Item 1. BUSINESS.
MVE, Inc., a Delaware corporation (the "Company"), develops, manufactures and distributes vacuum insulated containers and equipment used to transport and store liquid cryogens (gases that enter a liquid state at temperatures below - -80(degree)F), biological matter and other substances. Substantially all of the products of the Company's four business segments are based on its vacuum insulation technology, which enables the Company to produce containers with extremely high insulation characteristics. MVE Holdings, Inc. ("Holdings") owns all of the outstanding capital stock of the Company.
The Company owns all of the outstanding shares of Series A Participating Convertible Preferred Stock, $.01 par value per share, of CAIRE, Inc. (the "CAIRE Preferred Stock"). On February 2, 1998, the Company purchased all shares of CAIRE common stock owned by a third party. Subsequent to this transaction, on a fully diluted basis, the Company would own 97% of the shares.
The Company and Holdings have the same principal place of business, which is located at 3505 County Road 42 West, Burnsville, Minnesota 55306-3803, telephone 612-882-5000.
The Company has four business segments: Industrial Products, Distributed Products, Medical Respiratory Products and Applied Technologies.
Industrial Products
The Industrial Products business segment develops, manufactures and markets cryogenic storage tanks and transportation equipment and provides related services to producers, distributors and end users of liquid industrial gases such as oxygen, nitrogen, argon, hydrogen, helium and CO2. The cryogenic storage tanks and transportation equipment range in storage capacity from approximately 40 to 80,000 gallons.
The Industrial Products business segment serves a wide variety of customers. Industrial gas producers, as a group, are the Company's largest source of revenue. These customers produce and distribute industrial gases and purchase the Company's products for their own use and for rent or resale to third party distributors and end users. Food processing companies and semiconductor manufacturers also represent a significant customer base for Industrial Products' direct sales.
The Industrial Products business segment sells its products and services worldwide. The Company's competitors include a number of other companies, some of which are larger (in the aggregate) and have greater financial resources than the Company. The Company believes that competition is based primarily upon product design, dependability and customer support and service.
Distributed Products
The Distributed Products business segment consists primarily of vacuum-insulated, bulk liquid CO2 containers used for beverage carbonation in restaurants, convenience stores and cinemas. The Company also manufactures and markets non-insulated bulk flavored syrup containers for side-by-side installation with its CO2 systems. The Company's beverage systems are sold to food franchisers, soft drink companies and CO2 distributors. The Company also manufactures cooking oil management systems which provide restaurant owners with a new method to store, filter and dispense frying oils.
The Company's primary competitors for its bulk liquid CO2 beverage delivery systems are producers of high pressure gaseous CO2 systems and sellers of bulk liquid CO2 beverage systems, some of which are larger (in the aggregate) and have greater financial resources than the Company. The Company believes that competition for bulk liquid CO2 beverage systems is based primarily on service and price.
Medical Respiratory Products
The Medical Respiratory Products business segment, which is operated through CAIRE, Inc., develops, manufactures, assembles, and markets a limited range of medical respiratory products, including liquid oxygen systems, ambulatory oxygen systems and oxygen concentrators, all of which are used for the in-home supplemental oxygen treatment of patients with chronic obstructive pulmonary diseases ("COPD"), such as bronchitis, emphysema and asthma. In addition, CAIRE sells nebulizers that are used for the oral, inhaled delivery of medication for a wide variety of respiratory ailments, particularly asthma. It also manufactures and markets patient information systems, consisting of both electronic hardware and software, that allow its customers to monitor system performance and patient compliance. In 1998, the company exited the oxygen concentrator and nebulizer markets to focus on its liquid oxygen market using its cryogenic resources.
Individuals for whom supplemental oxygen is prescribed generally purchase or rent an oxygen system from a home healthcare provider or medical equipment dealer. The provider/dealer or physician usually selects which type of oxygen system to recommend to its customers: liquid oxygen systems, oxygen concentrators or high pressure oxygen cylinders. The three methods are currently believed to be therapeutically equivalent.
The Company's primary competitors in the sale of liquid oxygen systems, oxygen concentrators and nebulizers include a number of other companies, some of which are larger and have greater financial resources than the Company. The Company believes that competition for liquid oxygen systems and oxygen concentrators is based primarily upon product performance, reliability, ease-of-service and price. The Company believes that competition in the nebulizer market is based primarily upon product pricing and reliability and focuses its marketing strategies on these considerations.
Applied Technologies
The Applied Technologies business segment consists of various product lines including biological storage systems, vacuum insulated containers for liquid natural gas (LNG) storage, environmental test chambers for rapid heat/cold testing, vacuum insulated pipe and other end user applications. This area of the Company's activity focuses on the development of new markets and new applications for the Company's existing and developing technologies.
Biological Storage Systems
This product line consists of vacuum insulated vessels used by the beef and dairy cattle breeding industry to transport frozen semen and embryos and vacuum insulated vessels used by hospitals, medical laboratories and research facilities to transport and store human organs, tissue samples and other temperature-sensitive biological matter.
These products are sold through laboratory product original equipment manufacturers ("OEMs"), laboratory products distributors, industrial gas distributors and breeding service providers. Many of these distributors provide a single source for many different types of products to hospitals, medical laboratories and research facilities.
The Company's competitors for biological storage systems include a few companies inside and outside the United States, some of which are larger and have greater financial resources than the Company. Competition for biological storage systems is based primarily on product design, reliability and price. Alternatives to vacuum insulated vessels include mechanical, electrically powered refrigeration for storage of biological matter.
Liquid Natural Gas (LNG) Storage
This product line consists of vacuum insulated containers for liquid natural gas (LNG) storage and fueling systems for centrally fueled fleets of vehicles powered by LNG (such as fleets operated by metropolitan transportation authorities, refuse haulers, railroads and utilities). Competition for LNG fueling and storage systems is based primarily on product design, customer support and service, dependability and price. Although there are alternatives to LNG fuel, the Company is not aware of any alternatives to vacuum insulated containers for LNG fueling and storage systems.
Vacuum Insulated Pipe
This product line specializes in the design and fabrication of custom cryogenic piping (VIP) for liquid nitrogen, oxygen, argon, helium and hydrogen in pipe sizes ranging from 1/4" to 8". The configuration of VIP is built to order and is restricted only by shipping and installation constraints. Competition for VIP is based on technology (foam vs. vacuum insulation), price and delivery lead times.
Supplies and Materials
The Company's primary raw materials for its vacuum insulated containers are carbon, stainless and nickel alloy steel. Aluminum is also a significant component of its biological products line. The Company is not dependent on any sole source for its supply of these materials. Certain major components of the Company's other products are purchased from a single source of supply, an interruption of which could cause a disruption of product availability; however, the Company believes that the strategic and operational advantages of working with certain key suppliers on a single source basis outweigh the risks of this dependence.
Patents and Trademarks
The Company owns various domestic and foreign patents and trademarks. The registered processes and products were either purchased by the Company in connection with the acquisition of its businesses or developed by the Company through research and development activities.
Regulation
The Company is subject to a wide variety of federal, state and local environmental laws and regulations ("Environmental Laws"), which continue to be adopted and amended. The Environmental Laws regulate, among other things: air and water emissions and discharges at the Company's manufacturing facilities; the safety and health of employees in the production areas of its manufacturing facilities; the generation, storage, treatment, transportation and disposal of solid and hazardous waste by the Company; the release of toxic substances, pollutants and contaminants into the environment at properties owned or operated by the Company and at other sites; and, in some circumstances, the environmental condition of property prior to a transfer or sale.
The Company is currently participating in environmental investigations and assessments under these regulations at some if its current and former sites. In 1997, Holdings submitted a site investigation report and Response Action Plan (RAP) to the Minnesota Pollution Control Agency (MPCA). The soil RAP has been conditionally approved by the MPCA. The groundwater RAP is subject to further review. These plans include possible obligations to remove or mitigate the effects of hazardous substances from the environment. The amount of such future costs will depend on factors such as the unknown nature or extent of contamination, the extent and method of the remedial actions which may be required and the magnitude of clean-up costs. To date, the costs of compliance with Environmental Laws have not had a material adverse effect on the financial condition or results of operations of the Company. Although future costs related to compliance with Environmental Laws could be significant, the Company does not believe that such costs will have a material adverse effect on the Company's financial condition or results of operations.
The manufacturing and marketing of CAIRE's products are subject to regulation by the Food and Drug Administration (the "FDA") under the Federal Food, Drug and Cosmetic Act. These regulations subject manufacturers to certain controls to provide reasonable assurance of the safety and effectiveness of medical devices, including labeling requirements, registration with the FDA as a manufacturer, listing with the FDA of devices in commercial distribution, pre-market notification to the FDA of changes in a listed device or manner of production or of other devices proposed to be marketed, conformity to specified current "good manufacturing practices," and conformity to certain record keeping requirements. Similarly, many of the Company's vacuum insulated containers are made to conform to various pressure vessel design codes around the world including those of the Department of Transportation, American Society of Mechanical Engineers, ASTM, BS 5500 and A.D. Merkblatter.
Year 2000
The Year 2000 Problem is the result of the inability of hardware, software and control systems to properly recognize and process two-digit references to specific years, beginning with the year 2000. The Year 2000 Problem could result in system failures or miscalculations causing disruptions of the operations of Holdings, its suppliers and its customers.
In early 1998, Holdings began a plan which includes identification, assessment, remediation and testing of its critical software systems. Holdings has completed the identification and assessment phases.
Holdings produces a limited number of products utilizing control systems with embedded chip technology, and is contacting the vendors who provide these embedded chips to determine compliance. Holdings is also undergoing its own internal testing and assessment of all of its products. This project will be completed in the 2nd quarter of 1999.
Based upon Holdings' review of systems using embedded chip technology within its existing facilities, Holdings is reasonably sure that its facilities are materially year 2000 compliant.
Holdings' Year 2000 plan also considers the readiness of significant customers and suppliers. Holdings believes that the third parties whose Year 2000 problems pose the greatest risks for Holdings include its suppliers of the major materials used in production processes and its providers of freight services. Holdings has been reviewing and continues to review with its critical suppliers and major customers the status of their Year 2000 readiness. Holdings has established plans for ongoing monitoring of suppliers during 1999. However, Holdings provides no assurance that these third parties will be Year 2000 compliant or that their noncompliance will not have a material adverse effect on the Company.
Holdings does not expect the costs associated with its Year 2000 efforts to be substantial. The estimated total cost for the Year 2000 project is not significant to the consolidated financial statements, including costs already incurred. Holdings has not deferred any projects as a result of the implementation of the Year 2000 project.
Holdings believes that completed and planned modifications and conversions of its internal systems and equipment will allow it to be Year 2000 compliant in a timely manner. There can be no assurance, however, that Holdings' internal systems or equipment or those of third parties on which Holdings relies will be Year 2000 compliant in a timely manner or that Holdings' or third parties' contingency plans will mitigate the effects of any noncompliance. The failure of the systems or equipment of Holdings or third parties could result in some reduction of the Company's operations which could have a material adverse effect on Holdings' business or consolidated financial statements. Holdings believes that the third parties whose Year 2000 Problems pose the greatest risks for Holdings include its banks that maintain depository accounts, its payroll processing company, its suppliers of the major materials used in production processes, its utility providers and its providers of freight services.
Holdings has not completed its systems integration testing, and, accordingly, has not fully assessed its risks from potential year 2000 failures. Holdings has not yet developed year 2000 specific contingency plans, however, plans will be developed if the results of systems integration testing identifies a business segment at risk.
The preceding "Year 2000" discussion contains various forward-looking statements, which represent Holdings beliefs or expectations regarding future events. When used in this discussion, the words "believes", "expects", "estimates", and similar expressions are intended to identify forward-looking statements. Forward-looking statements include, without limitation, Holdings' expectations as to when it will complete the remediation and testing phases of its Year 2000 program as well as contingency plans; its estimated costs of achieving Year 2000 related readiness; and Holdings' belief that its internal systems and equipment will be compliant in a timely manner. All forward-looking statements involve a number of risks and uncertainties that could cause the actual results to differ materially from the projected results. Factors that may cause these differences include, but are not limited to, the availability of qualified personnel and other IS resources; the ability to identify and remediate all date-sensitive computer coding or replacability of embedded computer chips in affected systems or equipment; and the actions of governmental agencies or other third parties with respect to Year 2000 problems.
The Euro Conversion
On January 1, 1999, eleven of the fifteen member countries of the European Union (EU) established fixed conversion rates through the European Central Bank (ECB) between their existing local currencies and the Euro, the EU's single currency. The participating countries have agreed to adopt the Euro as their common legal currency on that date, the Euro now trades on currency exchanges and will be available for non-cash transactions.
Holdings is reviewing the Euro's impact on Holdings' business and pricing strategies. Holdings' European business units have made the necessary investments in their information services systems in order to be able to handle transactions in Euros, as requested. The introduction of the Euro is not expected to have a material impact on Holdings' overall currency risk or its ability to transact business.
Forward-Looking Statements
Holdings is making this statement in order to satisfy the "safe harbor" provisions contained in the Private Securities Litigation Reform Act of 1995. This Annual Report on Form 10-K includes forward-looking statements relating to the business of Holdings. Forward-looking statements contained herein or in other statements made by Holdings are based on management's expectations and beliefs concerning future events impacting Holdings and are subject to uncertainties and factors relating to Holdings' operations and business environment, all of which are difficult to predict and many of which are beyond the control of Holdings, that could cause actual results of Holdings to differ materially from those matters expressed or implied by forward-looking statements. Holdings believes that the following factors, among others, could affect its future performance and cause actual results of Holdings to differ materially from those expressed or implied by forward-looking statements made by or on behalf of Holdings: (a) general economic, business and market conditions; (b) competition; (c) decreases in spending by its industrial customers; (d) the loss of a major customer or customers; (e) ability of Holdings to identify, consummate and integrate the operations of suitable acquisition targets; (f) ability of Holdings to manage its fixed-price contract exposure; (g) Holdings' relations with its employees; (h) the extent of product liability claims asserted against Holdings; (i) variability in Holdings' operating results; (j) the ability of Holdings to attract and retain key personnel; (k) the costs of compliance with environmental matters; (l) the ability of Holdings to protect its proprietary information; and (m) disruption of Holdings' business or operations resulting from the Year 2000 Problem.
Subsequent Event - Agreement and Plan of Merger
On February 16, 1999, Holdings entered into a merger agreement with Chart Industries, Inc. (Chart). Under the agreement, Holdings shall become a wholly owned subsidiary of Chart. The transaction is expected to be complete within 60 days. The closing is subject to certain regulatory approvals and satisfaction of usual and customary closing conditions. The purchase price is approximately $240 million including assumed debt. As part of the merger agreement, Chart will retain 20% of the stock of the cooking oil management business. The remaining 80% of the stock will be distributed to the current shareholders of Holdings.
Item 2.
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, 1998 there were twenty-five stockholders of Holdings Common Stock, one stockholder of Holdings Preferred Class A Stock, and four stockholders of Holdings Preferred Class B Stock on record. Holdings owns all of the outstanding Common Stock of the Company. The agreement governing the Company's revolving credit facility and the indenture governing the Senior Secured Notes restrict the Company's ability to pay dividends to Holdings.
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. The financial data set forth below should be read in conjunction with the historical consolidated financial statements and related notes thereto of Holdings and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained elsewhere herein.
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(1) Loss on sale of assets of $639 was excluded from EBITDA as a result of bank covenant requirements. Also, EBITDA was adjusted for the interest of the minority shareholders of Ferox in Ferox's interest, taxes, depreciation and amortization expense.
(2) The extraordinary loss in 1995 of $1,307 is due to losses realized upon extinguishment of debt, net of an income tax benefit of $871.
(3) Operating loss for the ten months ended December 31, 1996 included non recurring charges of $22.0 million relating to the revaluation of certain business units and product lines including $3.5 million relating to the recapitalization of Holdings in August 1996. (See Note 11)
(4) Management calculates EBITDA as earnings before interest, taxes, depreciation, amortization and extraordinary items. EBITDA has been adjusted to include minority interest in net income (loss). Management reports EBITDA as it is required for bank covenant purposes. EBITDA is not intended to represent cash flow from operations for the period nor has it been presented as an alternative to either (1) operating income (as determined by GAAP) as an indicator of operating performance or (2) cash flow from operating, investing and financing activities (as determined by GAAP). EBITDA is therefore susceptible to varying calculations and as presented may not be comparable to other similarly titled measures of other companies.
(5) The extraordinary gain in 1998 of $6,118 is due to the gain realized upon extinguishment of debt (See Note 6).
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 four business segments: industrial, distributed, medical respiratory and applied technologies. The industrial products segment develops and manufactures cryogenic storage tanks and transportation equipment and markets them to producers, distributors and end users of industrial gases. The distributed products segment develops, manufactures and markets a variety of products utilizing similar technologies as the industrial products segment, but markets them through distributors to various commercial markets, principally end users of bulk liquid CO2 beverage systems. The distributed products segment also includes the cooking oil management business. The medical respiratory products segment develops, manufactures and markets a limited range of medical respiratory products, including liquid oxygen systems, oxygen concentrators and medication nebulizers, all of which are used primarily for the in-home treatment of patients. The applied technologies segment includes storage systems for temperature-sensitive agricultural and biological products, liquid natural gas (LNG) storage, test chambers for rapid heat/cold testing, vacuum insulated pipe and other emerging products.
Holdings' sales are sensitive to changes in the economy and government. Vacuum insulated cryogenic tanks, particularly in the industrial market, represent capital expenditures for Holdings' major customers. Sales to the medical industry are strongly dependent on healthcare reimbursement policies. Sales of bulk liquid CO2 beverage systems depend on growth in the restaurant and fast food industries and the extent and timing of such industries' change from high pressure gaseous CO2 systems to bulk liquid CO2 systems. Sales in the LNG market are sensitive to government regulations.
RESULTS OF OPERATIONS - ---------------------
Years Ended December 31, 1998 and 1997
Net Sales
Net sales for the year ended December 31, 1998 increased 7.8% to $207.8 million from $192.7 million for the year ended December 31, 1997.
Industrial Products: Net sales for the year ended December 31, 1998 increased 1.6% to $116.5 million from $114.7 million for the year ended December 31, 1997. The change in net sales is due to the acquisition in February 1998 of a majority interest in Ferox a.s., a cryogenic tank manufacturer located in the Czech Republic, which increased net sales by $18.0 million. This increase was offset by approximately $15.0 million of reduced revenues due to continued softness in Asia, primarily for liquid cylinder products.
Distributed Products: Net sales increased 22.2% to $34.2 million in 1998 from $27.9 million in the comparable period in 1997. This increase is due to continued penetration of restaurant CO2 applications by the major distributors and expansion of the cooking oil management business.
Medical Respiratory Products: Net sales for the year ended December 31, 1998 increased 3.0% to $27.1 million from $26.3 million for the year ended December 31, 1997. The change resulted from growth in international sales offset by weakness in the domestic market caused by reductions in the Medicare reimbursement rates that were effective January 1, 1998. Also, during the year, MVE exited the oxygen concentrator and nebulizer markets to focus on its liquid oxygen market using its cryogenic resources.
Applied Technologies: Net sales for this group of products increased 26.1% to $30.0 million in 1998 from $23.8 million in 1997. MVE was awarded several contracts that used the LNG cylinder and fuel station technology that increased sales in 1998.
Gross Margin
Gross margin, expressed as a percent of net sales, remained virtually unchanged at 28.7 % in 1998 compared to 28.5% in 1997.
Industrial Products: Gross margin decreased 2.4% to 22.5% for the year ended December 31, 1998 from 24.9% for the year ended December 31, 1997. This reduction is due to poor economic conditions in Asia, lower margins as a result of spreading fixed U.S. overhead costs over a lower volume of sales and the acquisition of Ferox in the Czech Republic that has lower margins than the existing business.
Distributed Products: Margins remained fairly consistent at 44.0% in 1998 and 44.6% in 1997 as the Company was able to offset pricing pressure with improvements in manufacturing costs.
Medical Respiratory Products: Reductions in the Medicare reimbursement rates for patients with Chronic Obstructive Pulmonary Disease (COPD), and the push down in pricing to COPD equipment suppliers resulted in reduced margins for the Company's domestic business. Offsetting this decline in the U.S. market were increased sales to the international markets, which have higher margins. The combination of these two factors, coupled with greater manufacturing efficiencies, enabled margins to increase 2.4% to 26.7% for the year ended December 31, 1998 from 24.3% in 1997.
Applied Technologies: Gross profit margins increased 5.6% to 37.4% in 1998 from 31.8% in 1997 due to more favorable product mix and strong demand for LNG products.
Operating Expenses
Operating expenses for the year ended December 31, 1998 were $43.1 million in 1998, compared to $42.3 million in 1997. During the year, Holdings acquired a majority interest in Ferox a.s., in the Czech Republic, and continued development of its cooking oil management systems, which increased operating expenses by $3.0 million in 1998. In addition, as the Company exited the oxygen concentrator product line, it incurred costs of $1.0 million to write-off the value of net assets used for this product line. These increases were offset by structural changes that reduced operating costs by $4.0 million in 1998.
Operating Income
Operating income was $16.5 million in 1998, compared to $12.7 million in the same period in 1997 for the reasons identified earlier.
Interest Expense
Interest expense increased $1.7 million to $19.3 million in 1998 from $17.6 million in 1997 resulting from the acquisition debt and related interest expense of the Ferox a.s. acquisition.
Income Taxes
The provision for income taxes was $1.3 million for the year ended December 31, 1998 compared to a $3.4 million benefit for the year ended December 31, 1997. The effective tax rates for the years ended December 31, 1997 and 1996 were different from the statutory rates as a result of various permanent differences.
Net Loss
As a result of the above, net loss before extraordinary gain was $3.9 million in 1998 compared to $1.1 million in 1997. (See Note 6)
EBITDA
Earnings before interest, income taxes, depreciation and amortization (EBITDA) increased to $26.0 million, or 12.5% of net sales in 1998, from $20.2 million or 10.5% of net sales in 1997. This increase is due to reasons mentioned above as well as cost reduction programs affecting the organization and its manufacturing plants.
Years Ended December 31, 1997 and 1996
Net Sales
Net sales for the year ended December 31, 1997 increased 1.0% to $192.7 million from $190.8 million for the year ended December 31, 1996.
Industrial Products: Net sales for the year ended December 31, 1997 increased 1.5% to $114.7 million from $113.0 million for the year ended December 31, 1996. The increase is primarily attributable to the Company's acquisitions in August and November 1996 of subsidiaries located in China and Australia with sales of $11.3 million and $1.2 million for the years ended December 31, 1997 and 1996, respectively. Sales of small pressure vessels increased $2.7 million. The Orca product line was introduced in 1997 which increased sales $2.0 million. These increases were offset by a $14.5 million decrease in bulk tank sales resulting from the major gas producers reducing their tank inventory in 1997.
Distributed Products: Net sales for the year ended December 31, 1997 decreased 4.1% to $27.9 million from $29.1 million for the year ended December 31, 1996. The decrease is primarily attributable to decreases in AURA panel sales. Sales of AURA panels were $0.1 million and $2.2 million in the years ended December 31, 1997 and 1996, respectively. The sales of Aura panels were discontinued in 1997.
Medical Respiratory Products: Net sales for the year ended December 31, 1997 decreased 5.4% to $26.3 million from $27.8 million for the year ended December 31, 1996. The decrease is primarily attributable to decreases in price resulting from a competitive market.
Applied Technologies: Net sales for this group of products increased 13.9% to $23.8 million in 1997 from $20.9 million in 1996. Vacuum insulated pipe increased $1.5 million offset by reduced sales in biological storage systems. The environmental chambers product line was introduced in 1997 which increased sales $1.9 million.
Gross Margin
Gross margin (expressed as a percent of net sales) increased to 28.5% for the year ended December 31, 1997 from 27.4% for the year ended December 31, 1996.
Industrial Products: Gross margin increased 2.5% to 24.9% for the year ended December 31, 1997 from 22.4% for the year ended December 31, 1996. The increase is attributable to changes in the mix of products sold and decreased manufacturing costs.
Distributed Products: Gross margin increased 1.1% to 44.6% for the year ended December 31, 1997 from 43.5% for the year ended December 31, 1996.
Medical Respiratory Products: Gross margin decreased 0.6% to 24.3% for the year ended December 31, 1997 from 24.9% for the year ended December 31, 1996.
Applied Technologies: Gross profit margins decreased 3.3% to 31.8% in 1997 from 35.1% in 1996.
Operating Expenses
Operating expenses for the year ended December 31, 1997 were $42.3 million compared to $58.7 million for the year ended December 31, 1996. The decrease in operating expenses is primarily attributable to one-time, primarily non-cash charges of $22.0 million in 1996, including expenses of $3.5 million relating to the recapitalization of Holdings in August 1996 and $1.3 million resulting from discontinuing the AURA product line. These decreases were offset by an increase of $2.1 million associated with the expansion of the Company's business into the Pacific Rim and Europe, $1.2 million incurred by a company acquired in 1997 and development of the cooking oil management system. Other net spending increased approximately $3.7 million.
In connection with the change of ownership of Holdings in August 1996, management, at the direction of Holdings' Board of Directors, undertook a strategic review of all business units. This review was completed and presented to the Board of Directors in December 1996. As a result of this review, the Company revised various estimates used in the valuation of assets and liabilities related to various medical respiratory and industrial product lines and discontinued its AURA product line. One-time charges of $22 million were taken in the ten months ended December 31, 1996 as a direct result of this review and the recapitalization (see Note 11 to the Financial Statements).
After adjusting for one-time charges, including recapitalization expenses in 1996, operating expenses for the year ended December 31, 1997 increased $5.6 million from the same period one year ago.
Operating Income
Operating income was $12.7 million for the year ended December 31, 1997 compared to an operating loss of $6.5 million for the year ended December 31, 1996. The increase in operating income is primarily attributable to the factors noted in discussions above.
Interest Expense
Interest expense was $17.6 million for the year ended December 31, 1997 compared to $16.5 million in the year ended December 31, 1996.
Income Taxes
The benefit from income taxes was $3.4 million for the year ended December 31, 1997 compared to $1.6 million for the year ended December 31, 1996. The effective tax rates for the years ended December 31, 1997 and 1996 were different from the statutory rates as a result of various permanent differences.
Net Loss
Net loss for the year ended December 31, 1997 was $1.1 million compared to $20.4 million for the year ended December 31, 1996.
EBITDA
EBITDA (earnings before interest, income taxes, depreciation and amortization) was $20.2 million or 10.5% of net sales for the year ended December 31, 1997 compared to $4.1 million or 2.1% of net sales for the year ended December 31, 1996. The increase in EBITDA is attributable to the factors noted above. Adjusting for nonrecurring expenses of $22.0 million including expenses relating to the recapitalization of Holdings in August 1996, EBITDA for the year ended December 31, 1996 was $26.1 million.
LIQUIDITY AND CAPITAL RESERVES - ------------------------------
Cash Flow From Operating Activities
Cash flow provided by operating activities was approximately $0.7 million, $4.6 million, and $8.4 million for the years ended December 31, 1998 and 1997, and the ten months ended December 31, 1996, respectively. Working capital was $29.5 million, $16.9 million and $29.9 million, respectively at December 31, 1998, 1997, and 1996. Cash increased as a result of the issuance of the 14.125% senior subordinated notes. Additionally, the current maturities of long term debt of a subsidiary was restructured and a majority interest in Ferox a.s. in the Czech Republic was obtained.
Cash Flow From Investing Activities
For the years ended December 31, 1998 and 1997 and the ten months ended December 31, 1996, Holdings had approximately $4.3 million, $6.4 million and $9.8 million in capital expenditures, respectively. For the periods ended December 31, 1998 and 1997, Holdings invested $0.2 million and $0.4 million in non-cash capital expenditures. Holdings reduced the dollars spent on capital expenditures from 1997 as most of the modernization and investments in capacity changes were completed previously. The expenditures in the periods ended December 31, 1997 and 1996 were primarily due to the expansion of Holdings' New Prague operations, the construction of the Caire facility and normal equipment acquisition and replacement.
Cash Flow From Financing Activities
Cash flow provided by (used in) financing activities was approximately $8.0 million, $(2.6) million and $10.6 million in the years ended December 31, 1998 and 1997 and the ten months ended December 31, 1996, respectively. In 1998, $6.3 million was received from the issuance of 14.125% senior subordinated notes. Also, in 1997, Holdings purchased $3.2 million of treasury stock and $0.5 million of preferred stock. Cash flow from financing activities during the ten months ended December 31, 1996 was primarily attributable to the recapitalization of Holdings in August 1996 described below.
The agreement governing the revolving credit facility expires in October 2000 and contains numerous financial and operating covenants and prohibitions that impose limitations on the liquidity of the Company, including requirements that the Company satisfy certain financial ratios and that the Company maintain specific levels of EBITDA. The indenture governing the Senior Secured Notes, as amended in connection with the recapitalization of Holdings in August 1996, also imposes limitations on the incurrence of additional indebtedness. Holdings expects that the cash generated by operations and borrowings under its revolving credit agreement that expires on October 2000 will be sufficient to satisfy its working capital and debt service requirements through the period the current credit agreement is in place. Holdings expects that it may require waivers of certain quarterly financial covenants under this credit agreement from the lending institutions. While Holdings meets regularly with its lending institutions and keeps them advised of Holdings ongoing performance, no assurance can be given that the lending institutions will grant these covenant waivers, in which case Holdings would have to reduce its indebtedness significantly or negotiate changes to, or relief from, covenants in the credit facility. Holdings was in compliance with all covenants included in the agreement governing the revolving credit facility and the indenture as of December 31, 1998.
On August 28, 1996, MVE Investors, LLC purchased 4,700 shares of Holdings 12.5% Class A Cumulative Convertible Participating Preferred Stock, par value $100 per share, for the purchase price of $47 million. Holdings used the proceeds of this transaction to redeem a substantial portion of certain shareholders' Common Stock. MVE Investors, LLC's shares of Class A Preferred Stock are immediately convertible into 374,633 shares of Holdings Common Stock.
In exchange for 1,061 shares of Common Stock held by certain shareholders, Holdings issued 13 shares of 10% Series B Redeemable Preferred Stock in 1997. In 1996, 66,406 shares of Common Stock were exchanged for 833 shares of Series B Redeemable Preferred Stock.
In 1997, Holdings purchased 430 of its outstanding warrants for $30.10944 per warrant. In 1996, Holdings purchased 79% of its outstanding warrants for $30.10944 per warrant.
Holdings accrued, but did not declare or pay, dividends of $8.2 million, $7.2 million, and $2.3 million to the holders of Holdings Preferred Stock for the years ended December 31, 1998 and 1997 and the ten months ended December 31, 1996, respectively.
To the extent that operating cash flows are insufficient to repay borrowings under the Senior Secured Notes, the revolving credit agreement and the IRB financing at their respective maturities, Holdings expects that it will be required to refinance all or substantially all of the Senior Secured Notes, the revolving credit agreement and the IRB financing or sell equity or assets to fund the repayment of all or substantially all of the Senior Secured Notes, the revolving credit and the IRB financing at or prior to their respective maturities, or effect a combination of the foregoing; however, there can be no assurance that Holdings would be able to refinance such indebtedness.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY.
See Appendix A.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None
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, 1998 and 1997
MVE Holdings, Inc. and Subsidiaries Consolidated Statements of Operations for the Years Ended December 31, 1998 and 1997 and the Ten Months Ended December 31,
MVE Holdings, Inc. and Subsidiaries Consolidated Statements of Stockholders' Deficit for the Years Ended December 31, 1998 and 1997, and the Ten Months Ended December 31, 1996
MVE Holdings, Inc. and Subsidiaries Consolidated Statements of Cash Flows for the Years Ended December 31, 1998 and 1997, and the Ten Months Ended December 31, 1996
MVE Holdings, Inc. and Subsidiaries Consolidated Statements of Comprehensive Income for the Years Ended December 31, 1998 and 1997, and the Ten Months Ended December 31, 1996
Notes to MVE Holdings, Inc. and Subsidiaries Consolidated Financial Statements
Report of Deloitte & Touche LLP, Independent Public Accountants on MVE, Inc. and Subsidiaries
MVE, Inc. and Subsidiaries Consolidated Balance Sheets as of December 31, 1998 and 1997
MVE, Inc. and Subsidiaries Consolidated Statements of Operations for the Years Ended December 31, 1998 and 1997, and the Ten Months Ended December 31, 1996
MVE, Inc. and Subsidiaries Consolidated Statements of Stockholder's Deficit for the Years Ended December 31, 1998 and 1997, and the Ten Months Ended December 31, 1996
MVE, Inc. and Subsidiaries Consolidated Statements of Cash Flows for the Years Ended December 31, 1998 and 1997, and the Ten Months Ended December 31, 1996
MVE, Inc. and Consolidated Statement of Comprehensive Income for the Year Ended December 31, 1998 and 1997, and the Ten Months Ended December 31, 1996
Notes to MVE, Inc. and Subsidiaries Consolidated Financial Statements
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of MVE Holdings, Inc.
We have audited the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholder's deficit, cash flows and comprehensive income of MVE Holdings, Inc. and subsidiaries (Holdings) as of December 31, 1998 and 1997. These consolidated financial statements are the responsibility of Holdings' management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Holdings as of December 31, 1998 and 1997 and the results of its operations and its cash flows for the periods then ended in conformity with generally accepted accounting principles.
Deloitte & Touche LLP Minneapolis, Minnesota
March 12, 1999
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 Years Ended December 31, 1998 and 1997, and the Ten Months Ended December 31, 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 Years Ended December 31, 1998 and 1997, and the Ten Months Ended December 31, 1996 (In Thousands, Except Share Data)
The accompanying notes are an integral part of these consolidated financial statements.
MVE HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the Years Ended December 31, 1998 and 1997, and the Ten Months Ended December 31, 1996 (In Thousands)
The accompanying notes are an integral part of these consolidated financial statements.
MVE HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income For the Years Ended December 31, 1998 and 1997, and the Ten Months Ended December 31, 1996 (In Thousands)
The accompanying notes are an integral part of these consolidated financial statements.
MVE HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements For the Years Ended December 31, 1998 and 1997, and the Ten Months Ended December 31, 1996 (In Thousands, Except Share, Warrant and Per Share Data)
1. Organization and Summary of Significant Accounting Policies:
Principles of Consolidation and Business
The consolidated financial statements include the accounts of MVE Holdings, Inc. and its wholly owned and majority owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. MVE Holdings, Inc. and its subsidiaries are collectively referred to as Holdings or the Company. Holdings develops, manufactures, markets and sells products which are grouped according to four business segments: industrial, distributed, medical respiratory and applied technologies. Industrial products include cryogenic storage tanks and transportation equipment sold to producers, distributors and end users of industrial gases. Distributed products include bulk CO2 containers used for beverage carbonization and cooking oil management systems which provides a new and enhanced method to store and handle frying oils. Medical respiratory products include a range of respiratory products such as liquid oxygen systems, ambulatory oxygen systems, oxygen concentrators and nebulizers. Applied technologies includes specialized products using cryogenic technology for use with liquid natural gas (LNG) storage, test chambers for rapid heat/cold testing, storage systems used to store and transport temperature-sensitive agricultural and biological products, vacuum insulated pipe and other end user applications.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are used for such items as depreciable lives, tax provisions and reserves, uncollectible accounts receivable, inventory and warranty liabilities. As better information becomes available or accrual amounts are determinable, the recorded estimates are revised. Consequently, operating results can be affected by revisions to prior accounting estimates.
Cash and Cash Equivalents
Holdings considers all highly liquid investments with original maturities of three months or less to be cash equivalents. These investments are reflected at cost, which approximates fair value. Accounts payable include issued checks, which have not yet cleared Holdings' bank, totaling $994 and $3,695 at December 31, 1998 and 1997, respectively.
Receivables
Accounts receivable (A/R), net of allowance for doubtful accounts, consisted of the following as of December 31, 1998 and 1997:
December 31, December 31, 1998 1997 -------------- ------------- A/R trade $31,667 $27,601 A/R other 2,361 1,776 Notes receivable 106 289 ------- ------- 34,134 29,666 Allowance (1,251) (828) ------- ------- $32,883 $28,838 ======= =======
Allowance for doubtful accounts consisted of the following for the years ended December 31, 1998 and 1997, and the ten months ended December 31, 1996:
Additions: Write-offs, Beginning Charged to net of Ending Balance Expense Recoveries Balance --------- ---------- ----------- ------- December 31, 1996 $675 $168 $45 $888 December 31, 1997 888 434 (494) 828 December 31, 1998 828 550 (127) 1,251
Inventories
Inventories include material, labor and overhead at standard cost and are stated at the lower of cost or market. Holdings uses the first-in, first out (FIFO) method of accounting for inventories. Inventories consist of the following:
December 31, December 31, 1998 1997 ----------- -----------
Inventories at cost: Purchased materials and subassemblies $15,517 $14,710 Work in process 8,581 6,401 Finished goods 6,352 5,115 ------- ------- 30,450 26,226 Reserves (3,330) (1,452) ------- ------- $27,120 $24,774 ======= =======
Property, Plant and Equipment
Property, plant and equipment is recorded at cost, less accumulated depreciation. Additions and improvements to property and equipment are capitalized at cost while maintenance and repair expenditures are charged to operations as incurred. Depreciation is calculated principally by the straight-line method for financial reporting purposes and accelerated methods for income tax purposes. For financial reporting purposes, depreciation is provided over the following estimated useful lives:
Years ----- Buildings and improvements 10-30 Machinery and equipment 3-8 Furniture, fixtures and office equipment 3-8
Property, plant and equipment consisted of:
Other Assets
Other assets are being amortized on a straight-line basis over their estimated useful lives which range from 1 to 30 years. Accumulated amortization was $13,407 and $10,821 at December 31, 1998 and 1997 respectively. Other assets net of accumulated amortization consist of the following:
December 31, December 31, 1998 1997 ------------ ------------
Deferred financing costs $3,330 $3,993 Patents and trademarks 418 491 Noncompete agreements 4,930 5,480 Other 1,980 1,577 ------------ ------------
$10,658 $11,541 ============ ============
Foreign Currency Translation
Translation gains or losses resulting from translating foreign currency financial statements are reported as a component of stockholders' deficit. Gains and losses resulting from foreign currency transactions are included in earnings as incurred.
Revenue Recognition
Revenue is generally recognized upon shipment of goods. At the request of certain customers, large cryogenic tanks will be accepted by the customer at Holdings' facilities and stored there for later shipment. In these instances, title passes to the customer upon acceptance, and revenue is recognized at that time.
For the year ended December 31, 1998, two of Holdings' customers represented approximately 12% and 10%, respectively of Holdings' net sales. For the year ended December 31, 1997, one of Holdings' customers represented approximately 11% of Holdings' net sales.
Research and Development Costs
Holdings' policy is to charge all research and development costs to expense in the period incurred.
Warranty Costs
Holdings warrants most of its products against defects in materials and workmanship under normal use and service for periods extending to seven years. Warranty costs have not been material, and Holdings accrues estimated costs of warranty obligations at the time of sale.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using currently enacted tax rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Long-Lived Assets and Goodwill
In fiscal 1996, Holdings adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". The Statement establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles and goodwill related to those assets. There was no material
effect on the financial statements from the adoption because prior impairment recognition practice was consistent with the major provisions of the Statement. Under provisions of the Statement, impairment losses are recognized when expected future cash flows are less than the assets' carrying value. Accordingly, when indicators of impairment are present, Holdings evaluates the carrying value of property, plant and equipment, intangibles and goodwill in relation to the operating performance and future undiscounted cash flows of the underlying business. Holdings adjusts the net book value of the underlying assets if the sum of expected future cash flows is less than book value. Goodwill represents the cost of acquired businesses in excess of the fair value of net assets and is being amortized on a straight-line basis over 5 to 20 years. Accumulated amortization was $18,684 and $16,565 at December 31, 1998 and 1997, respectively (see Note 11).
Restricted Stock Plan
In 1998, the Board of Directors approved a restricted stock plan (the "Plan"). A total of 10,000 shares of Holdings' common stock are reserved for issuance upon the exercise of options under the Plan. Under the Plan, the awards and expiration of the awards are granted based on determination of the Plan Committee. The Plan will terminate on July 15, 2008 unless terminated sooner by the Board of Directors.
Stock Option Plan
In 1997, the Board of Directors approved a stock option plan (the "Plan"). A total of 100,000 shares of Holdings' common stock were reserved for issuance pursuant to the exercise of options granted under the Plan. Under the Plan, options to purchase shares of Holdings' common stock may be granted at a price not less than 100% of the fair market value of the stock at the date of grant. All options expire ten years from the date of grant.
Reclassifications
Certain reclassifications have been made to prior periods' financial statements to conform to the current year presentation. These reclassifications had no effect on Holdings' financial position or results of operations.
Change in Fiscal Year
On January 17, 1997, the Board of Directors of Holdings and MVE adopted a resolution to change the fiscal year of Holdings from the last day in February to a calendar year. The change in fiscal year is effective for the ten months ended December 31, 1996.
2. New Accounting Standards:
FAS 130 establishes standards for the reporting of comprehensive income and its components. Comprehensive income is defined as the change in equity during the period from transactions and other events and circumstances from non-owner sources.
FAS 131 requires Holdings to report information about its operating segments based on how Holdings manages its operations. Holdings manages its business in four operating segments and has restated its external reporting to reflect this change in structure. The four reportable segments are industrial, distributed, medical respiratory and applied technologies. See also Note 10.
In 1998, Holdings adopted the following new accounting standard: Statement of Financial Accounting Standard (FAS) No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits". FAS 132 revises and standardizes disclosures for pensions and other postretirement benefits. (See Note 8)
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities." Holdings must adopt this standard no later than January 1, 2000. Holdings expects that this standard will not materially affect its financial position and results of operations.
3. Acquisitions:
Effective February 18, 1998, Holdings, through a subsidiary, acquired a majority interest in Ferox, a.s., a manufacturer of cryogenic bulk storage tanks and other cryogenic equipment located in the Czech Republic, for $400 in cash and an agreement with the seller to make additional payments based on certain operational results of Ferox and Holdings. The purchase price has been allocated to the assets acquired and liabilities assumed based on their estimated fair market values at the date of acquisition. In addition, Holdings paid to the seller's parent the sum of $600 in cash in exchange for an agreement not to compete. Subsequently, in various transactions, Holdings acquired additional interests in Ferox. At December 31, 1998, Holdings owned 90% of the outstanding capital stock of Ferox. The acquisition was accounted for under the purchase method of accounting. The affect of the acquisition was not significant to the Holdings financial statements.
In 1997, Holdings acquired two companies with purchase prices of $1,000 and $300. In 1996, Holdings acquired two companies with purchase prices of $1,300 and $600. The effect of these acquisitions is not significant to Holdings' financial statements.
4. Accrued Expenses and Other Liabilities:
Accrued expenses and other liabilities consists of the following:
December 31, December 31, 1998 1997 ------------ ------------
Employee compensation and payroll taxes $4,556 $2,814 Income taxes 1,416 2,892 Warranty 3,564 1,930 Accrued pension liability 2,657 2,374 Accrued interest 5,772 5,422 Insurance 1,872 2,092 Deposits and rebates 3,119 2,429 Accrued professional fees 839 348 Accrued freight 322 471 Other 1,305 1,604 ------- -------
$25,422 $22,376 ======= =======
5. Supplemental Cash Flow Information:
Changes in operating assets and liabilities were as follows:
December 31, December 31, December 31, 1998 1997 1996 ----------- ----------- -----------
Accounts receivable $(1,774) $(2,840) $ 4,479 Inventories 2,211 4,042 (2,700) Prepaid expenses and other (1,253) (89) (329) Income tax refund receivable 1,013 3,517 (2,372) Accounts payable (7,977) 680 (1,245) Accrued expenses and other liabilities 616 (4,212) 9,586 ------- ------- -------
$(7,164) $ 1,098 $ 7,419 ======= ======= =======
Non-cash Investing and Financing Activities
A $1,500 loan in favor of a shareholder matured on January 9, 1998 and the shareholder defaulted. In accordance with the terms of the loan and pledge agreement, Holdings satisfied the defaulted loan by taking possession of certain Holdings' common stock that served as collateral for payment of the loan.
Several lease and note obligations of $148 and $364 were incurred when Holdings entered into leases or notes for new equipment and vehicles in 1998 and 1997, respectively.
In 1996, Holdings entered into a non-compete agreement for a total of $6,257 with a shareholder of the Company.
In 1997 and 1996, 1,061 and 66,406 shares of Common Stock were exchanged for 13 and 833 shares of 10% Class B Preferred Stock, respectively. Each share has a liquidation preference of $10,000 plus accrued and unpaid dividends.
In 1996, Holdings purchased a building for $500 in exchange for long-term debt.
6. Long-Term Debt:
Certain assets of Holdings, i.e.: subsidiary stock, accounts receivable inventory, selected real estate and equipment, are pledged as collateral for long-term debt. Long-term debt consists of the following:
On February 2, 1998, CAIRE Inc. (CAIRE), a subsidiary of Holdings, entered into an agreement whereby a third party agreed to accept, in full payment of all outstanding indebtedness currently owed to it by CAIRE, a cash payment of $50 and an option to purchase 820 shares of 10% Series AA Cumulative Preferred Stock (Series AA Preferred Stock), par value $.01 per share, of CAIRE. Concurrent with the above settlement, Holdings accepted, in full payment of all outstanding unsecured indebtedness currently owed to it by CAIRE, 632 shares of the Series AA Preferred Stock. Additionally, Holdings purchased all shares of CAIRE common stock owned by the third party for an aggregate purchase price of one hundred dollars. The Series AA Preferred Stock has a liquidation preference of $10 per share and is subject to mandatory redemption. As a result of this restructuring, Holdings incurred an extraordinary gain of $6,118.
On May 5, 1998, Holdings issued 14.125%, senior subordinated notes in the amount of $6,300 and two common stock purchase warrants, each allowing the holder to purchase 4,000 shares of Holdings common stock at $0.01 per share. The proceeds from these notes will be used for working capital and general corporate purposes. The senior subordinated notes are redeemable at the option of Holdings, in whole or in part, on May 5, 2005, plus accrued and unpaid interest. The senior subordinated notes contain certain covenants which restrict, among other things, payment of dividends and additional equity issuances.
The revolving credit facility provides for borrowings and issuances of Letters of Credit of up to $30,000 subject to a defined borrowing base of qualified accounts receivable and eligible inventory. The revolving credit facility is renewable annually through October 2000. Holdings is charged a monthly fee based on an annualized rate of .375% of the unused portion of the commitment. The interest rate is variable and contains a LIBOR and base rate option at the election of Holdings. The rate is determined based on MVE, Inc.'s EBITDA (earnings before interest, income taxes, depreciation and amortization) to total of Inc. debt as calculated quarterly. The outstanding balance was subject to a weighted average borrowing rate of 7.91% and 8.375% at December 31, 1998 and 1997, respectively. The credit facility contains certain covenants with respect to capital expenditures, borrowings and disposition of assets. As of December 31, 1998, Holdings was in compliance with all covenants governing the revolving credit facility.
The senior secured notes are redeemable at the option of Holdings, in whole or in part, on or after February 15, 2000, at the redemption prices (expressed as percentages of principal amount) set forth below, plus accrued and unpaid interest thereon to the redemption dates indicated below:
Year Percentage ------------------- ----------
2000 102.083% 2001 and thereafter 100.000%
The senior secured note agreement contains certain covenants which restrict borrowings, dividends, acquisition and disposition of assets and require Holdings to maintain certain liquidity and debt coverage ratios. As of December 31, 1998, Holdings was in compliance with its financial covenants.
The scheduled annual maturities of long-term debt at December 31, 1998 are as follows:
Year Amount ----------------- -----------
1999 $7,524 2000 20,373 2001 3,946 2002 117,809 2003 1,262 Thereafter 12,634 ----------- $163,548 ===========
Long-term debt, including current maturities, has a carrying value at December 31, 1998 of $163,548 and a fair value of $183,489. The estimated fair value represents the present value of debt service at rates currently available to Holdings for issuance of debt with similar terms. Except for the above, all financial instruments are carried at amounts that approximate estimated fair value.
7. Income Taxes:
Income tax expense (benefit) consists of the following for the periods ended:
Fiscal Year Fiscal Year 10 Months December 31, December 31, December 31, 1998 1997 1996 ------------- ------------ ------------
Current: Federal $ 803 $ 779 $ (198) State 267 57 (70) ------------- ------------ ------------- 1,070 836 (268) Deferred 266 (4,234) (2,929) ------------- ------------- ------------- $1,336 $(3,398) $(3,197) ============= ============= =============
The differences between income taxes computed using the federal statutory rate and the expense (benefit) for income taxes were as follows for the periods ended:
The tax effects of temporary differences that give rise to the net deferred tax asset were as follows:
December 31, December 31, 1998 1997 ----------- ----------
Accrued pension $1,033 $1,020 Accrued compensation 570 620 Accrued self insurance reserve 739 913 Deferred compensation 728 823 Intangibles 1,777 1,167 Inventory reserves 973 1,111 Depreciable assets (1,360) (1,162) Loss and credit carryforwards 3,062 3,638 Warranty reserve 804 818 Other accruals 637 576 Other 409 114 ------ ------ 9,372 9,638 Valuation allowance (551) (551) ------ ------ Net deferred tax asset $8,821 $9,087 ====== ======
The Company has tax loss carryforwards for income tax purposes. Such tax loss carryforwards have been reduced in part by a valuation allowance, since realization of a portion of the carryforwards is not deemed more likely than not. The carryforwards of $3,062 expire as follows: $551 in 2007, $207 in 2011, $2,156 in 2012 and $148 in 2013.
8. Employee Benefit Plans:
Pension Plan
Holdings maintains two noncontributory defined benefit pension plans covering substantially all employees of its U.S. subsidiaries. The benefits to which an employee is entitled under the plans are derived using a formula based on the number of years of service and compensation levels during the last five years of service before retirement. Holdings funds the plans in accordance with the requirements of federal laws and regulations.
Weighted Average assumptions as of December 31:
Approximately 88% of the plan assets are invested in equity securities and 12% in cash equivalents as of December 31, 1998.
Savings Plan
Holdings has a 401(k) savings plan (the Plan) which covers all employees of its U.S. subsidiaries who have completed one month of service and attained the age of 21. The Plan provides for voluntary participant contributions of 1% to 15% of each employee's wages. In 1997, Holdings began matching contributions of up to 2% of eligible employee wages. Prior to this, Holdings made matching contributions at the discretion of the board of directors. For the years ended December 31, 1998 and 1997, Holdings made matching contributions of $536 and $315 to the Plan. Holdings did not make matching contributions to the Plan in the fiscal year ended December 31, 1996.
Deferred Compensation Plan
During the ten months ended December 31, 1996, Holdings' Board of Directors approved a deferred compensation plan to replace the existing plan in its entirety. The new plan awarded deferred compensation to certain key members of upper management with the objective of retaining their services, encouraging profitability and rewarding them. The plan awarded 29,750 units to three individuals which may be exchanged for Common Stock of an equal number at a future date, given the occurrence of certain events. For the ten months ended December 31, 1996, Holdings expensed $1,916 in connection with the adoption of this plan.
During 1997 and subsequent to 1997, Holdings entered into agreements with the three individuals that effectively terminated each individual's participation in the deferred compensation plan. Pursuant to the agreements, Holdings will issue 29,750 shares of common stock of MVE to the three individuals upon the earlier of December 31, 2006 or the occurrence of certain events. As a result of the Company entering into these agreements, the Company reclassified the accrued liability related to the deferred compensation plan of $1,866 as of December 31, 1996 to equity.
9. Commitments and Contingencies:
Leases
A portion of Holdings' operations is conducted using leased equipment and facilities. These leases are noncancelable and renewable. Total rental expense included in the accompanying consolidated statements of operations was approximately $716, $718 and $702, for the years ended December 31, 1998 and 1997 and for the ten months ended December 31, 1996. The future minimum rental payments required under these leases are $722 in 1999, $462 in 2000, $303 in 2001 and $88 in 2002.
Litigation
Various lawsuits, claims and proceedings of a nature considered normal to its businesses are pending against Holdings and certain of its subsidiaries. Most significant legal proceedings are related to matters covered by insurance. The most significant contingencies are described below.
In 1997, a former officer of a subsidiary of Holdings and a related limited partnership company filed a lawsuit against Holdings and certain of its affiliates and others alleging breach of contract and other claims arising out of such officer's separation from the subsidiary for which he was employed.
In 1997, a designer and marketer of an alternative beverage CO2 technology filed a lawsuit against MVE, Inc. and certain other providers of cryogenic mini-bulk carbonated systems in Johnson County, Texas, alleging business disparagement, violations of Texas antitrust lawsuits and related claims. With respect to this lawsuit, MVE, Inc.'s insurer has accepted coverage, subject to a reservation of rights.
For both of these lawsuits, extensive discovery has been conducted and Holdings believes that the claims are without merit and that the outcome of these lawsuits will not have a material adverse effect on its operating results, cash flow or financial position.
Environmental Matters
Holdings' past and present operations include activities which are subject to extensive federal and state environmental regulations. As a result, Holdings is currently participating in environmental investigations and assessments under these regulations at some of its current and former sites. In 1997, Holdings submitted a site investigation report and Response Action Plan (RAP) to the Minnesota Pollution Control Agency (MPCA). The soil RAP has been conditionally approved by the MPCA. The groundwater RAP is subject to further review. These plans include possible obligations to remove or mitigate the effects of hazardous substances from the environment. The amount of such future costs will depend on factors such as the unknown nature or extent of contamination, the extent and method of the remedial actions which may be required and the magnitude of clean-up costs.
Ongoing environmental costs are expensed as incurred. Costs incurred to date as of the year ended December 31, 1998 were $849, of which, $666 are to be indemnified. In accordance with the recapitalization agreement, Holdings is to be indemnified of most environmental claims. Based upon this and subject to the difficulty in estimating these future costs, Holdings expects that the amount it may be required to pay in connection with environmental matters would be indemnified and also would not have a material adverse effect on the financial condition or results of operations.
10. Segment Reporting and Export Sales:
The operations of Holdings are divided into four business segments for financial reporting purposes. The industrial products segment develops and manufactures cryogenic storage tanks and transportation equipment and markets them to producers, distributors and end users of industrial gases. The distributed products segment develops, manufactures and markets a variety of products utilizing similar technologies as the industrial products segment, but markets them through distributors to various commercial markets, principally end users of bulk liquid CO2 beverage systems. The medical respiratory products segment develops, manufactures and markets a broad range of medical respiratory products, including liquid oxygen systems, oxygen concentrators and medication nebulizers, all of which are used primarily for the in-home treatment of patients. The applied technologies segment includes storage systems for temperature-sensitive agricultural and biological products, liquid natural gas (LNG) storage, test chambers for rapid heat/cold testing, vacuum insulated pipe and other emerging products. General corporate assets include cash and cash equivalents and income taxes.
Other expenses recorded in the ten months ended December 31, 1996 are included in operating income as follows: industrial $5,435, distributed $1,280, medical respiratory $9,796 and corporate $5,461 (see Note 11). Financial information by business segment as of and for the years ended December 31, 1998 and 1997, and the ten months ended December 31, 1996 was as follows:
Export sales from Holdings' U.S. operations for the years ended December 31, 1998 and 1997, and the ten months ended December 31, 1996 were as follows:
December 31, December 31, December 31, 1998 1997 1996 ------------- ------------- ------------
Canada and Mexico $12,653 $10,922 $ 6,957 Europe 16,454 12,164 12,407 Pacific 12,497 29,318 24,868 Other 9,386 8,331 7,271 ------------- ------------- ------------ Total $50,990 $60,735 $51,503 ============= ============= ============
11. Other Expenses:
In 1998, MVE exited the oxygen concentrator market to focus on its liquid oxygen market using its cryogenic resources. As a result, Holdings incurred a $1,042 loss on the write-off of the assets associated with this product line.
Other expense recorded in the ten months ended December 31, 1996 include the following:
Recapitalization Expenses $ 3,545 Deferred compensation plan (Note 9) 1,916 Discontinue AURA product line 1,280 Debt forgiveness 3,722 Goodwill write-offs 10,824 Other 685 ----------- $21,972 ===========
Recapitalization Expenses
In 1996, Holdings incurred $3,545 of expenses related to recapitalization of Holdings. These expenses related to consent and solicitation of the holders of the senior secured notes and legal and accounting fees.
Discontinuance of AURA Product Line
In 1996, Holdings wrotedown $1,280 of fixed and other assets, net of debt forgiveness, related to the discontinuance of the AURA product line, which was included in the distributed products segment. Prior to December 1996, Holdings had an agreement with a third party to participate in a joint venture to produce and market its AURA product line. In December 1996, Holdings and the joint venture partner agreed to discontinue all AURA operating and marketing activities.
Debt Forgiveness
Prior to December 1996, the Company made loans to a major supplier of components for its medical oxygen concentrators. The loans were to be repaid through future purchase credits from the supplier. In December 1996, the Company entered into a new agreement with the supplier, which forgave $3,722 of the debt.
Goodwill Write-down
In December 1996, Holdings recorded a goodwill write-down of $10,824 ($4,750 in industrial products and $6,074 in the medical respiratory products segment). In connection with the change in ownership in 1996, management undertook a strategic review of all business units. As a result of the review, goodwill was determined to have been impaired because of the financial condition of certain medical respiratory and industrial business units and Holdings' inability to generate future operating income from these business units. Moreover, anticipated future cash flow of these business units indicates that the recoverability of the goodwill is not reasonably assured. Prior to December of 1996, goodwill was amortized using the
straight-line method over twenty years.
12. Preferred Stock and Recapitalization
On August 28, 1996 MVE Investors, LLC purchased 4,700 shares of Holdings 12.5% Series A Cumulative Redeemable Convertible Participating Preferred Stock, par value $100 per share, for the purchase price of $47,000. Holdings used the proceeds of this transaction to purchase a substantial portion of certain Holdings shareholders' common stock. Each share has a liquidation preference of $10,000 plus accrued and unpaid dividends. The shareholders shall be entitled to one vote for each share of Common Stock assuming conversion of the preferred stock to common.
Following this recapitalization, MVE Investors, LLC holds shares of Series A Redeemable Preferred Stock which are convertible into 374,633 shares of Holdings Common Stock, or approximately 74.9% of the Common Stock outstanding on a fully diluted basis. As of December 31, 1998 and 1997, Holdings had accrued, but unpaid dividends of $15,643 and $8,388 relating to Series A Preferred Stock, respectively.
In exchange for 1,061 shares of Common Stock held by certain shareholders, Holdings issued 13 shares of 10% Series B Redeemable Preferred Stock in 1997. Each such share has a liquidation preference of $10,000 plus accrued and unpaid dividends. Also, 49 shares of Series B Redeemable Preferred Stock was purchased for $10,000 per share. In 1996, 66,406 shares of Common Stock were exchanged for 833 shares of the Series B Redeemable Preferred Stock. This class of stock is subject to mandatory redemption and is non-voting. As of December 31, 1998 and 1997, Holdings had accrued, but unpaid dividends of $1,984 and $1,079 relating to Series B Preferred Stock, respectively.
In 1997, Holdings purchased 430 of its outstanding warrants for $30.10944 per warrant. In 1996, Holdings purchased 79% of its outstanding warrants for $30.10944 per warrant.
13. Fiscal Results for the Year Ended December 31, 1996 (Unaudited)
December 31, ------------
Net sales $190,782 Cost of sales 138,578 -------- Gross profit 52,204 Operating expenses: Selling and Marketing 11,789 General and administrative 15,910 Research and development 3,510 Amortization 5,548 Other expenses 21,972 -------- Total operating expenses 58,729 -------- Operating loss (6,525) Interest expense (16,530) -------- Net loss before income tax benefit and minority interest (23,055) Income tax benefit 1,616 -------- Net loss before minority interest (21,439) Minority interest in net loss 1,077 -------- Net loss $(20,362) ========
14. Related Party Transactions
Holdings purchased from MVE, Inc. 850 shares of $.01 par common stock in MVE Restaurant Services, Inc. for $500.
On November 11, 1998, Holdings loaned a shareholder $50 to be repaid on or before July 1, 2005. Interest accrues quarterly at 8%. The loan is secured by Holdings Common Stock owned by the shareholder.
Holdings loaned two shareholders $2,000 on August 27, 1996, to be repaid to Holdings on or before August 27, 2003. On January 9, 1998, one of the notes matured and the shareholder defaulted. In accordance with the terms of the loan and pledge agreement, Holdings satisfied the defaulted loan by taking possession of certain Holdings' common stock that served as collateral for payment of the loan. Simple interest accrues on the principal amount at an annual rate of 8%. Principal of $500 and $2,000 and accrued interest of $102 and $225 was outstanding at December 31, 1998 and 1997, respectively. The loan is secured by Holdings Common Stock owned by the shareholder.
A director of Holdings has an agreement with the Company which pays an annual fee of $75 in exchange for consulting services. This agreement has a term of one year, renewable at the option of Holdings.
Two shareholders have management agreements with the Company which pay a quarterly fee of $44 each plus expenses. The company paid $387 and $401 related to these agreements in the years ended December 31, 1998 and 1997.
15. Subsequent Events
Agreement and plan of merger
On February 16, 1999, Holdings entered into a merger agreement with Chart Industries, Inc. (Chart). Under the agreement, Holdings shall become a wholly owned subsidiary of Chart. The transaction is expected to be complete within 60 days. The closing is subject to certain regulatory approvals and satisfaction of usual and customary closing conditions. The purchase price is approximately $240 million including assumed debt. As part of the merger agreement, Chart will retain 20% of the stock of the cooking oil management business. The remaining 80% of the stock will be distributed to the current shareholders of Holdings.
MVE, INC.
Items 1 - 5 see MVE Holdings, Inc. reporT.
Item 6. SELECTED FINANCIAL DATA.
The following table sets forth selected consolidated financial data with respect to the Company as of the dates and for the periods indicated. The financial data set forth below should be read in conjunction with the historical consolidated financial statements and related notes thereto of the Company, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained elsewhere herein.
- -------------------------
(1) Loss on sale of assets of $674 was excluded from EBITDA as a result of bank covenant requirements.
(2) The extraordinary loss in 1995 of $1,307 is due to losses realized upon extinguishment of debt, net of an income tax benefit of $871.
(3) Operating loss for the ten months ended December 31, 1996 included non recurring charges of $22.0 million relating to the revaluation of certain business units and product lines including $3.5 million relating to the recapitalization of Holdings in August 1996.
(4) Management calculates EBITDA as earnings before interest, taxes, depreciation, amortization and extraordinary items. EBITDA has been adjusted to include minority interest in net income (loss). Management reports EBITDA as it is required for bank covenant purposes. EBITDA is not intended to represent cash flow from operations for the period nor has it been presented as an alternative to either (1) operating income (as determined by GAAP) as an indicator of operating performance or (2) cash flow from operating, investing and financing activities (as determined by GAAP). EBITDA is therefore susceptible to varying calculations and as presented may not be comparable to other similarly titled measures of other companies.
(5) The extraordinary gain in 1998 of $6,118 is due to the gain realized upon extinguishment of debt (See Note 6)
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
SUMMARY - -------
See MVE Holdings, Inc. report
RESULTS OF OPERATIONS - ---------------------
Years Ended December 31, 1998 and 1997
Net Sales
Net sales for the year ended December 31, 1998 decreased 1.8% to $189.2 million from $192.7 million for the year ended December 31, 1997.
Industrial Products: Net sales for the year ended December 31, 1998 decreased 14.0% to $98.6 million from $114.7 million for the year ended December 31, 1997. The change in net sales is due, primarily, to approximately $15.0 million of reduced revenues due to continued softness in Asia, primarily for liquid cylinder products.
Distributed Products: Net sales increased 20.1% to $33.5 million in 1998 from $27.9 million in the comparable period in 1997. This increase is due to continued penetration of restaurant CO2 applications by the major distributors and expansion of the cooking oil management business.
Medical Respiratory Products: Net sales for the year ended December 31, 1998 increased 3.0% to $27.1 million from $26.3 million for the year ended December 31, 1997. The change resulted from growth in international sales offset by weakness in the domestic market caused by reductions in the Medicare reimbursement rates that were effective January 1, 1998. Also, during the year, MVE exited the oxygen concentrator and nebulizer markets to focus on its liquid oxygen market using its cryogenic resources.
Applied Technologies: Net sales for this group of products increased 26.0% to $30.0 million in 1998 from $23.8 million in 1997. MVE was awarded several contracts that used the LNG cylinder and fuel station technology that increased sales in 1998.
Gross Margin
Gross margin, expressed as a percent of net sales, increased 1.3% to 29.8% in 1998 compared to 28.5% in 1997.
Industrial Products: Gross margin decreased 1.5% to 23.4% for the year ended December 31, 1998 from 24.9% for the year ended December 31, 1997. This reduction is due to poor economic conditions in Asia and lower margins as a result of spreading fixed U.S. overhead costs over a lower volume of sales.
Distributed Products: Margins remained fairly consistent at 44.2% in 1998 and 44.6% in 1997 as the Company was able to offset pricing pressure with improvements in manufacturing costs.
Medical Respiratory Products: Reductions in the Medicare reimbursement rates for patients with Chronic Obstructive Pulmonary Disease (COPD) and the push down in pricing to COPD equipment suppliers resulted in reduced margins for the Company's domestic business. Offsetting this decline in the U.S. market were increased sales to the international markets, which have higher margins. The combination of these two factors, coupled with greater manufacturing efficiencies, enabled margins to increase 2.4% to 26.7% for the year ended December 31, 1998 from 24.3% in 1997.
Applied Technologies: Gross profit margins increased 5.6% to 37.4% in 1998 from 31.8% in 1997 due to a more favorable product mix and strong demand for LNG products.
Operating Expenses
Operating expenses for the year ended December 31, 1998 were $39.8 million in 1998, compared to $41.6 million in 1997. The Company exited the oxygen concentrator product line incurring costs of $1.0 million to write-off the value of net assets used for this product line. In addition, the Company continued development of its cooking oil management systems. These increases were offset by structural changes that reduced operating costs in 1998.
Operating Income
Operating income was $16.6 million in 1998, compared to $13.3 million in the same period in 1997 for the reasons identified earlier.
Interest Expense
Interest expense was $16.8 million in 1998 compared to $16.7 million in 1997.
Income Taxes
The provision for income taxes was $2.7 million for the year ended December 31, 1998 compared to a benefit of $3.0 million for the year ended December 31, 1997. The effective tax rates for the years ended December 31, 1998 and 1997 were different from the statutory rates as a result of various permanent differences.
Net Loss
As a result of the above, net loss before extraordinary gain was $3.0 million in 1998 compared to $0.4 million in 1997.
EBITDA
Earnings before interest, income taxes, depreciation and amortization (EBITDA) increased to $24.7 million, or 13.1% of net sales in 1998, from $20.3 million or 10.5% of net sales in 1997. This increase is due to reasons mentioned above as well as cost reduction programs affecting the organization and its manufacturing plants.
Years Ended December 31, 1997 and 1996
Net Sales
Net sales for the year ended December 31, 1997 increased 1.0% to $192.7 million from $190.8 million for the year ended December 31, 1996.
Industrial Products: Net sales for the year ended December 31, 1997 increased 1.5% to $114.7 million from $113.0 million for the year ended December 31, 1996. The increase is primarily attributable to the Company's acquisitions in August and November 1996 of subsidiaries located in China and Australia with sales of $11.3 million and $1.2 million for the years ended December 31, 1997 and 1996, respectively. Sales of small pressure vessels increased $2.7 million. The Orca product line was introduced in 1997 which increased sales $2.0 million. These increases were offset by a $14.5 million decrease in bulk tank sales resulting from the major gas producers reducing their tank inventory in 1997.
Distributed Products: Net sales for the year ended December 31, 1997 decreased 4.1% to $27.9 million from $29.1 million for the year ended December 31, 1996. The decrease is primarily attributable to decreases in AURA panel sales. Sales of AURA panels were $0.1 million and $2.2 million in the years ended December 31, 1997 and 1996, respectively. The sales of Aura panels were discontinued in 1997.
Medical Respiratory Products: Net sales for the year ended December 31, 1997 decreased 5.4% to $26.3 million from $27.8 million for the year ended December 31, 1996. The decrease is primarily attributable to decreases in price resulting from a competitive market.
Applied Technologies: Net sales for this group of products increased 13.9% to $23.8 million in 1997 from $20.9 million in 1996. Vacuum insulated pipe increased $1.5 million offset by reduced sales in biological storage systems. The environmental chambers product line was introduced in 1997 which increased sales $1.9 million.
Gross Margin
Gross margin (expressed as a percent of net sales) increased to 28.5% for the year ended December 31, 1997 from 27.4% for the year ended December 31, 1996.
Industrial Products: Gross margin increased 2.5% to 24.9% for the year ended December 31, 1997 from 22.4% for the year ended December 31, 1996. The increase is attributable to changes in the mix of products sold and decreased manufacturing costs.
Distributed Products: Gross margin increased 1.1% to 44.6% for the year ended December 31, 1997 from 43.5% for the year ended December 31, 1996.
Medical Respiratory Products: Gross margin decreased 0.6% to 24.3% for the year ended December 31, 1997 from 24.9% for the year ended December 31, 1996.
Applied Technologies: Gross profit margins decreased 3.3% to 31.8% in 1997 from 35.1% in 1996.
Operating Expenses
Operating expenses for the year ended December 31, 1997 were $41.6 million compared to $56.0 million for the year ended December 31, 1996. The decrease in operating expenses is primarily attributable to one-time, primarily non-cash charges of $19.7 million in 1996, including expenses of $1.2 million relating to the recapitalization of Holdings and the Company in August 1996 and $1.3 million resulting from discontinuing the AURA product line. These decreases were offset by an increase of $2.1 million associated with the expansion of the Company's business into the Pacific Rim and Europe, $1.2 million incurred by a company acquired in 1997 and development of the cooking oil management system. Other net spending increased approximately $2.0 million.
In connection with the change of ownership of Holdings and the Company in August 1996, management, at the direction of the Board of Directors, undertook a strategic review of all business units. This review was completed and presented to the Board of Directors in December 1996. As a result of this review, the Company revised various estimates used in the valuation of assets and liabilities related to various medical respiratory and industrial product lines and discontinued its AURA product line. One-time charges of $19.7 million were taken in the ten months ended December 31, 1996 as a direct result of this review and the recapitalization (see Note 10 to the Financial Statements).
After adjusting for one-time charges, including recapitalization expenses in 1996, operating expenses for the year ended December 31, 1997 increased $5.3 million from the same period one year ago.
Operating Income
Operating income was $13.3 million for the year ended December 31, 1997 compared to an operating loss of $3.8 million for the year ended December 31, 1996. The increase in operating income is primarily attributable to the factors noted in discussions above.
Interest Expense
Interest expense was $16.7 million for the years ended December 31, 1997 and 1996.
Income Taxes
The benefit from income taxes was $3.0 million for the year ended December 31, 1997 compared to $1.7 million for the year ended December 31, 1996. The effective tax rates for the years ended December 31, 1997 and 1996 were different from the statutory rates as a result of various permanent differences.
Net Loss
Net loss for the years ended December 31, 1997 and 1996 were $0.4 million and $17.8 million.
EBITDA
EBITDA (earnings before interest, income taxes, depreciation and amortization) was $20.3 million or 10.5% of net sales for the year ended December 31, 1997 compared to $6.5 million or 3.4% of net sales for the year ended December 31, 1996. The increase in EBITDA is attributable to the factors noted above. Adjusting for nonrecurring expenses of $19.7 million including expenses relating to the recapitalization of Holdings and the Company in August 1996, EBITDA for the year ended December 31, 1996 was $26.2 million.
LIQUIDITY AND CAPITAL RESERVES
Cash Flow From Operating Activities
Cash flow provided by operating activities was approximately $0.5 million, $5.3 million, and $10.5 million for the years ended December 31, 1998 and 1997, and the ten months ended December 31, 1996, respectively. Working capital was $25.8 million, $14.5 million and $23.1 million, respectively at December 31, 1998, 1997, and 1996. Working capital increased as a result of the current maturities of long term debt of a subsidiary being restructured and decreased inventory purchases.
Cash Flow From Investing Activities
For the years ended December 31, 1998 and 1997 and the ten months ended December 31, 1996, the Company had approximately $3.4 million, $6.4 million and $9.8 million in capital expenditures, respectively. For the periods ended December 31, 1998 and 1997, the Company invested $0.1 million and $0.4 million in non-cash capital expenditures. The Company reduced the dollars spent on capital expenditures from 1997 as most of the modernization and investments in capacity changes were completed previously. The expenditures in the periods ended December 31, 1997 and 1996 were primarily due to the expansion of the Company's New Prague operations, the construction of the Caire facility and normal equipment acquisition and replacement.
Cash Flow From Financing Activities
Cash flow provided by financing activities was approximately $1.7 million, $1.0 million and $1.0 million in the years ended December 31, 1998 and 1997 and the ten months ended December 31, 1996, respectively.
The agreement governing the revolving credit facility expires in October 2000 and contains numerous financial and operating covenants and prohibitions that impose limitations on the liquidity of the Company, including requirements that the Company satisfy certain financial ratios and that the Company maintain specific levels of EBITDA. The indenture governing the Senior Secured Notes, as amended in connection with the recapitalization of Holdings in August 1996, also imposes limitations on the incurrence of additional indebtedness. The Company expects that the cash generated by operations and borrowings under its revolving credit agrement that expires in October 2000 will be sufficient to satisfy its working capital and debt service requirements through the period the current agreement is in place. The Company expects that it may require waivers of certain quarterly financial covenants under this credit agreement from the lending institutions. While the Company meets regularly with its lending institutions and keeps them advised of the company's ongoing performance, no assurance can be given that the lending institutions will grant these covenant waivers, in which case the Company would have to reduce its indebtedness significantly or negotiate changes to, or relief from, covenants in the credit facility. The Company was in compliance with all covenants included in the agreement governing the revolving credit facility and the indenture as of December 31, 1998.
To the extent that operating cash flows are insufficient to repay borrowings under the Senior Secured Notes, the revolving credit agreement and the IRB financing at their respective maturities, the Company expects that it will be required to refinance all or substantially all of the Senior Secured Notes, the revolving credit agreement and the IRB financing or sell equity or assets to fund the repayment of all or substantially all of the Senior Secured Notes, the revolving credit and the IRB financing at or prior to their respective maturities, or effect a combination of the foregoing; however, there can be no assurance that the Company would be able to refinance such indebtedness.
Items 8 - 14 FOR MVE, INC. PLEASE SEE MVE HOLDINGS, INC. REPORT.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of MVE, Inc.
We have audited the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholder's deficit cash flows and comprehensive income as of December 31, 1998 and 1997 of MVE, Inc. and subsidiaries (the Company). These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1998 and 1997, and the results of its operations and its cash flows for the periods then ended in conformity with generally accepted accounting principles.
Deloitte & Touche LLP Minneapolis, Minnesota
March 12, 1999
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 Years Ended December 31, 1998 and 1997, and the Ten Months Ended December 31, 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 Years Ended December 31, 1998 and 1997, and the Ten Months Ended December 31, 1996 (In Thousands, Except Share Data)
The accompanying notes are an integral part of these consolidated financial statements.
MVE, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the Years Ended December 31, 1998 and 1997, and the Ten Months Ended December 31, 1996 (In Thousands)
The accompanying notes are an integral part of these consolidated financial statements.
MVE, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income For the Years Ended December 31, 1998 and 1997, and the Ten Months Ended December 31, 1996 (In Thousands)
The accompanying notes are an integral part of these consolidated financial statements.
MVE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements For the Years Ended December 31, 1998 and 1997, and the Ten Months Ended December 31, 1996 (In Thousands, Except Share, Warrant and Per Share Data)
1. Organization and Summary of Significant Accounting Policies:
Principles of Consolidation and Business
The consolidated financial statements include the accounts of MVE, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. MVE, Inc. and its subsidiaries are collectively referred to as the Company. The Company develops, manufactures, markets and sells products which are grouped according to four business segments: industrial, distributed, medical respiratory and applied technologies. Industrial products include cryogenic storage tanks and transportation equipment sold to producers, distributors and end users of industrial gases. Distributed products include bulk CO2 containers used for beverage carbonization and cooking oil management systems which provide a new and enhanced method to store and handle frying oils. Medical respiratory products include a range of respiratory products such as liquid oxygen systems, ambulatory oxygen systems, oxygen concentrators and nebulizers. Applied technologies includes specialized products using cryogenic technology for use with liquid natural gas (LNG) storage, test chambers for rapid heat/cold testing, storage systems used to store and transport temperature-sensitive agricultural and biological products, vacuum insulated pipe and other end user applications. The Company is a wholly owned subsidiary of MVE Holdings, Inc. (Holdings).
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are used for such items as depreciable lives, tax provisions and reserves, uncollectible accounts receivable, inventory and warranty liabilities. As better information becomes available, or accrual amounts are determinable, the recorded estimates are revised. Consequently, operating results can be affected by revisions to prior accounting estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. These investments are reflected at cost which approximates fair value. Accounts payable include issued checks, which have not yet cleared the Company's bank, totaling $994 and $3,695 at December 31, 1998 and 1997, respectively.
Receivables
Accounts receivable (A/R), net of allowance for doubtful accounts, consisted of the following as of December 31, 1998 and 1997:
December 31, December 31, 1998 1997 -------------- ------------- A/R trade $28,460 $27,601 A/R other 2,355 1,775 Notes receivable 106 289 -------------- ------------- 30,921 29,665 Allowance (824) (828) -------------- ------------- $30,097 $28,837 ============== =============
Allowance for doubtful accounts consisted of the following for the years ended December 31, 1998 and 1997, and the ten months ended December 31, 1996:
Additions: Write-offs, Beginning Charged to net of Ending Balance Expense Recoveries Balance --------- ---------- ----------- ------- December 31, 1996 $675 168 45 $888 December 31, 1997 888 434 (494) 828 December 31, 1998 828 112 (116) 824
Inventories
Inventories include material, labor and overhead at standard cost and are stated at the lower of cost or market. The Company uses the first-in, first out (FIFO) method of accounting for inventories. Inventories consist of the following:
December 31, December 31, 1998 1997 ----------- ------------- Inventories at cost: Purchased materials and subassemblies $12,403 $14,710 Work in process 6,303 6,401 Finished goods 5,878 5,115 ------- ------- 24,584 26,226 Reserves (1,413) (1,452) ======= ======= $23,171 $24,774 ======= =======
Property, Plant and Equipment
Property, plant and equipment is recorded at cost, less accumulated depreciation. Additions and improvements to property and equipment are capitalized at cost while maintenance and repair expenditures are charged to operations as incurred. Depreciation is calculated principally by the straight-line method for financial reporting purposes and accelerated methods for income tax purposes. For financial reporting purposes, depreciation is provided over the following estimated useful lives:
Years ----- Buildings and improvements 10-30 Machinery and equipment 3-8 Furniture, fixtures and office equipment 3-8
Property, plant and equipment consisted of:
Other Assets
Other assets are being amortized on a straight-line basis over their estimated useful lives which range from 2 to 30 years. Accumulated amortization was $11,503 and $10,103 at December 31, 1998 and 1997, respectively. Other assets net of accumulated amortization consist of the following:
December 31, December 31, 1998 1997 ------------- -------------- Deferred financing costs $2,974 $3,993 Patents, trademarks and product lines 348 491 Non-compete agreement 12 47 Other 1,009 1,577 ------------- -------------- $4,343 $6,108 ============= ==============
Foreign Currency Translation
Translation gains or losses resulting from translating foreign currency financial statements are reported as a component of stockholders' deficit. Gains and losses resulting from foreign currency transactions are included in earnings as incurred.
Revenue Recognition
Revenue is generally recognized upon shipment of goods. At the request of certain customers, large cryogenic tanks will be accepted by the customer at the Company's facilities and stored there for later shipment. In these instances, title passes to the customer upon acceptance and revenue is recognized at that time.
For the year ended December 31, 1998, two of the Company's customers represented approximately 13% and 11%, respectively of the Company's net sales. For the year ended December 31, 1997, one of the Company's customers represented approximately 11% of the Company's net sales.
Research and Development Costs
The Company's policy is to charge all research and development costs to expense in the period incurred.
Warranty Costs
The Company warrants most of its products against defects in materials and workmanship under normal use and service for periods extending to seven years. Warranty costs have not been material and the Company accrues estimated costs of warranty obligations at the time of sale.
Income Taxes
The Company files a consolidated federal income tax return with MVE Holdings, Inc. The Company is operating under the provisions of a tax sharing arrangement that requires it to pay taxes to or receive refunds from MVE Holdings, Inc. based on the Company's taxable income determined as if the Company were a separate company.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using currently enacted tax rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Long-Lived Assets and Goodwill
In fiscal 1996, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". The Statement establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles and goodwill related to those assets. There was no material effect on the financial statements from the adoption because the Company's prior impairment recognition practice was consistent with the major provisions of the Statement. Under provisions of the Statement, impairment losses are recognized when expected future cash flows are less than the assets' carrying value. Accordingly, when indicators of impairment are present, the Company evaluates the carrying value of property, plant and equipment, intangibles and goodwill in relation to the operating performance and future undiscounted cash flows of the underlying business. The Company adjusts the net book value of the underlying assets if the sum of expected future cash flows in less than book value. Goodwill represents the cost of acquired businesses in excess of the fair value of net assets and is being amortized on a straight-line basis over 5 to 20 years. Accumulated amortization was $18,684 and $16,565 at December 31, 1998 and 1997, respectively (See Note 10).
Reclassifications
Certain reclassifications have been made to prior periods' financial statements to conform to the current year presentation. These reclassifications had no effect on the Company's financial position or results of operations.
Change in Fiscal Year
On January 17, 1997, the Board of Directors of Holdings and MVE adopted a resolution to change the fiscal year of the Company from the last day in February to a calendar year. The change in fiscal year is effective for the ten months ended December 31, 1996.
2. New Accounting Standards:
FAS 130 establishes standards for the reporting of comprehensive income and its components. Comprehensive income is defined as the change in equity during the period from transactions and other events and circumstances from non-owner sources.
FAS 131 requires the Company to report information about its operating segments based on how the Company manages its operations. The Company manages its business in four operating segments and has restated its external reporting to reflect this change in structure. The four reportable segments are industrial, distributed, medical respiratory and applied technologies. See also Note 9.
In 1998, the Company adopted the following new accounting standard: Statement of Financial Accounting Standard (FAS) No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits". FAS 132 revises and standardizes disclosures for pensions and other postretirement benefits (see Note 7).
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Company must adopt this standard no later than January 1, 2000. The Company expects that this standard will not materially affect its financial position and results of operations.
3. Accrued Expenses and Other Liabilities:
Accrued expenses and other liabilities consists of the following:
December 31, December 31, 1998 1997 ----------- ----------- Accrued interest $5,443 $ 5,422 Employee compensation and payroll taxes 3,901 2,814 Deposits and rebates 3,119 2,429 Accrued pension cost 2,657 2,374 Warranty 2,067 1,930 Insurance 1,872 2,092 Income taxes 1,433 2,892 Accrued Professional Fees 409 348 Accrued freight 322 471 Other 1,300 1,599 ----------- ----------- $22,523 $22,371 =========== ===========
4. Supplemental Cash Flow Information:
Changes in operating assets and liabilities were as follows:
Non-cash Investing and Financing Activities
Several lease and note obligations of $148 and $364 were incurred when the Company entered into leases or notes for new equipment, vehicles and furniture in 1998 and 1997, respectively.
In 1996, the Company purchased a building for $500 in exchange for long-term debt.
5. Long-Term Debt:
Certain assets of the Company, i.e.: subsidiary stock, accounts receivable inventory, selected real estate and equipment are pledged as collateral for long-term debt. Long-term debt consists of the following:
On February 2, 1998, CAIRE Inc. (CAIRE), a subsidiary of the Company entered into an agreement whereby a third party agreed to accept, in full payment of all outstanding indebtedness currently owed to it by CAIRE, a cash payment of $50 and an option to purchase 820 shares of 10% Series AA Cumulative Preferred Stock (Series AA Preferred Stock), par value $.01 per share of CAIRE. Concurrent with the above settlement, the Company accepted, in full payment of all outstanding unsecured indebtedness currently owed to it by CAIRE, 632 shares of the Series AA Preferred Stock. Additionally, the Company purchased all shares of CAIRE common stock owned by the third party for an aggregate purchase price of one hundred dollars. The Series AA preferred Stock has a liquidation preference of $10 per share and is subject to mandatory redemption. As a result of this restructuring, the Company incurred an extraordinary gain of $6,118.
The senior subordinated notes are redeemable at the option of Holdings, in whole or in part, on May 5, 2005, plus accrued and unpaid interest. The senior subordinated notes contain certain covenants which restrict, among other things, payment of dividends and additional equity issuances.
The revolving credit facility provides for borrowings and issuances of Letters of Credit of up to $30,000 subject to a defined borrowing base of qualified accounts receivable and eligible inventory. The revolving credit facility is renewable annually through October 2000. The Company is charged a monthly fee based on an annualized rate of 0.375% of the unused portion of the commitment. The interest rate is variable and contains a LIBOR and base rate option at the election of the Company. The rate is determined based on the Company's EBITDA (earnings before interest, income taxes, depreciation and amortization) to total debt as calculated quarterly. The outstanding balance was subject to a weighted average borrowing rate of 7.91% and 8.375% at December 31, 1998 and 1997, respectively. The credit facility contains covenants with respect to capital expenditures, borrowings and disposition of assets. As of December 31, 1998, the Company was in compliance with all covenants governing the revolving credit facility.
The senior secured notes are redeemable at the option of the Company, in whole or in part, on or after February 15, 2000, at the redemption prices (expressed as percentages of principal amount) set forth below, plus accrued and unpaid interest thereon to the redemption dates indicated below:
Year Percentage ---- ---------- 2000 102.083% 2001 and thereafter 100.000%
The senior secured notes and revolving credit facility agreements contain certain covenants which restrict borrowings, dividends, acquisition and disposition of assets and require the Company to maintain certain liquidity and debt coverage ratios. As of December 31, 1998, the Company was in compliance with all covenants.
The scheduled annual maturities of long-term debt at December 31, 1998 are as follows:
Year Amount ---- ------ 1999 $ 2,268 2000 18,141 2001 1,585 2002 113,674 2003 178 Thereafter 4,004 -------- $139,850 ========
Long-term debt, including current maturities, has a carrying value of $139,850 and a fair value of $155,809. The estimated fair value represents the present value of debt service at rates currently available to the Company for issuance of debt with similar terms. Except for the above, all financial instruments are carried at amounts that approximate estimated fair value.
6. Income Taxes:
Income tax expense (benefit) consists of the following for the periods ended:
Fiscal Year Fiscal Year Ten Months ------------ ------------- ------------ December 31, December 31, December 31, 1998 1997 1996 ------------ ------------- ------------ Current: Federal $ 406 $ 887 $ (198) State 370 31 (70) ------ ------- ------- 776 918 (268) Deferred 1,973 (3,964) (2,929) ------ ------- ------- $2,749 $(3,046) $(3,197) ====== ======= =======
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, 1998 1997 ----------- ----------- Accrued pension $1,033 $1,020 Accrued compensation 570 620 Accrued self insurance reserve 739 913 Deferred compensation 728 823 Intangibles 405 208 Inventory reserves 962 1,111 Depreciable assets (1,246) (1,162) Loss and credit carryforwards 1,603 3,535 Warranty reserve 789 818 Other accruals 637 557 Other 364 114 ----------- ----------- 6,584 8,557 Valuation allowance (551) (551) ----------- ----------- Net deferred tax asset $6,033 $8,006 =========== ===========
The Company has tax loss carryforwards for income tax purposes. Such tax loss carryforwards have been reduced in part by a valuation allowance, since realization of a portion of the carryforwards is not deemed more likely than not. The carryforwards of $3,535 expire in 2012.
7. Employee Benefit Plans:
Pension Plan
The Company maintains two noncontributory defined benefit pension plans covering substantially all employees of its U.S. subsidiaries. The benefits to which an employee is entitled under the plans are derived using a formula based on the number of years of service and compensation levels during the last five years of service before retirement. The Company funds the plans in accordance with the requirements of federal laws and regulations.
Weighted Average assumptions as of December 31:
Approximately 88% of the plan assets are invested in equity securities and 12% in cash equivalents as of December 31, 1998.
Savings Plan
The Company has a 401(k) savings plan (the Plan) which covers all employees of its U.S. subsidiaries who have completed one month of service and attained the age of 21. The Plan provides for voluntary participant contributions of 1% to 15% of each employee's wages. In 1997, the Company began matching contributions of up to 2% of eligible employee wages. Prior to this, the Company made matching contributions at the discretion of the Board of Directors. For the years ended December 31, 1998 and 1997, the Company made matching contributions of $536 and $315 to the Plan. The Company did not make matching contributions to the Plan in the fiscal year ended December 31, 1996.
Deferred Compensation Plan
During the ten months ended December 31, 1996, the Company's Board of Directors approved a deferred compensation plan to replace the existing plan in its entirety. The new plan awarded deferred compensation to certain key members of upper management with the objective of retaining their services, encouraging profitability and rewarding them. The plan awarded 29,270 units to three individuals which may be exchanged for Common Stock of an equal number at a future date, given the occurrence of certain events. For the ten months ended December 31, 1996, the Company expensed $1,916 in connection with the adoption of this plan.
During 1997 and subsequent to 1997, the Company entered into agreements with the three individuals that effectively terminated each individual's participation in the deferred compensation plan. Pursuant to the agreements, the Company will issue 29,750 shares of common stock of MVE to the three individuals upon the earlier of December 31, 2006 or the occurrence of certain events. As a result of the Company entering into these agreements, the Company reclassified the accrued liability related to the deferred compensation plan of $1,866 as of December 31, 1996 to equity.
8. Commitments and Contingencies:
Leases
A portion of the Company's operations is conducted using leased equipment and facilities. These leases are noncancelable and renewable. Total rental expense included in the accompanying consolidated statements of operations was approximately $684, $718, and $702 for the years ended December 31, 1998 and 1997 and for the ten months ended December 31, 1996. The future minimum rental payments required under these leases are $635 in 1999, $376 in 2000, $217 in 2001 and $2 in 2002.
Litigation Various lawsuits, claims and proceedings of a nature considered normal to its businesses are pending against the Company and certain of its subsidiaries. Most significant legal proceedings are related to matters covered by insurance. The most significant contingencies are described below.
In 1997, a former officer of a subsidiary of the Company and a related limited partnership company filed a lawsuit against the Company and certain of its affiliates and others alleging breach of contract and other claims arising out of such officer's separation from the subsidiary for which he was employed.
In 1997, a designer and marketer of an alternative beverage CO2 technology filed a lawsuit against the Company and certain other providers of cryogenic mini-bulk carbonated systems in Johnson County, Texas, alleging business disparagement, violations of Texas antitrust lawsuits and related claims. With respect to this lawsuit, the Company's insurer has accepted coverage, subject to a reservation of rights.
For both of these lawsuits, extensive discovery has been conducted and the Company believes that the claims are without merit and that the outcome of these lawsuits will not have a material adverse effect on its operating results, cash flow or financial position.
Environmental Matters
The Company's past and present operations include activities which are subject to extensive federal and state environmental regulations. As a result, the Company is currently participating in environmental investigations and assessments under these regulations at some of its current and former sites. In 1997, the Company submitted a site investigation report and Response Action Plan (RAP) to the Minnesota Pollution control Agency (MPCA). The soil RAP has been conditionally approved by the MPCA. The groundwater RAP is subject to further review. These plans include possible obligations to remove or mitigate the effects of hazardous substances from the environment. The amount of such future costs will depend on factors such as the unknown nature or extent of contamination, the extent and method of the remedial actions which may be required and the magnitude of clean-up costs.
Ongoing environmental costs are expensed as incurred. Costs incurred to date as of the year ended December 31, 1998 were $849, of which, $666 are to be indemnified. In accordance with the recapitalization agreement, the Company is to be indemnified of most environmental claims. Based upon this and subject to the difficulty in estimating these future costs, the Company expects that the amount it may be required to pay in connection with environmental matters would be indemnified and also would not have a material adverse effect on the financial condition or results of operations.
9. Segment Reporting and Export Sales:
The operations of the Company are divided into four business segments for financial reporting purposes. The industrial products segment develops and manufactures cryogenic storage tanks and transportation equipment and markets them to producers, distributors and end users of industrial gases. The distributed products segment develops, manufactures and markets a variety of products utilizing similar technologies as the industrial products segment, but markets them through distributors to various commercial markets, principally end users of bulk liquid CO2 beverage systems. The medical respiratory products segment develops, manufactures and markets a broad range of medical respiratory products, including liquid oxygen systems, oxygen concentrators and medication nebulizers, all of which are used primarily for the in-home treatment of patients. The applied technologies segment includes storage systems for temperature-sensitive agricultural and biological products, liquid natural gas (LNG) storage, test chambers for rapid heat/cold testing, vacuum insulated pipe and other emerging products. General corporate assets include cash and cash equivalents and income taxes.
Other expenses recorded in the ten months ended December 31, 1996 are included in operating income as follows: industrial $5,432, distributed $1,280, medical respiratory $9,796 and corporate $3,157 (see Note 10). Financial information by business segment as of and for the years ended December 31, 1998 and 1997, and the ten months ended December 31, 1996 was as follows:
Export sales from the Company's U.S. operations for the years ended December 31, 1998 and 1997, and the ten months ended December 31, 1996 were as follows:
December 31, December 31, December 31, 1998 1997 1996 ------------ ------------ ------------ Canada and Mexico $12,653 $10,922 $6,957 Europe 16,412 12,164 12,407 Pacific 12,497 29,318 24,868 Other 9,386 8,331 7,271 ------------ ------------ ------------ Total $50,948 $60,735 $51,503 ============ ============ ============
10. Other Expense:
In 1998, MVE exited the concentrator market to focus on its liquid market using its cryogenic resources. As a result, Holdings incurred a $1,042 loss on the write-off of the assets associated with this product line.
Other expense recorded in the ten months ended December 31, 1996 include the following:
Recapitalization Expenses $1,241 Deferred Compensation Plan (Note 7) 1,916 Discontinue AURA product line 1,280 Debt Forgiveness 3,722 Goodwill write-offs 10,824 Other 685 -------------- $19,668 ==============
Recapitalization Expenses
In 1996, the Company incurred $1,241 of expenses related to recapitalization of the Company. These expenses related to consent and solicitation of the holders of the senior secured notes and legal and accounting fees.
Discontinuance of AURA Product line
In 1996, the Company wrotedown $1,280 of fixed and other assets, net of debt forgiveness, related to the discontinuance of the AURA product line, which was included in the distributed products segment. Prior to December 1996, the Company had an agreement with a third party to participate in a joint venture to produce and market its AURA product line. In December 1996, the Company and the joint venture partner agreed to discontinue all AURA operating and marketing activities.
Debt Forgiveness
Prior to December 1996, the Company made loans to a major supplier of components for its medical oxygen concentrators. The loans were to be repaid through future purchase credits from the supplier. In December 1996, the Company entered into a new agreement with the supplier which forgave $3,722 of the debt.
Goodwill Writedown
In December 1996, the Company recorded a goodwill writedown of $10,824 ($4,750 in industrial products and $6,074 in the medical respiratory products segment). In connection with the change in ownership in 1996, management undertook a strategic review of all business units. As a result of the review, goodwill was determined to have been impaired because of the financial condition of certain medical respiratory and industrial business units and the Company's inability to generate future operating income from these business units. Moreover, anticipated future cash flow of these business units indicate that the recoverability of the goodwill is not reasonably assured. Prior to December of 1996, goodwill was amortized using the straight-line method over twenty years.
11. Fiscal Results for the Year Ended December 31, 1996 (Unaudited)
December 31, -----------
Net sales $190,782 Cost of sales 138,578 ----------- Gross profit 52,204 Operating expenses: Selling and Marketing 11,789 General and administrative 15,523 Research and development 3,510 Amortization 5,548 Other expenses 19,668 ----------- Total operating expenses 56,038 ----------- Operating loss (3,834) Interest expense (16,669) ----------- Net loss before income tax benefit and minority interest (20,503) Income tax benefit 1,663 ----------- Net loss before minority interest (18,840) Minority interest in net loss 1,077 ----------- Net loss $ (17,763) ===========
12. Related-Party Transaction
On November 11, 1998, Holdings loaned a sharebolder $50 to be repaid on or before July 1, 2005. Interest accrues quarterly at 8%. The loan is secured by Holdings Common Stock owned by the shareholder.
A director of the Company has an agreement with the Company which pays an annual fee of $75 in exchange for consulting services. This agreement has a term of one year, renewable at the option of the Company.
The Company sold 850 shares of $.01 par common stock in MVE Restaurant Services, Inc. to Holdings for $500,000. Prior to the sale, an intercompany receivable of $4,114 was forgiven.
13. Subsequent Events
Agreement and plan of merger
On February 16, 1999, Holdings entered into a merger agreement with Chart Industries, Inc. (Chart). Under the agreement, Holdings and the Company shall become a wholly owned subsidiary of Chart. The transaction is expected to be complete within 60 days. The closing is subject to certain regulatory approvals and satisfaction of usual and customary closing conditions. The purchase price is approximately $240 million including assumed debt.