 shares of 10% Series B Redeemable Preferred Stock in 1997. In 1996, 66,406 shares of Common Stock were exchanged for 833 shares of Series B Redeemable Preferred Stock.
In 1997, Holdings purchased 430 of its outstanding warrants for $30.10944 per warrant. In 1996, Holdings purchased 79% of its outstanding warrants for $30.10944 per warrant. At March 1, 1997, Holdings has 23,722 warrants outstanding convertible into 5,693 shares of Holdings' Common Stock.
Holdings accrued, but did not declare or pay, dividends of $9.5 million and $2.3 million to the holders of Holdings Preferred Stock as of December 31, 1997 and 1996.
To the extent that operating cash flows are insufficient to repay borrowings under the Senior Secured Notes, the revolving credit agreement and the IRB financing at their respective maturities, the Company expects that it will be required to refinance all or substantially all of the Senior Secured Notes, the revolving credit agreement and the IRB financing or sell equity or assets to fund the repayment of all or substantially all of the Senior Secured Notes, the revolving credit and the IRB financing at or prior to their respective maturities, or effect a combination of the foregoing; however, there can be no assurance that the Company would be able to refinance such indebtedness.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. -------------------------------------------
See Appendix A.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ---------------------------------------------------------------
On January 17, 1997, MVE Holdings, Inc. ("Holdings") and MVE, Inc. (the "Company") terminated the services of Arthur Andersen LLP as their principal accountant and engaged Deloitte & Touche LLP as their principal accountant to audit their financial statements for the ten months year ending December 31, 1996. The decision to change accountants was approved by the Boards of Directors of Holdings and the Company.
In connection with the audit of the fiscal year ended February 29, 1996, and in the subsequent interim period through the date of dismissal, there were no disagreements with Arthur Andersen LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures.
Arthur Andersen LLP's report on the consolidated financial statements as of and for the year ended February 29, 1996, did not contain any adverse opinion or disclaimer of opinion, nor was it qualified as to uncertainty, audit scope, or accounting principles.
PART III --------
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS. ---------------------------------------------------
Not provided.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION. ----------------------
Not provided.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. ---------------------------------------------------------------
Not provided.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. ----------------------------------------------
Not provided.
PART IV - -------
Item 14.
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.
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Report of Deloitte & Touche LLP, Independent Public Accountants on MVE Holdings, Inc. and Subsidiaries
MVE Holdings, Inc. and Subsidiaries Consolidated Balance Sheets as of December 31, 1997 and 1996
MVE Holdings, Inc. and Subsidiaries Consolidated Statements of Operations for the Year Ended December 31, 1997, the Ten Months Ended December 31, 1996, and Year Ended February 29, 1996
MVE Holdings, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity (Deficit) for the Year Ended December 31, 1997, the Ten Months Ended December 31, 1996, and Year Ended February 29, 1996
MVE Holdings, Inc. and Subsidiaries Consolidated Statements of Cash Flows for the Year Ended December 31, 1997, the Ten Months Ended December 31, 1996, and Year Ended February 28, 1996
Notes to MVE Holdings, Inc. and Subsidiaries Consolidated Financial Statements
Report of Deloitte & Touche LLP, Independent Public Accountants on MVE, Inc. and Subsidiaries
MVE, Inc. and Subsidiaries Consolidated Balance Sheets as of December 31, 1997 and 1996
MVE, Inc. and Subsidiaries Consolidated Statements of Operations for the Year Ended December 31, 1997, the Ten Months Ended December 31, 1996, and Year Ended February 29, 1996
MVE, Inc. and Subsidiaries Consolidated Statements of Stockholder's Equity (Deficit) for the Year Ended December 31, 1997, the Ten Months Ended December 31, 1996, and Year Ended February 29, 1996
MVE, Inc. and Subsidiaries Consolidated Statements of Cash Flows for the Year Ended December 31, 1997, the Ten Months Ended December 31, 1996, and Year Ended February 29, 1996
Notes to MVE, Inc. and Subsidiaries Consolidated Financial Statements
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of MVE Holdings, Inc.
We have audited the accompanying consolidated balance sheets of MVE Holdings, Inc. and subsidiaries (Holdings) as of December 31, 1997 and 1996 and the related consolidated statements of operations, stockholders' deficit, and cash flows for the year ended December 31, 1997 and the ten month period ended December 31, 1996. These consolidated financial statements are the responsibility of Holdings' management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The consolidated financial statements of Holdings for the year ended February 29, 1996 were audited by other auditors whose report, dated April 16, 1996, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Holdings as of December 31, 1997 and 1996 and the results of its operations and its cash flows for the periods then ended in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Minneapolis, Minnesota March 6, 1998
MVE HOLDINGS, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In Thousands, Except Share and Per Share Data)
The accompanying notes are an integral part of these consolidated financial statements.
MVE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Year Ended December 31, 1997, the Ten Months Ended December 31, 1996, and the Year Ended February 29, 1996
(In Thousands)
The accompanying notes are an integral part of these consolidated financial statements.
MVE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Deficit
For the Year Ended December 31, 1997, the Ten Months Ended December 31, 1996, and the Year Ended February 29, 1996
(In Thousands)
The accompanying notes are an integral part of these consolidated financial statements.
MVE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Year Ended December 31, 1997, the Ten Months Ended December 31, 1996, and the Year Ended February 29, 1996
(In Thousands)
The accompanying notes are an integral part of these consolidated financial statements.
MVE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Year Ended December 31, 1997, the Ten Months Ended December 31, 1996, and the Year Ended February 29, 1996
(In Thousands, Except Share, Warrant and Per Share Data)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION AND BUSINESS
The consolidated financial statements include the accounts of MVE Holdings, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. MVE Holdings, Inc. and its subsidiaries are collectively referred to as Holdings or the Company. Holdings develops, manufactures, markets and sells products which are grouped according to three business segments: industrial, distributed and medical. Industrial products include cryogenic storage tanks and transportation equipment sold to producers, distributors and end users of industrial gases. Distributed products include bulk CO2 containers used for beverage carbonization, biological storage systems used to store and transport temperature-sensitive biological matter and insulated storage of liquid natural gas. Medical products include a range of respiratory products such as liquid oxygen systems, ambulatory oxygen systems, oxygen concentrators and nebulizers.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are used for such items as plant depreciable lives, tax provisions and reserves, uncollectible accounts receivable and warranty liabilities. As better information becomes available or accrual amounts are determinable, the recorded estimates are revised. Consequently, operating results can be affected by revisions to prior accounting estimates.
CASH AND CASH EQUIVALENTS
Holdings considers all highly liquid investments with original maturities of three months or less to be cash equivalents. These investments are reflected at cost which approximates fair value. Accounts payable include issued checks, which have not yet cleared Holdings' bank, totaling $3,695 and $1,030 at December 31, 1997 and 1996, respectively.
RECEIVABLES
Accounts receivable, net of allowance for doubtful accounts, consisted of the following as of December 31, 1997 and 1996:
Allowance for doubtful accounts consisted of the following for the year ended December 31, 1997, the ten months ended December 31, 1996 and for the year ended February 29, 1996:
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:
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:
OTHER ASSETS
Other assets are being amortized on a straight-line basis over their estimated useful lives which range from 2 to 30 years. Accumulated amortization was $10,821 at December 31, 1997 and $8,830 at December 31, 1996. Other assets net of accumulated amortization consist of the following:
REVENUE RECOGNITION
Revenue is generally recognized upon shipment of goods. At the request of certain customers, large cryogenic tanks will be accepted by the customer at Holdings' facilities and stored there for later shipment. In these instances, title passes to the customer upon acceptance, and revenue is recognized at that time.
For the year ended December 31, 1997, one of Holdings' customers represented approximately 11% of Holdings' net sales. For the ten months ended December 31, 1996, one of Holdings' customers represented approximately 15% of Holdings' net sales.
RESEARCH AND DEVELOPMENT COSTS
Holdings' policy is to charge all research and development costs to expense in the period incurred.
WARRANTY COSTS
Holdings warrants most of its products against defects in materials and workmanship under normal use and service for periods extending to seven years. Warranty costs have not been material, and Holdings accrues estimated costs of warranty obligations at the time of sale.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using currently enacted tax rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
LONG-LIVED ASSETS AND GOODWILL
In fiscal 1996, Holdings adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". The Statement establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles and goodwill related to those assets. There was no material effect on the financial statements from the adoption because prior impairment recognition practice was consistent with the major provisions of the Statement. Under provisions of the Statement, impairment losses are recognized when expected future cash flows are less than the assets' carrying value. Accordingly, when indicators of impairment are present, Holdings evaluates the carrying value of property, plant and equipment, intangibles and goodwill in relation to the operating performance and future undiscounted cash flows of the underlying business. Holdings adjusts the net book value of the underlying assets if the sum of expected future cash flows is less than book value. Goodwill represents the cost of acquired businesses in excess of net assets and is being amortized on a straight-line basis over 5 to 20 years. Accumulated amortization was $16,565 at December 31, 1997 and $14,487 at December 31, 1996 (see Note 10).
STOCK OPTION PLAN
In 1997, the Board of Directors approved a stock option plan (the "Plan"). A total of 100,000 shares of Holdings' common stock were reserved for issuance pursuant to the exercise of options granted under the Plan. Under the Plan, options to purchase shares of Holdings' common stock may be granted at a price not less than 100% of the fair market value of the stock at the date of grant. All options expire ten years from the date of grant.
RECLASSIFICATIONS
Certain reclassifications have been made to prior periods' financial statements to conform to the current year presentation. These reclassifications had no effect on Holdings' financial position or results of operations.
CHANGE IN FISCAL YEAR
On January 17, 1997, the Board of Directors of Holdings and MVE adopted a resolution to change the fiscal year of Holdings from the last day in February to a calendar year. The change in fiscal year is effective for the ten months ended December 31, 1996.
2. ACCRUED EXPENSES AND OTHER LIABILITIES:
Accrued expenses and other liabilities consists of the following:
3. SUPPLEMENTAL CASH FLOW INFORMATION:
Changes in operating assets and liabilities were as follows:
NON-CASH INVESTING AND FINANCING ACTIVITIES
Several lease and note obligations of $364 and $2,131 were incurred when Holdings entered into leases or notes for new equipment, vehicles and furniture in 1997 and 1996, respectively.
The Company acquired two companies in 1997 with purchase prices of $1,000 and $300. In 1996, the Company acquired two companies with purchase prices of $1,300 and $600. The acquisitions were not significant to the consolidated statements of cash flows.
In 1996, Holdings entered into a non-compete agreement for a total of $6,257 with a shareholder of the Company.
In 1997 and 1996, 1,061 and 66,406 shares of Common Stock were exchanged for 13 and 833 shares of 10% Class B Preferred Stock, respectively. Each share has a liquidation preference of $10,000 plus accrued and unpaid dividends.
In 1996, Holdings purchased a building for $500 in exchange for long-term debt.
4. ACQUISITION:
Effective July 30, 1993, CAIRE, INC. (CAIRE), a subsidiary of Holdings, acquired Mountain Medical Equipment, Inc. (MME) through a merger of a subsidiary of CAIRE with MME. The transaction was accounted for using the purchase method of accounting. The total purchase price, including acquisition costs of $2,954, was allocated to the net assets acquired based on fair values at the date of acquisition. The purchase price exceeded the fair value of net assets acquired by $7,035. Holdings recorded an increase to stockholders' equity of $512 as the transaction has been reflected as a partial sale of CAIRE's net assets to the minority stockholders. On March 1, 1995, MME was merged into CAIRE. Pursuant to the merger agreement:
a. CAIRE issued 404,027 shares of its Series A Participating Convertible Preferred Stock (the Preferred Stock) to MVE, Inc. The Preferred Stock is convertible into 404,027 shares of CAIRE's common stock, votes with the common stock as to all matters and carries a $23.56 per share annual dividend which is limited to CAIRE's net available cash flow as defined by the merger agreement. The Preferred Stock has a liquidation preference of $161.65 per share at February 29, 1996 plus accrued and unpaid dividends which will decline over time by the cumulative present value of dividends actually paid, discounted at 12% per year back to the merger date. The Preferred Stock must be converted to common stock upon certain events.
b. CAIRE issued 41,924 shares of common stock to the former stockholders of MME, resulting in a 9% ownership by such stockholders in the combined company.
c. MME debt held by a third party was amended to be exchangeable under certain conditions into 29,558 shares of CAIRE common stock.
d. MME's operating results subsequent to July 30, 1993 have been included in the accompanying consolidated statements of operations.
5. LONG-TERM DEBT:
Certain assets of Holdings are pledged as collateral for long-term debt. Long- term debt consists of the following:
The revolving credit facility provides for borrowings and issuances of Letters of Credit of up to $30,000 subject to a defined borrowing base of qualified accounts receivable and eligible inventory. The revolving credit facility is renewable annually for three year periods through October 2000. Holdings is charged a monthly fee based on an annualized rate of .375% of the unused portion of the commitment. The interest rate is variable and contains a LIBOR and base rate option at the election of the Company. At December 31, 1997, $10,000 of the outstanding balance was subject to a LIBOR based rate of 8.375%. The remaining $857 carried a base rate of 9%. The credit facility contains certain covenants with respect to capital expenditures, borrowings and disposition of assets. As of December 31, 1997, the Company was in compliance with all financial covenants.
In 1996, the revolving credit facility provided for borrowings and issuance of letters of credit of up to $20,000, subject to a defined borrowing base of qualified accounts receivable and eligible inventory. The note was renewable for three-year periods through June 2001. Holdings was charged a monthly fee based on an annualized rate of .5% of the unused portion of the commitment.
In February 1995, Holdings consummated a refinancing plan. As part of this refinancing plan, MVE, Inc. issued $112,000 of senior secured notes and Holdings issued 112,000 common stock warrants, each allowing the holder to purchase 0.24 shares of Holdings common stock at $0.01 per share. The proceeds from this refinancing plan were used to redeem all outstanding shares of Holdings 11.32% Cumulative Redeemable Preferred Stock ($100 par value per share), all outstanding redeemable common stock warrants, and retire certain outstanding debt of Holdings.
The senior secured notes are redeemable at the option of Holdings, in whole or in part, on or after February 15, 2000, at the redemption prices (expressed as percentages of principal amount) set forth below, plus accrued and unpaid interest thereon to the redemption dates indicated below:
Year Percentage - ------------------- ----------------- 2000 102.083% 2001 and thereafter 100.000%
The senior secured notes and revolving credit facility agreements contain certain covenants which restrict borrowings, dividends, acquisition and disposition of assets, and require Holdings to maintain certain liquidity and debt coverage ratios. As of December 31, 1997, Holdings was in compliance with its financial covenants.
The scheduled annual maturities of long-term debt at December 31, 1997 (see Note 14) are as follows:
Year Amount - ------------------- ---------------- 1998 $ 9,858 1999 3,015 2000 13,580 2001 2,832 2002 115,349 Thereafter 5,893 ---------------- $150,527 ================
Long-term debt, including current maturities, has a carrying value of $150,527 and a fair value of $169,717. The estimated fair value represents the present value of debt service at rates currently available to the Company for issuance of debt with similar terms. Except for the above, all financial instruments are carried at amounts that approximate estimated fair value.
6. INCOME TAXES:
Income tax expense (benefit) consists of the following for the periods ended:
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:
The tax effects of temporary differences that give rise to the net deferred tax asset were as follows:
The Company has tax loss carryforwards for income tax purposes. Such tax loss carryforwards have been reduced in part by a valuation allowance, since realization of a portion of the carryforwards is deemed more likely than not. The carryforwards of $3,638 expire in 2012.
7. EMPLOYEE BENEFIT PLANS:
Pension Plan
Holdings maintains two noncontributory defined benefit pension plans covering substantially all employees. The benefits to which an employee is entitled under the plans are derived using a formula based on the number of years of service and compensation levels during the last five years of service before retirement. Holdings funds the plans in accordance with the requirements of federal laws and regulations.
The net periodic cost is computed as follows:
Approximately 60% of the plan assets are invested in equity securities and 40% in bonds as of December 31, 1997.
The following table sets forth the funded status of the plans:
SAVINGS PLAN
Holdings has a 401(k) savings plan (the Plan) which covers all employees who have completed one month of service and attained the age of 21. The Plan provides for voluntary participant contributions of 1% to 15% of each employee's wages. In 1997, Holdings began matching contributions of up to 2% of eligible employee wages. Prior to this, Holdings made matching contributions at the discretion of the board of directors. For the year ended December 31, 1997, Holdings made matching contributions of $315 to the Plan. Holdings did not make matching contributions to the Plan in the ten months ended December 31, 1996, or the fiscal year ended February 29, 1996.
DEFERRED COMPENSATION PLAN
As of February 29, 1996, Holdings had a deferred compensation plan for key management employees to encourage and reward the continued profitable growth of Holdings. The awards of the plan are capital appreciation units and are made at the discretion of the Board of Directors. As of February 29, 1996, 36,000 units were outstanding. Each unit was valued at the date of grant at the Board of Directors' discretion and is related to the book value of common stock, as defined. Units vested over a five-year period, and compensation was payable under various terms and conditions after the end of the vesting period or in the event of a sale or public offering, in which case compensation was determined on fair market value of the units. Amounts accrued under this plan were not significant at February 29, 1996 and February 28, 1995.
During the ten months ended December 31, 1996, Holdings' Board of Directors approved a deferred compensation plan to replace the existing plan in its entirety. The new plan awarded deferred compensation to certain key members of upper management with the objective of retaining their services, encouraging profitability and rewarding them. The plan awarded 29,750 units to three individuals which may be exchanged for Common Stock of an equal number at a future date, given the occurrence of certain events. For the ten months ended December 31, 1996, Holdings expensed $1,916 in connection with the adoption of this plan.
During 1997 and subsequent to 1997, the Company entered into agreements with the three individuals that effectively terminated each individual's participation in the deferred compensation plan. Pursuant to the agreements, the Company will issue 29,750 shares of common stock of MVE to the three individuals upon the earlier of December 31, 2006 or the occurrence of certain events. As a result of the Company entering into these agreements, the Company reclassified the accrued liability related to the deferred compensation plan of $1,866 as of December 31, 1996 to equity.
8. COMMITMENTS AND CONTINGENCIES:
LEASES
A portion of Holdings' operations is conducted using leased equipment and facilities. These leases are noncancelable and renewable. Total rental expense included in the accompanying consolidated statements of operations was approximately $718, $702 and $502, for the year ended December 31, 1997 and for the ten months ended December 31, 1996, and for the fiscal year ended February 29, 1996. The future minimum rental payments required under these leases are $470 in 1998, $270 in 1999, $89 in 2000, and $9 in 2001.
LITIGATION
Holdings is subject to a number of asserted and unasserted potential claims encountered in the normal course of business. In the opinion of management, based on consultation with outside legal counsel, the resolution of these matters will not have a material adverse effect on Holdings' financial position or results of operations.
9. SEGMENT REPORTING AND EXPORT SALES:
The operations of Holdings are divided into three business segments for financial reporting purposes. The industrial products segment develops and manufactures cryogenic storage tanks and transportation equipment and markets them to producers, distributors and end users of industrial gases. The distributed products segment develops, manufactures and markets a variety of products utilizing similar technologies as the industrial products segment, but markets them through distributors to various commercial markets, principally end users of bulk liquid CO2 beverage systems and biological material storage systems. Also included in the distributed products segment are those emerging products anticipated to be used in commercial markets including liquid natural gas systems for vehicle fleets and flat vacuum panels for use in refrigeration appliances. The medical products segment develops, manufactures and markets a broad range of medical products, including liquid oxygen systems, oxygen concentrators and medication nebulizers, all of which are used primarily for the in-home treatment of patients. General corporate assets include cash and cash equivalents and income taxes.
Financial information by business segment as of and for the year ended December 31, 1997, the ten months ended December 31, 1996, and the fiscal year ended February 29, 1996 was as follows:
Export sales from Holdings' U.S. operations for the year ended December 31, 1997, the ten months ended December 31, 1996, and the fiscal year ended February 29, 1996 were as follows:
10. OTHER EXPENSES:
Other expense recorded in the ten months ended December 31, 1996 include the following:
Recapitalization Expenses $ 3,545 Deferred compensation plan (Note 7) 1,916 Discontinue AURA product line 1,280 Debt forgiveness 3,722 Goodwill write-offs 10,824 Other 685 --------- $21,972 =========
RECAPITALIZATION EXPENSES
In 1996, the Company incurred $3,545 of expenses related to recapitalization of the Company. These expenses related to consent and solicitation of the holders of the senior secured notes and legal and accounting fees.
DISCONTINUANCE OF AURA PRODUCT LINE
In 1996, Holdings wrotedown $1,280 of fixed and other assets, net of debt forgiveness, related to the discontinuance of the AURA product line, which was included in the Distributed Products segment. Prior to December 1996, the Company had an agreement with a third party to participate in a joint venture to produce and market its AURA product line. In December 1996, the Company and the joint venture partner agreed to discontinue all AURA operating and marketing activities.
DEBT FORGIVENESS
Prior to December 1996, the Company made loans to a major supplier of components for its medical oxygen concentrators. The loans were to be repaid through future purchase credits from the supplier. In December 1996, the Company entered into a new agreement with the supplier which forgave $3,722 of the debt.
GOODWILL WRITE-DOWN
In December 1996, the Company recorded a goodwill write-down of $10,824 ($4,750 in Industrial Products and $6,074 in the Medical Products segment). In connection with the change in ownership in 1996, management undertook a strategic review of all business units. As a result of the review, goodwill was determined to have been impaired because of the financial condition of certain medical and industrial business units and the Company's inability to generate future operating income from these business units. Moreover, anticipated future cash flow of these business units indicate that the recoverability of the goodwill is not reasonably assured. Prior to December of 1996, goodwill was amortized using the straight-line method over twenty years.
11. PREFERRED STOCK AND RECAPITALIZATION
On August 28, 1996 MVE Investors, LLC purchased 4,700 shares of Holdings 12.5% Series A Cumulative Redeemable Convertible Participating Preferred Stock, par value $100 per share, for the purchase price of $47,000. Holdings used the proceeds of this transaction to purchase a substantial portion of certain Holdings shareholders' common stock.
Following this recapitalization, MVE Investors, LLC holds shares of Series A Redeemable Preferred Stock which are convertible into 374,633 shares of Holdings Common Stock, or approximately 67.4% of the Common Stock outstanding on a fully diluted basis. As of December 31, 1997 and 1996, Holdings had accrued, but unpaid dividends of $8,388 and $1,973 relating to Series A Preferred Stock, respectively.
In exchange for 1,061 shares of Common Stock held by certain shareholders, Holdings issued 13 shares of 10% Series B Redeemable Preferred Stock in 1997. Each such share has a liquidation preference of $10,000 plus accrued and unpaid dividends. Also, 49 shares of Series B Redeemable Preferred Stock was purchased for $10,000 per share. In 1996, 66,406 shares of Common Stock were exchanged for 833 shares of the Series B Redeemable Preferred Stock. This class of stock is subject to mandatory redemption. As of December 31, 1997 and 1996, Holdings had accrued, but unpaid dividends of $1,079 and $278 relating to Series B Preferred Stock, respectively.
In 1997, Holdings purchased 430 of its outstanding warrants for $30.10944 per warrant. In 1996, Holdings purchased 79% of its outstanding warrants for $30.10944 per warrant.
12. FISCAL RESULTS FOR THE TEN MONTHS ENDED DECEMBER 31, 1995 (UNAUDITED)
13. RELATED PARTY TRANSACTIONS
The Company loaned two shareholders $2,000 on August 27, 1996, to be repaid to the Company on or before August 27, 2003. Simple interest accrues on the principal amount at an annual rate of 8%. Principal of $2,000 and accrued interest of $225 and $56 was outstanding at December 31, 1997 and 1996, respectively. The loan is secured by Holdings Common Stock owned by the shareholders.
A director of Holdings has an agreement with the Company which pays an annual fee of $75 in exchange for consulting services. This agreement has a term of one year, renewable at the option of Holdings.
Two shareholders have management agreements with the Company which pays a quarterly fee of $44 each plus expenses. The company paid $401 related to this agreement in the year ended December 31, 1997.
14. SUBSEQUENT EVENTS
DEBT RESTRUCTURING
On February 2, 1998, CAIRE entered into an agreement whereby a third party agreed to accept, in full payment of all outstanding indebtedness currently owed to it by CAIRE, a cash payment of $50 and an option to purchase 28,957 shares of 10% Series AA Cumulative Preferred Stock (Series AA Preferred Stock), par value $.01 per share, of CAIRE. Concurrent with the above settlement, MVE accepted, in full payment of all outstanding unsecured indebtedness currently owed to it by CAIRE, 632 shares of the Series AA Preferred Stock. Additionally, pursuant to the February 2, 1998 agreement, MVE purchased all shares of CAIRE common stock owned by the third party for an aggregate purchase price of one hundred dollars. The Series AA Preferred Stock has a liquidation preference of $10,000 per share and is subject to mandatory redemption. Had the restructuring occurred at December 31, 1997, unaudited pro forma results for 1997 are: extraordinary gain from extinguishment of debt, net of tax, $3,695; net income $2,634 total liabilities $187,579; and equity $(115,603).
ACQUISITION
Effective February 18, 1998, the Company acquired a majority interest in Ferox, a.s., a manufacturer of bulk tanks and other cryogenic equipment located in the Czech Republic for $400 in cash and an agreement with the seller to make additional payments based on certain operational results of Ferox and the Company. In addition, the Company paid to the seller's parent the sum of $600 in cash in exchange for an agreement not to compete. The pro forma effect of the acquisition is not material to the consolidated financial statements.
LOAN DEFAULT
The Company accelerated the maturity of a $1,500 loan, referred to in Note 13, to January 9, 1998 and the shareholder defaulted. In accordance with the terms of the loan and pledge agreement, the Company took possession of certain Holdings' Common Stock equal in value to the principal and unpaid interest on the loan.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of MVE, Inc.
We have audited the accompanying consolidated balance sheets of MVE, Inc. and subsidiaries (the Company) as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' deficit, and cash flows for the year ended December 31, 1997 and the ten month period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The consolidated financial statements of the Company for the year ended February 29, 1996 were audited by other auditors whose report, dated April 16, 1996, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1997 and 1996, and the results of its operations and its cash flows for the periods then ended in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Minneapolis, Minnesota March 6, 1998
MVE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Data)
The accompanying notes are an integral part of these consolidated financial statements.
MVE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Year Ended December 31, 1997, the Ten Months Ended December 31, 1996, and the Year Ended February 29, 1996
(In Thousands)
The accompanying notes are an integral part of these consolidated financial statements.
MVE, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholder's Deficit
For the Year Ended December 31, 1997, the Ten Months Ended December 31, 1996, and the Year Ended February 29, 1996
(In Thousands)
The accompanying notes are an integral part of these consolidated financial statements.
MVE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Year Ended December 31, 1997, the Ten Months Ended December 31, 1996, and the Year Ended December 31, 1996
(In Thousands)
The accompanying notes are an integral part of these consolidated financial statements.
MVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Year Ended December 31, 1997, the Ten Months Ended December 31, 1996, and the Year Ended February 29, 1996
(In Thousands, Except Share, Warrant and Per Share Data)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION AND BUSINESS
The consolidated financial statements include the accounts of MVE, Inc. and its majority owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. MVE, Inc. and its subsidiaries are collectively referred to as the Company. The Company develops, manufactures, markets and sells products which are grouped according to three business segments: Industrial, Distributed and Medical. Industrial products include cryogenic storage tanks and transportation equipment sold to producers, distributors and end users of industrial gases. Distributed products include bulk CO2 containers used for beverage carbonization, biological storage systems used to store and transport temperature-sensitive biological matter, and insulated storage of liquid natural gas. Medical products include a range of respiratory products such as liquid oxygen systems, ambulatory oxygen systems, oxygen concentrators and nebulizers. The Company is a wholly owned subsidiary of MVE Holdings, Inc. (Holdings).
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are used for such items as plant depreciable lives, tax provisions and reserves, uncollectible accounts receivable and warranty liabilities. As better information becomes available, or accrual amounts are determinable, the recorded estimates are revised. Consequently, operating results can be affected by revisions to prior accounting estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. These investments are reflected at cost which approximates fair value. Accounts payable include issued checks, which have not yet cleared the Company's bank, totaling $3,695 and $1,030 at December 31, 1997 and 1996, respectively.
RECEIVABLES
Accounts receivable, net of allowance for doubtful accounts, consisted of the following as of December 31, 1997 and 1996:
December 31, December 31, 1997 1996 ----------------- ---------------- A/R trade $27,601 $26,785 A/R other 1,775 389 Notes receivable 289 672 ----------------- ---------------- 29,665 27,846 Allowance (828) (888) ----------------- ---------------- $28,837 $26,958 ================= ================
Allowance for doubtful accounts consisted of the following for the year ended December 31, 1997, the ten months ended December 31, 1996 and for the year ended February 29, 1996:
Additions: Write-offs, Beginning Charged to net of Ending Balance Expense Recoveries Balance -------------- ------------- ------------- --------- February 29, 1996 $769 $221 $(315) $675 December 31, 1996 675 168 45 888 December 31, 1997 888 434 (494) 828
INVENTORIES
Inventories include material, labor and overhead at standard cost and are stated at the lower of cost or market. The Company uses the first-in, first out (FIFO) method of accounting for inventories. Inventories consist of the following:
December 31, December 31, 1997 1996 --------------- --------------- Inventories at cost: Purchased materials and subassemblies $14,710 $17,522 Work in process 6,401 6,591 Finished goods 5,115 6,070 --------------- --------------- 26,226 30,183 Reserves (1,452) (2,092) --------------- --------------- $24,774 $28,091 =============== ===============
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost, less accumulated depreciation. Additions and improvements to property and equipment are capitalized at cost while maintenance and repair expenditures are charged to operations as incurred. Depreciation is calculated principally by the straight-line method for financial reporting purposes and accelerated methods for income tax purposes. For financial reporting purposes, depreciation is provided over the following estimated useful lives:
YEARS ----- Buildings and improvements 10-30 Machinery and equipment 3-8 Furniture, fixtures and office equipment 3-8
Property, plant and equipment consisted of:
December 31, December 31, 1997 1996 --------------- ------------ Land $ 1,925 $ 2,058 Building and improvements 13,750 11,122 Machinery and equipment 23,086 16,882 Furniture, fixtures and office equipment 8,995 7,118 Construction in progress 884 5,208 ----------- ------------ 48,640 42,388 Less - accumulated depreciation and amortization (18,765) (15,376) ----------- ------------ Net property, plant and equipment $29,875 $27,012 =========== ============
OTHER ASSETS
Other assets are being amortized on a straight-line basis over their estimated useful lives which range from 2 to 30 years. Accumulated amortization was $10,821 and $8,830 at December 31, 1997 and 1996, respectively. Other assets net of accumulated amortization consist of the following:
December 31, December 31, 1997 1996 ----------------- ----------------- Deferred financing costs $3,993 $ 4,030 Patents, trademarks and product lines 491 657 Non-compete agreement 47 Other 1,577 1,805 ----------------- ----------------- $6,108 $6,492 ================= =================
REVENUE RECOGNITION
Revenue is generally recognized upon shipment of goods. At the request of certain customers, large cryogenic tanks will be accepted by the customer at the Company's facilities and stored there for later shipment. In these instances, title passes to the customer upon acceptance and revenue is recognized at that time.
For the year ended December 31, 1997, one of the Company's customers represented 11% of the Company's net sales. For the ten months ended December 31, 1996, one of the Company's customers represented approximately 15% of the Company's net sales.
RESEARCH AND DEVELOPMENT COSTS
The Company's policy is to charge all research and development costs to expense in the period incurred.
WARRANTY COSTS
The Company warrants most of its products against defects in materials and workmanship under normal use and service for periods extending to five years. Warranty costs have not been material and the Company accrues estimated costs of warranty obligations at the time of sale.
INCOME TAXES
The Company files a consolidated federal income tax return with MVE Holdings, Inc. The Company is operating under the provisions of a tax sharing arrangement that requires it to pay taxes to or receive refunds from MVE Holdings, Inc. based on the Company's taxable income determined as if the Company were a separate company.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using currently enacted tax rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
LONG-LIVED ASSETS AND GOODWILL
In fiscal 1996, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". The Statement establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets. There was no material effect on the financial statements from the adoption because the Company's prior impairment recognition practice was consistent with the major provisions of the Statement. Under provisions of the Statement, impairment losses are recognized when expected future cash flows are less than the assets' carrying value. Accordingly, when indicators of impairment are present, the Company evaluates the carrying value of property, plant and equipment, intangibles and goodwill in relation to the operating performance and future undiscounted cash flows of the underlying business. The Company adjusts the net book value of the underlying assets if the sum of expected future cash flows in less than book value. Goodwill represents the cost of acquired businesses in excess of net assets and is being amortized on a straight-line basis over 5 to 20 years. Accumulated amortization was $16,565 and $14,487 at December 31, 1997 and 1996, respectively (See Note 10).
RECLASSIFICATIONS
Certain reclassifications have been made to prior periods' financial statements to conform to the current year presentation. These reclassifications had no effect on the Company's financial position or results of operations.
CHANGE IN FISCAL YEAR
On January 17, 1997, the Board of Directors of Holdings and MVE adopted a resolution to change the fiscal year of the Company from the last day in February to a calendar year. The change in fiscal year is effective for the ten months ended December 31, 1996.
2. ACCRUED EXPENSES AND OTHER LIABILITIES:
Accrued expenses and other liabilities consists of the following:
December 31, December 31, 1997 1996 --------------- --------------- Employee compensation and payroll taxes $ 2,814 $ 4,924 Income taxes 2,892 1,732 Warranty 1,930 1,909 Accrued pension cost 2,374 1,741 Accrued interest 5,422 5,366 Insurance 2,092 1,967 Deposits and rebates 2,429 4,185 Accrued freight 471 567 Other 1,947 2,591 --------------- --------------- $22,371 $24,982 =============== ===============
3. SUPPLEMENTAL CASH FLOW INFORMATION:
Changes in operating assets and liabilities were as follows:
NON-CASH INVESTING AND FINANCING ACTIVITIES
The Company acquired two companies in 1997 with purchase prices of $1,000 and $300. In 1996, the Company acquired two companies with purchase prices of $1,300 and $600. The acquisitions were not significant to the consolidated statements of cash flows.
Several lease and note obligations of $364 and $2,131 were incurred when the Company entered into leases or notes for new equipment, vehicles and furniture in 1997 and 1996, respectively.
In 1996, the Company purchased a building for $500 in exchange for long-term debt.
4. ACQUISITION:
Effective July 30, 1993, CAIRE INC. (CAIRE), a subsidiary of the Company, acquired Mountain Medical Equipment, Inc. (MME) through a merger of a subsidiary of CAIRE with MME. The transaction was accounted for using the purchase method of accounting. The total purchase price, including acquisition costs of $2,954, was allocated to the net assets acquired based on fair values at the date of acquisition. The purchase price exceeded the fair value of net assets acquired by $7,035. The Company recorded an increase to stockholder's equity of $512 as the transaction has been reflected as a partial sale of CAIRE's net assets to the minority stockholders. On March 1, 1995, MME was merged into CAIRE. Pursuant to the merger agreement:
a. CAIRE issued 404,027 shares of its Series A Participating Convertible Preferred Stock (the Preferred Stock) to the Company. The Preferred Stock is convertible into 404,027 shares of CAIRE's common stock, votes with the common stock as to all matters and carries a $23.56 per share annual dividend which is limited to CAIRE's net available cash flow as defined by the merger agreement. The Preferred Stock has a liquidation preference of $161.65 per share at February 29, 1996 plus accrued and unpaid dividends, which will decline over time by the cumulative present value of dividends actually paid, discounted at 12% per year back to the merger date. The Preferred Stock must be converted to common stock upon certain events.
b. CAIRE issued 41,924 shares of common stock to the former stockholders of MME, resulting in a 9% ownership by such stockholders in the combined company.
c. MME debt held by a third party was amended to be exchangeable under certain conditions into 29,558 shares of CAIRE common stock.
d. CAIRE's operating results subsequent to July 30, 1993 have been included in the accompanying consolidated statements of operations.
5. LONG-TERM DEBT:
Certain assets of the Company are pledged as collateral for long-term debt. Long-term debt consists of the following:
The revolving credit facility provides for borrowings and issuances of Letters of Credit of up to $30,000 subject to a defined borrowing base of qualified accounts receivable and eligible inventory. The revolving credit facility is renewable annually for three year periods through October 2000. Holdings is charged a monthly fee based on an annualized rate of .375% of the unused portion of the commitment. The interest rate is variable and contains a LIBOR and base rate option at the election of the Company. At December 31, 1997, $10,000 of the outstanding balance was subject to a LIBOR based rate of $8.375%. The remaining $857 carried a base rate of 9%. The credit facility contains certain covenants with respect to capital expenditures, borrowings and disposition of assets. As of December 31, 1997, the Company was in compliance with all financial covenants.
In 1996, the revolving credit facility provided for borrowings and issuance of letters of credit of up to $20,000, subject to a defined borrowing base of qualified accounts receivable and eligible inventory. The note was renewable for three-year periods through June 2001. The Company was charged a monthly fee based on an annualized rate of .5% of the unused portion of the commitment.
In February 1995, the Company consummated a refinancing plan. As part of this refinancing plan, the Company issued $112,000 of senior secured notes and Holdings issued 112,000 common stock warrants, each allowing the holder to purchase 0.24 shares of Holdings common stock at $0.01 per share. The proceeds from this refinancing plan were used to retire certain long-term debt of the Company and make an advance to Holdings of $31,015 to allow it to redeem all outstanding shares of Holdings 11.32% Cumulative Redeemable Preferred Stock ($100 par value per share), and all outstanding warrants to purchase Holdings common stock.
The senior secured notes are redeemable at the option of the Company, in whole or in part, on or after February 15, 2000, at the redemption prices (expressed as percentages of principal amount) set forth below, plus accrued and unpaid interest thereon to the redemption dates indicated below:
YEAR PERCENTAGE - ---- ---------- 2000 102.083% 2001 and thereafter 100.000%
The senior secured notes and revolving credit facility agreements contain certain covenants which restrict borrowings, dividends, acquisition and disposition of assets, and require the Company to maintain certain liquidity and debt coverage ratios. As of December 31, 1997, the Company was in compliance with its financial covenants.
The scheduled annual maturities of long-term debt at December 31, 1997 (see Note 13) are as follows:
YEAR AMOUNT - ---- -------------- 1998 $ 9,069 1999 2,124 2000 12,575 2001 1,697 2002 113,766 Thereafter 4,432 -------------- $143,663 ==============
Long-term debt, including current maturities, has a carrying value of $143,663 and a fair value of $161,151. The estimated fair value represents the present value of debt service at rates currently available to the Company for issuance of debt with similar terms. Except for the above, all financial instruments are carried at amounts that approximate estimated fair value.
6. INCOME TAXES:
Income tax expense (benefit) consists of the following for the periods ended:
Fiscal Year Ten Months Fiscal Year ---------------- ---------------- ---------------- December 31, December 31, February 29, 1997 1996 1996 ---------------- ---------------- ---------------- Current: Federal $ 887 $ (198) $1,870 State 31 (70) 281 ---------------- ---------------- --------------- 918 (268) 2,151 Deferred (3,964) (2,929) (478) ---------------- --------------- --------------- $(3,046) $(3,197) $1,673 ================ =============== ===============
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:
The tax effects of temporary differences that give rise to the net deferred tax asset were as follows:
December 31, December 31, 1997 1996 --------------- --------------- Accrued Pension $ 1,020 $ 659 Accrued Compensation 620 1,417 Accrued Self Insurance Reserve 913 746 Aura Write-off 0 522 Deferred compensation 823 725 Intangibles 208 Inventory reserves 1,111 1,120 Depreciable assets (1,162) (2,494) Loss and credit carryforwards 3,535 1,059 Warranty reserve 818 773 Other accruals 557 510 Other 114 367 --------------- --------------- 8,557 5,404 Valuation allowance (551) (551) --------------- --------------- Net deferred tax asset $ 8,006 $ 4,853 =============== ===============
The Company has tax loss carryforwards for income tax purposes. Such tax loss carryforwards have been reduced in part by a valuation allowance, since realization of a portion of the carryforwards is deemed more likely than not. The carryforwards of $3,535 expire in 2012.
7. EMPLOYEE BENEFIT PLANS:
PENSION PLAN
The Company maintains two noncontributory defined benefit pension plans covering substantially all employees of the Company. The benefits to which an employee is entitled under the plans are derived using a formula based on the number of years of service and compensation levels during the last five years of service before retirement. The Company funds the plans in accordance with the requirements of federal laws and regulations.
The net periodic cost is computed as follows:
Approximately 60% of the plan assets are invested in equity securities and 40% in bonds as of December 31, 1997.
The following table sets forth the funded status of the plans:
SAVINGS PLAN
The Company has a 401(k) savings plan (the Plan) which covers all employees who have completed one month of service and attained the age of 21. The Plan provides for voluntary participant contributions of 1% to 15% of each employee's wages. In 1997, the Company began matching contributions of up to 2% of eligible employee wages. Prior to this, the Company made matching contributions at the discretion of the Board of Directors. For the year ended December 31, 1997, the Company made matching contributions of $315 to the Plan. The Company did not make matching contributions to the Plan in the ten months ended December 31, 1996, or the fiscal year ended February 29, 1996.
DEFERRED COMPENSATION PLAN
As of February 29, 1996, the Company had a deferred compensation plan for key management employees to encourage and reward the continued profitable growth of the Company. The awards of the plan are capital appreciation units and are made at the discretion of the Board of Directors. As of February 29, 1996, 36,000 units were outstanding. Each unit was valued at the date of grant at the Board of Directors' discretion and is related to the book value of common stock, as defined. Units vested over a five-year period, and compensation was payable under various terms and conditions after the end of the vesting period or in the event of a sale or public offering, in which case compensation was determined on fair market value of the units.
During the ten months ended December 31, 1996, the Company's Board of Directors approved a deferred compensation plan to replace the existing plan in its entirety. The new plan awarded deferred compensation to certain key members of upper management with the objective of retaining their services, encouraging profitability and rewarding them. The plan awarded 29,270 units to three individuals which may be exchanged for Common Stock of an equal number at a future date, given the occurrence of certain events. For the fiscal year ended December 31, 1996, the Company expensed $1,916 in connection with the adoption of this plan.
During 1997 and subsequent to 1997, the Company entered into agreements with the three individuals that effectively terminated each individual's participation in the deferred compensation plan. Pursuant to the agreements, the Company will issue 29,750 shares of common stock of MVE to the three individuals upon the earlier of December 31, 2006 or the occurrence of certain events. As a result of the Company entering into these agreements, the Company reclassified the accrued liability related to the deferred compensation plan of $1,866 as of December 31, 1996 to equity.
8. COMMITMENTS AND CONTINGENCIES:
LEASES
A portion of the Company's operations is conducted using leased equipment and facilities. These leases are noncancelable and renewable. Total rental expense included in the accompanying consolidated statements of operations was approximately $718, $702, and $502 for the year ended December 31, 1997 and for the ten months ended December 31, 1996 and for the fiscal year ended February 29, 1996. The future minimum rental payments required under these leases are $470 in 1998, $270 in 1999, $89 in 2000, and $9 in 2001.
LITIGATION
The Company is subject to a number of asserted and unasserted potential claims encountered in the normal course of business. In the opinion of the Company's management, based on consultation with outside legal counsel, the resolution of these matters will not have a material adverse effect on the Company's financial position or results of operations.
9. SEGMENT REPORTING AND EXPORT SALES:
The operations of the Company are divided into three business segments for financial reporting purposes. The industrial products segment develops and manufactures cryogenic storage tanks and transportation equipment and markets them to producers, distributors and end users of industrial gases. The distributed products segment develops, manufactures and markets a variety of products utilizing similar technologies as the industrial products segment, but markets them through distributors to various commercial markets, principally end users of bulk liquid CO2 beverage systems and biological material storage systems. Also included in the distributed products segment are those emerging products anticipated to be used in commercial markets including liquid natural gas systems for vehicle fleets and flat vacuum panels for use in refrigeration appliances. The medical products segment develops, manufactures and markets a broad range of medical products, including liquid oxygen systems, oxygen concentrators and medication nebulizers, all of which are used primarily for the in-home treatment of patients. General corporate assets include cash and cash equivalents and income taxes.
Financial information by business segment as of and for the year ended December 31, 1997, the ten months ended December 31, 1996 and the fiscal year ended February 29, 1996 was as follows:
Export sales from the Company's U.S. operations for the year ended December 31, 1997, the ten months ended December 31, 1996 and the fiscal year ended February 29, 1996 were as follows:
December 31, December 31, February 29, 1997 1996 1996 ---------------- ---------------- ---------------- Canada and Mexico $10,922 $ 6,957 $ 7,999 Europe 12,164 12,407 13,358 Pacific 29,318 24,868 26,434 Other 8,331 7,271 7,497 ---------------- ---------------- ---------------- Total 60,735 $51,503 $55,288 ================ ================ ================
10. OTHER EXPENSE:
Other expense recorded in the ten months ended December 31, 1996 include the following:
Recapitalization Expenses $1,241 Deferred Compensation Plan (Note 7) 1,916 Discontinue AURA product line 1,280 Debt Forgiveness 3,722 Goodwill write-offs 10,824 Other 685 ---------------- $19,668 ================
RECAPITALIZATION EXPENSES
In 1996, the Company incurred $1,241 of expenses related to recapitalization of the Company. These expenses related to consent and solicitation of the holders of the senior secured notes and legal and accounting fees.
DISCONTINUANCE OF AURA PRODUCT LINE
In 1996, the Company wrotedown $1,280 of fixed and other assets, net of debt forgiveness, related to the discontinuance of the AURA product line, which was included in the Distributed Products segment. Prior to December 1996, the Company had an agreement with a third party to participate in a joint venture to product and market its AURA product line. In December 1996, the Company and the joint venture partner agreed to discontinue all AURA operating and marketing activities.
DEBT FORGIVENESS
Prior to December 1996, the Company made loans to a major supplier of components for its medical oxygen concentrators. The loans were to be repaid through future purchase credits from the supplier. In December 1996, the Company entered into a new agreement with the supplier which forgave $3,722 of the debt.
GOODWILL WRITEDOWN
In December 1996, the Company recorded a goodwill writedown of $10,824 ($4,750 in Industrial Products and $6,074 in the Medical Products segment). In connection with the change in ownership in 1996, management undertook a strategic review of all business units. As a result of the review, goodwill was determined to have been impaired because of the financial condition of certain medical and industrial business units and the Company's inability to generate future operating income from these business units. Moreover, anticipated future cash flow of these business units indicate that the recoverability of the goodwill is not reasonably assured. Prior to December of 1996, goodwill was amortized using the straight-line method over twenty years.
11. FISCAL RESULTS FOR THE TEN MONTHS ENDED DECEMBER 31, 1995 (UNAUDITED)
December 31, ---------------
Net sales $144,183 Cost of sales 103,501 --------------- Gross profit 40,682 Operating expenses: Selling and Marketing 8,525 General and administrative 10,734 Research and development 4,654 Amortization 4,539 --------------- Total operating expenses 28,452 --------------- Operating income 12,230 Interest expense (13,517) ---------------- Income (loss) before income tax provision (benefit) and minority interest (1,287) Income tax provision (190) ---------------- Loss before minority interest (1,477) Minority interest in net income (133) ---------------- Net loss (1,610) ================
12. RELATED-PARTY TRANSACTION
A director of the Company has an agreement with the Company which pays an annual fee of $75 in exchange for consulting services. This agreement has a term of one year, renewable at the option of the Company.
13. SUBSEQUENT EVENTS
DEBT RESTRUCTURING
On February 2, 1998, CAIRE entered into an agreement whereby a third party agreed to accept, in full payment of all outstanding indebtedness currently owed to it by CAIRE, a cash payment of $50 and an option to purchase 28,957 shares of 10% Series AA Cumulative Preferred Stock (Series AA Preferred Stock), par value $.01 per share, of CAIRE. Concurrent with the above settlement, MVE accepted, in full payment of all outstanding unsecured indebtedness currently owed to it by CAIRE, 632 shares of the Series AA Preferred Stock. Additionally, pursuant to the February 2, 1998 agreement, MVE purchased all shares of CAIRE common stock owned by the third party for an aggregate purchase price of one hundred dollars. The Series AA Preferred Stock has a liquidation preference of $10,000 per share and is subject to mandatory redemption. Had the restructuring occurred at December 31, 1997, unaudited pro forma results for 1997 are: extraordinary gain from extinguishment of debt, net of tax, $3,695; net income $3,319; total liabilities $180,729; and equity $(22,110).