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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-57457
PROSPECTUS
OFFER FOR ALL OUTSTANDING
9 7/8% SENIOR SUBORDINATED NOTES DUE 2008
IN EXCHANGE FOR
9 7/8% SENIOR SUBORDINATED NOTES DUE 2008
OF
THERMADYNE MFG. LLC
AND
THERMADYNE CAPITAL CORP.
Thermadyne Mfg. LLC (the "Company"), Thermadyne Capital Corp. ("Capital Corp.,"
and, together with the Company, the "Issuers") and the Guarantors (as
hereinafter defined) hereby offer, upon the terms and subject to the conditions
set forth in this Prospectus and the accompanying Letter of Transmittal (which
together constitute the "Exchange Offer"), to exchange $1,000 principal amount
at maturity of registered 9 7/8% Senior Subordinated Notes due 2008 (the "New
Senior Subordinated Notes") issued by the Issuers for each $1,000 principal
amount at maturity of unregistered 9 7/8% Senior Subordinated Notes due 2008
(the "Old Senior Subordinated Notes") issued by the Issuers, of which an
aggregate principal amount at maturity of $207,000,000 is outstanding. The form
and terms of the New Senior Subordinated Notes are identical to the form and
terms of the Old Senior Subordinated Notes except that the New Senior
Subordinated Notes have been registered under the Securities Act of 1933, as
amended (the "Securities Act"), and will not bear any legends restricting their
transfer. The New Senior Subordinated Notes will evidence the same debt as the
Old Senior Subordinated Notes and will be issued pursuant to, and entitled to
the benefits of, the Indenture (as defined) governing the Old Senior
Subordinated Notes. The Exchange Offer is being made in order to satisfy certain
contractual obligations of the Issuers. See "The Exchange Offer" and
"Description of New Senior Subordinated Notes." The New Senior Subordinated
Notes and the Old Senior Subordinated Notes are sometimes collectively referred
to herein as the "Senior Subordinated Notes."
The New Senior Subordinated Notes will mature on June 1, 2008. Interest on the
New Senior Subordinated Notes will be payable semi-annually on June 1 and
December 1 of each year, commencing on December 1, 1998. The New Senior
Subordinated Notes will be subject to redemption at any time on or after June 1,
2003 at the option of the Issuers, in whole or in part, in cash at the
redemption prices set forth herein, plus accrued and unpaid interest and
Liquidated Damages (as defined herein), if any, thereon to the applicable
redemption date. Notwithstanding the foregoing, on or prior to June 1, 2001, the
Issuers may redeem up to 35% of the aggregate principal amount of Senior
Subordinated Notes ever issued under the Indenture in cash at a redemption price
of 109.875% of the principal amount thereof, plus accrued and unpaid interest
and Liquidated Damages, if any, thereon to the redemption date, with the net
cash proceeds of one or more Public Equity Offerings (as defined herein);
provided that at least 65% of the aggregate principal amount of Senior
Subordinated Notes ever issued under the Indenture remains outstanding
immediately after the occurrence of any such redemption. In addition, at any
time prior to June 1, 2003, the Issuers may, at their option upon the occurrence
of a Change of Control (as defined herein), redeem the New Senior Subordinated
Notes, in whole but not in part, in cash at a redemption price equal to (i) the
present value of the sum of all the remaining interest (excluding accrued and
unpaid interest, if any), premium and principal payments that would become due
on the New Senior Subordinated Notes as if the New Senior Subordinated Notes
were to remain outstanding and be redeemed on June 1, 2003, computed using a
discount rate equal to the Treasury Rate (as defined herein) plus 50 basis
points, plus (ii) accrued and unpaid interest and Liquidated Damages, if any, to
the date of redemption. Upon the occurrence of a Change of Control, each Holder
of New Senior Subordinated Notes will have the right to require the Issuers to
repurchase all or any part of such Holder's New Senior Subordinated Notes at an
offer price in cash equal to 101% of the aggregate principal amount thereof,
plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the
date of repurchase. See "Description of New Senior Subordinated Notes."
The New Senior Subordinated Notes will be general unsecured obligations of the
Issuers and will be subordinated in right of payment to all existing and future
Senior Indebtedness (as defined herein) of the Issuers, including indebtedness
pursuant to the New Credit Facility (as defined herein). The New Senior
Subordinated Notes will rank pari passu with any future senior subordinated
indebtedness of the Issuers and will rank senior to all subordinated
Indebtedness (as defined herein) of the Issuers. The New Senior Subordinated
Notes will be effectively subordinated to all liabilities of the Issuers'
subsidiaries that are not Guarantors (as defined herein). The New Senior
Subordinated Notes will be unconditionally guaranteed on a senior subordinated
basis by certain of the Company's existing domestic subsidiaries (the
"Guarantors"). The Note Guarantees (as defined herein) will be general unsecured
obligations of the Guarantors, will be subordinated in right of payment to all
existing and future Senior Indebtedness of the Guarantors, including
indebtedness under the New Credit Facility, and will rank senior in right of
payment to any future subordinated indebtedness of the Guarantors. On a pro
forma basis after giving effect to the Merger (as defined herein), including the
Merger Financing (as defined herein) and the application of the proceeds
thereof, as of March 31, 1998, the Company and the Guarantors would have had
outstanding approximately $379.5 million of Senior Indebtedness, and the
Company's non-Guarantor subsidiaries would have had approximately $87.0 million
of outstanding liabilities, including trade payables.
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SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NEW SENIOR
SUBORDINATED NOTES.
- --------------------------------------------------------------------------------
The Issuers will accept for exchange any and all Old Senior Subordinated Notes
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
September 3, 1998, unless extended (as so extended, the "Expiration Date").
Tenders of Old Senior Subordinated Notes may be withdrawn at any time prior to
the Expiration Date. The Exchange Offer is subject to certain customary
conditions. See "The Exchange Offer."
(Cover page continued on next page)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS AUGUST 4, 1998.
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(Continued from cover page)
Each broker-dealer that receives New Senior Subordinated Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Senior Subordinated Notes.
The letter of transmittal accompanying this Prospectus (the "Letter of
Transmittal") states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Senior Subordinated Notes received in exchange for Old
Senior Subordinated Notes where such Old Senior Subordinated Notes were acquired
by such broker-dealer as a result of market-making activities or other trading
activities. The Issuers have agreed, for a period of 90 days after the
Expiration Date, to make this Prospectus available to any broker-dealer for use
in connection with any such resale. See "Plan of Distribution."
No public market existed for the Old Senior Subordinated Notes before the
Exchange Offer. The Issuers currently do not intend to list the New Senior
Subordinated Notes on any securities exchange or to seek approval for quotation
through any automated quotation system, and no active public market for the New
Senior Subordinated Notes is currently anticipated. The Issuers will pay all the
expenses incident to the Exchange Offer.
The Exchange Offer is not conditioned upon any minimum principal amount of Old
Senior Subordinated Notes being tendered for exchange pursuant to the Exchange
Offer.
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AVAILABLE INFORMATION
As a result of the filing under the Securities Act of the Registration
Statement on Form S-1 with respect to the New Senior Subordinated Notes (the
"Registration Statement"), of which this Prospectus is a part, the Issuers will
become subject to the informational requirements of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and in accordance therewith will file
reports and other information with the Securities and Exchange Commission (the
"Commission"). Additionally, the Company's parent corporation, Thermadyne
Holdings Corporation, is currently subject to the informational requirements of
the Exchange Act and in accordance therewith files reports and other information
with the Commission. Such reports and other information may be inspected and
copied at the public reference facilities of the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices at 500 West Madison Street, Suite 1400, Chicago, Illinois 60611, and 7
World Trade Center, 13th Floor, New York, New York 10048. Copies of such
material can also be obtained at prescribed rates by writing to the Public
Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549.
This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits and schedules thereto. Statements made
in this Prospectus as to the contents of any contract, agreement or other
document are not necessarily complete. With respect to each such contract,
agreement or other document filed as an exhibit to the Registration Statement,
reference is hereby made to such exhibit for a more complete description of the
matter involved, and each such statement shall be deemed qualified in its
entirety by such reference. Copies of the Registration Statement and the
exhibits thereto are on file with the Commission and may be examined without
charge at the public reference facilities of the Commission described above.
Copies of such materials can also be obtained at prescribed rates by writing to
the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549. The reports, proxy statements and other
information filed by the Issuers with the Commission may also be obtained from
the web site that the Commission maintains at http://www.sec.gov.
The Issuers are required by the Indenture to furnish the holders of the New
Senior Subordinated Notes with copies of the annual reports and of the
information, documents and other reports specified in Sections 13 and 15(d) of
the Exchange Act, so long as any New Senior Subordinated Notes are outstanding.
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SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Investors are urged to read this Prospectus in its
entirety. As used in this Prospectus, the term "Holdings" means Thermadyne
Holdings Corporation, including its predecessors and subsidiaries; the term
"Issuers" means Thermadyne Mfg. LLC, a wholly owned subsidiary of Holdings
("Thermadyne LLC"), and Thermadyne Capital Corp. ("Thermadyne Capital"), a
wholly owned subsidiary of Thermadyne LLC; and the terms "Company" and
"Thermadyne" mean Thermadyne LLC and its predecessors and subsidiaries.
THE COMPANY
OVERVIEW
Thermadyne is a leading global manufacturer of cutting and welding products
and accessories. The Company manufactures a broad range of gas (oxy-fuel) and
electric arc cutting and welding products that are ultimately sold to end-user
customers principally engaged in the aerospace, automotive, construction, metal
fabrication, mining, mill and foundry, petroleum and shipbuilding industries.
Thermadyne sells its products through a long-established domestic network of
approximately 1,100 independent distributors who market Thermadyne products to
over 10,000 end-user customers. For the twelve months ended March 31, 1998, the
Company's net sales and Adjusted EBITDA (as defined herein), on a pro forma
basis, were $548.2 million and $115.5 million, respectively.
The Company's core products enjoy leading brand recognition, a reputation
for quality and strong market positions. In 1994, following the Company's
Restructuring (as defined herein), current management initiated a series of
transactions to focus the Company's business exclusively on the cutting and
welding industry. As part of this strategy, the Company divested three non-core
businesses and acquired six cutting and welding businesses, which collectively
generated approximately $169 million in annual revenues at the respective times
of acquisition. As a result of this repositioning strategy, along with ongoing
new product introductions, an extensive distribution network and market leading
brands, the Company has achieved a compound annual growth in net sales and
EBITDA of 20.3% and 12.5%, respectively, from 1993 to 1997.
According to the United States Department of Commerce, domestic welding
industry revenues totaled over $3.6 billion in 1997. The domestic industry has
grown at an annual rate of 5.9% since 1989 and is expected to grow 4.2% in 1998.
Global welding industry revenues are estimated to total over $10.0 billion, and
management believes that growth in the international market has been faster than
the domestic market, driven, in large part, by infrastructure spending in
developing markets. International markets, including Australia and Italy,
represented approximately 42% of the Company's net sales in 1997, up from
approximately 20% of net sales in 1994. Although the industry has begun to
experience global consolidation, it continues to be very fragmented.
COMPETITIVE STRENGTHS
Thermadyne possesses a number of competitive strengths that have allowed it
to develop and maintain a strong position within the cutting and welding
industry, including the following:
Market Leading Brands. Management believes that the strength and longevity
of the numerous Thermadyne brand names create a significant competitive
advantage and position Thermadyne as one of the leaders in the cutting and
welding industry. Each of the Company's major divisions maintains
industry-leading brand names with significant market shares. Management believes
that VICTOR(R), founded in 1913, is the leading brand name in domestic
gas-operated cutting and welding torches and equipment; TWECO(R), founded in
1936, is the leading domestic manufacturer of metal inert gas ("MIG") and manual
welding torches; ARCAIR(R) is the leading domestic brand name of tungsten inert
gas ("TIG") torch and accessory products; THERMAL DYNAMICS(R), founded in 1957,
is a leading domestic manufacturer of manual plasma cutting products; and
CIGWELD(R), founded in 1922, is the leading brand name in the Australia/New
Zealand cutting and welding
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products market. Each of the manufacturing operations associated with these
brands is ISO-9000 series certified.
Diverse and Stable Customer Base. The Company's customer base includes
cutting and welding product distributors as well as end-user customers
principally engaged in the aerospace, automotive, construction, metal
fabrication, mining, mill and foundry, petroleum and ship building industries.
No one customer accounted for more than 9% of the Company's 1997 net sales.
Further, the Company's top 20 customers have been associated with the Company
for an average of over 10 years.
Established, Effective Distribution Channels. The Company believes that its
strong, established and long-standing relationships with over 1,100 independent
cutting and welding products distributors in the United States provide a
significant competitive advantage and support the Company's strong market
position. Thermadyne's domestic distributor relationships are maintained by 11
area business managers who oversee the Company's relationships with large
distributors and by separate product-specific sales forces for each of
Thermadyne's business units. Management believes that this unique structure,
which combines relationship managers with technically trained product
specialists, will enable the Company to more effectively maintain and utilize
its distributor networks. Management also believes that this established
distribution network enables the Company to achieve market penetration when
introducing newly developed or acquired products.
Proven and Committed Senior Management Team. Thermadyne's management team
has strategically repositioned the Company over the past four years to focus
exclusively in its core cutting and welding markets. This repositioning was
accomplished through divestitures of three non-core assets and acquisitions of
six strategic businesses or product lines. In addition, management has initiated
the development and introduction of significant new products and product lines.
As a result of management's efforts, the Company achieved a 20.3% growth rate in
net sales from 1993 to 1997. In connection with the Merger each member of the
senior management team signed an employment contract with the Company.
Additionally, the Company adopted an incentive plan to tie each member of senior
management's compensation to the Company's financial performance. See "Executive
Compensation."
BUSINESS STRATEGY
Thermadyne has developed a business strategy designed to enhance its strong
market positions and continue to improve its growth and profitability. The
primary elements of the Company's business strategy are as follows:
Continue New Product Development and Enhancement. The foundation for
Thermadyne's strong market positions and leading brand names is the development
and introduction of new products and enhancements of existing products. The
Company believes it is at the forefront of cutting and welding technology with a
proven track-record of continual new product introductions and existing product
enhancements that have resulted in 262 issued or pending United States and
foreign patents. New products and product enhancements are designed to add value
for customers, including enhanced safety features, improved productivity and
ergonomics and an improved welding environment. Examples of recent new product
introductions include robotic welding systems and accessories, high-purity
instrumentation, automated plasma cutting and safety products as well as
underwater cutting electrodes. During 1997, the Company introduced over 135 new
products or product enhancements, and the Company expects to continue this
effort in the future.
Expand Strategic Acquisitions. The Company has completed six acquisitions
since 1993, which collectively generated approximately $169 million in annual
revenues at the respective times of acquisition, including over $135 million of
revenues for Australia and Italy. The Company believes that numerous acquisition
candidates exist globally, and the Company intends to continue to seek new
acquisition opportunities in its cutting and welding business. Thermadyne
intends to continue its focused acquisition strategy that includes the following
principal elements: (i) entering and expanding in geographic areas where the
Company does not currently have a significant presence through acquisitions of
local cutting and welding businesses and (ii) expanding in geographic areas
where the Company currently maintains a strong presence through the acquisition
of complementary product lines.
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Leverage Existing Distribution Network. The Company intends to leverage its
existing distribution network through the acquisition or introduction of new
products and product enhancements. Management believes that when the Company
acquires a local presence in a new geographic area, it can utilize the acquired
distribution network to sell existing Thermadyne brands into that local market.
In addition, the Company believes that significant opportunities exist to
purchase complementary product lines and expand its business by selling the new
product lines through Thermadyne's extensive distribution network. For example,
through recent acquisitions the Company has expanded its offering of filler
metals, conventional arc welding power supplies, safety equipment and
engine-driven welding power sources and began marketing such products through
its established distribution network. The Company intends to continue this
strategy of penetrating new welding product markets by leveraging its extensive
distribution network in conjunction with its new product development and focused
acquisition strategies.
Broaden International Presence. Thermadyne has maintained an international
presence for over 30 years and continues to broaden its presence throughout the
world. International sales accounted for approximately 42% of net sales in 1997
as compared to approximately 20% in 1994. The Company has established a
dedicated international market presence and maintains the leading position in
Australia/New Zealand and significant and growing positions in Europe, Asia and
Latin America. Management intends to continue the expansion of its strong
domestic brand names into the international market and to continue to penetrate
the growing Asian and Latin American cutting and welding markets.
Continue Cost Reduction Efforts. Thermadyne strives to continually improve
manufacturing efficiencies and reduce unit costs. In December 1997, the Company
implemented a cost reduction program that includes the following principal
elements: (i) vendor rationalization and consolidation; (ii) manufacturing
process and productivity improvements and product design changes; (iii)
personnel rationalization and expense reductions; (iv) advertising and trade
show expense reductions; (v) aircraft, charter and other travel expense
reductions; and (vi) elimination of the annual sales meeting. These cost
reduction initiatives are expected to generate approximately $10 million in
savings on an annualized basis. In addition, the Company has initiated the
implementation of a new global information system that is designed to allow the
Company to further integrate administrative functions and improve information
flow across business unit lines.
Continue Dedicated Customer Service. The Company believes that effective
and proactive customer service has enabled the Company to build and maintain its
leading market positions and strong distributor relationships. Management plans
to continue this strategy of enhancing distributor and end-user relationships
through continuous customer service improvements. Each of Thermadyne's divisions
maintains a dedicated, well trained, technically oriented and product-specific
sales and customer service team. Management believes that the dedicated product
teams provide Thermadyne with a significant competitive advantage. In addition,
to further improve customer service, the Company has implemented a national
accounts team of 11 area business managers to support the dedicated product
sales and service teams and further support sales to the Company's key
distributors.
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THE MERGER AND MERGER FINANCING
On May 22, 1998, Holdings consummated the merger of Mercury Acquisition
Corporation ("Mercury"), a corporation organized by DLJ Merchant Banking
Partners II, L.P. ("DLJMB") and affiliated funds and entities (the "DLJMB
Funds") with and into Holdings, with Holdings continuing as the surviving
corporation (the "Merger").
In order to fund the payment of the cash portion of the Merger
Consideration (as defined herein), the Option Cash Proceeds (as defined herein)
and the ESPP Cash Proceeds (as defined herein), to refinance and/or retire
outstanding indebtedness of the Company, and to pay expenses incurred in
connection with the Merger, the Issuers issued the Senior Subordinated Notes and
the Company entered into a syndicated senior secured loan facility providing for
term loan borrowings in the aggregate principal amount of approximately $330
million and revolving loan borrowings of $100 million (the "New Credit
Facility"). In connection with the Merger, the Company borrowed all term loans
available under the New Credit Facility plus approximately $25 million of
revolving loans. The remaining revolving loans will be available to fund the
working capital requirements of the Company. The proceeds of such financings
were distributed to Holdings in the form of a dividend. See "Description of New
Credit Facility," "The Merger and Merger Financing" and "Certain Relationships
and Related Transactions."
Mercury issued approximately $94.6 million aggregate gross proceeds of its
12 1/2% Senior Discount Debentures due 2008 (the "Debentures"). In connection
with the Merger, Holdings succeeded to the obligations of Mercury with respect
to the Debentures. The DLJMB Funds also purchased 2,608,696 shares of common
stock of Mercury ("Mercury Common Stock"), 2,000,000 shares of senior
exchangeable preferred stock of Mercury ("Mercury Preferred Stock") and warrants
to purchase 353,428 shares of Mercury Common Stock at an exercise price of $0.01
per share (the "DLJMB Warrants") for approximately $140 million (the "DLJMB
Equity Investment"). As a result of the Merger, the proceeds of such purchases
became an asset of Holdings, each share of Mercury Common Stock became a share
of common stock of Holdings ("Holdings Common Stock"), each share of Mercury
Preferred Stock became a share of senior exchangeable preferred stock of
Holdings ("Holdings Preferred Stock") and each DLJMB Warrant to acquire Mercury
Common Stock became exercisable for an equal number of shares of Holdings Common
Stock. In addition, in connection with the Merger, certain members of senior
management purchased 143,192 shares of Holdings Common Stock for approximately
$4.9 million (the "Management Share Purchase"), of which approximately $3.6
million was provided through non-recourse loans from Holdings (the "Management
Loans").
The equity and debt financings referred to above are collectively referred
to herein as the "Merger Financing."
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THE EXCHANGE OFFER
The Exchange Offer......... $1,000 principal amount at maturity of New Senior
Subordinated Notes in exchange for each $1,000
principal amount at maturity of Old Senior
Subordinated Notes. The Old Senior Subordinated
Notes were sold on May 22, 1998, in a private
placement to Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJSC" or the "Initial
Purchaser"), which immediately resold to the Old
Senior Subordinated Notes pursuant to Rule 144A
promulgated under the Securities Act (the "Original
Offering"). As of the date hereof, Old Senior
Subordinated Notes representing $207 million
aggregate principal amount at maturity are
outstanding. The terms of the New Senior
Subordinated Notes and the Old Senior Subordinated
Notes are substantially identical in all material
respects, except that the New Senior Subordinated
Notes will be freely transferable by the holders
thereof except as otherwise provided herein. See
"Description of New Senior Subordinated Notes."
Based on an interpretation by the Commission's
staff set forth in no-action letters issued to
third parties unrelated to the Issuers and the
Guarantors, the Issuers and the Guarantors believe
that New Senior Subordinated Notes issued pursuant
to the Exchange Offer in exchange for Old Senior
Subordinated Notes may be offered for resale, sold
and otherwise transferred by any person receiving
the New Notes, whether or not that person is the
registered holder (other than any such holder or
such other person that is an "affiliate" of the
Issuers or any Guarantor within the meaning of Rule
405 under the Securities Act), without compliance
with the registration and prospectus delivery
provisions of the Securities Act, provided that (i)
the New Senior Subordinated Notes are acquired in
the ordinary course of business of that holder or
such other person, (ii) neither the holder nor such
other person is engaging in or intends to engage in
a distribution of the New Senior Subordinated Notes
and (iii) neither the holder nor such other person
has an arrangement or understanding with any person
to participate in the distribution of the New
Senior Subordinated Notes. See "The Exchange
Offer -- Purpose and Effect." Each broker-dealer
that receives New Senior Subordinated Notes for its
own account in exchange for Old Senior Subordinated
Notes, where those Old Senior Subordinated Notes
were acquired by the broker-dealer as a result of
its market-making activities or other trading
activities, must acknowledge that it will deliver a
prospectus in connection with any resale of these
New Senior Subordinated Notes. See "Plan of
Distribution."
Registration Rights
Agreement................ In connection with the Original Offering, the
Issuers and the Guarantors entered into a
Registration Rights Agreement with the Initial
Purchaser (the "Registration Rights Agreement")
requiring the Issuers to make the Exchange Offer.
See "The Exchange Offer -- Purpose and Effect."
Expiration Date............ The Exchange Offer will expire at 5:00 p.m., New
York City time, September 3, 1998, or such later
date and time to which it is extended (the
"Expiration Date").
Withdrawal................. The tender of the Old Senior Subordinated Notes
pursuant to the Exchange Offer may be withdrawn at
any time prior to 5:00 p.m., New York City time, on
the Expiration Date. Any Old Senior Subordinated
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Notes not accepted for exchange for any reason will
be returned without expense to the tendering holder
thereof as promptly as practicable after the
expiration or termination of the Exchange Offer.
Interest on the New
Senior Subordinated
Notes.................... Interest on each New Senior Subordinated Note will
accrue from the date of issuance of the Old Senior
Subordinated Note for which the New Senior
Subordinated Note is exchanged or from the date of
the last periodic payment of interest on such Old
Senior Subordinated Note, whichever is later. No
additional interest will be paid on Old Senior
Subordinated Notes tendered and accepted for
exchange.
Conditions to the Exchange
Offer.................... The Exchange Offer is subject to certain customary
conditions, certain of which may be waived by the
Issuers. See "The Exchange Offer -- Conditions to
the Exchange Offer."
Procedures for Tendering
Old
Senior Subordinated
Notes.................... Each holder of Old Senior Subordinated Notes
wishing to accept the Exchange Offer must complete,
sign and date the Letter of Transmittal, or a copy
thereof, in accordance with the instructions
contained herein and therein, and mail or otherwise
deliver the Letter of Transmittal, or the copy,
together with the Old Senior Subordinated Notes and
any other required documentation, to the Exchange
Agent (as defined herein) at the address set forth
herein. Persons holding the Old Senior Subordinated
Notes through the Depository Trust Company ("DTC")
and wishing to accept the Exchange Offer must do so
pursuant to the DTC's Automated Tender Offer
Program, by which each tendering participant will
agree to be bound by the Letter of Transmittal. By
executing or agreeing to be bound by the Letter of
Transmittal, each holder will represent to the
Issuers that, among other things, (i) the New
Senior Subordinated Notes acquired pursuant to the
Exchange Offer are being obtained in the ordinary
course of business of the person receiving such New
Senior Subordinated Notes, whether or not such
person is the registered holder of the Old Senior
Subordinated Notes, (ii) neither the holder nor any
such other person is engaging in or intends to
engage in a distribution of such New Senior
Subordinated Notes, (iii) neither the holder nor
any such other person has an arrangement or
understanding with any person to participate in the
distribution of such New Senior Subordinated Notes,
and (iv) neither the holder nor any such other
person is an "affiliate," as defined under Rule 405
promulgated under the Securities Act, of the
Issuers or any Guarantor. Pursuant to the
Registration Rights Agreement, the Issuers are
required to file a "shelf" registration statement
for a continuous offering pursuant to Rule 415
under the Securities Act in respect of the Old
Notes if (a) they are prohibited from consummating
the Exchange Offer because the Exchange Offer is
not permitted by applicable law or Commission
policy or (b) any holder of Transfer Restricted
Securities (as defined) notifies the Issuers in
writing prior to the 20th business day following
consummation of the Exchange Offer that (i) based
on an opinion of counsel, it is prohibited by law
or Commission policy from participating in the
Exchange Offer or (ii) it is a broker-dealer and
owns Senior Subordinated Notes acquired directly
from the Issuers.
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Acceptance of Old Notes and
Delivery of New Notes.... The Issuers and the Guarantors will accept for
exchange any and all Old Senior Subordinated Notes
which are properly tendered (and not withdrawn) in
the Exchange Offer prior to 5:00 p.m., New York
City time, on the Expiration Date. The New Senior
Subordinated Notes issued pursuant to the Exchange
Offer will be delivered promptly following the
Expiration Date. See "The Exchange Offer -- Terms
of the Exchange Offer."
Exchange Agent............. State Street Bank and Trust Company is serving as
Exchange Agent (the "Exchange Agent") in connection
with the Exchange Offer.
Federal Income Tax
Considerations........... The exchange pursuant to the Exchange Offer should
not be a taxable event for federal income tax
purposes. See "Certain United States Federal Income
Tax Considerations."
Effect of Not Tendering.... Old Senior Subordinated Notes that are not tendered
or that are improperly tendered and not accepted
will, following the completion of the Exchange
Offer, continue to be subject to the existing
restrictions upon transfer thereof. The Issuers and
the Guarantors will have no further obligation to
provide for the registration under the Securities
Act of such Old Senior Subordinated Notes.
9
<PAGE> 11
THE NEW SENIOR SUBORDINATED NOTES
Securities Offered......... $207.0 million aggregate principal amount at
maturity of 9 7/8% Senior Subordinated Notes due
2008.
Issuers.................... The New Senior Subordinated Notes will be joint and
several obligations of the Company and Thermadyne
Capital. Thermadyne Capital is a Delaware
corporation and wholly-owned subsidiary of the
Company formed in connection with the Original
Offering. Thermadyne Capital has no assets, no
liabilities (other than the Senior Subordinated
Notes), no substantial operations, and will be
prohibited from engaging in any business
activities.
Maturity Date.............. June 1, 2008.
Interest Payment Dates..... June 1 and December 1, commencing December 1, 1998.
Optional Redemption........ The New Senior Subordinated Notes will be subject
to redemption at any time on or after June 1, 2003
at the option of the Issuers, in whole or in part,
in cash at the redemption prices set forth herein,
plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the applicable
redemption date. Notwithstanding the foregoing, on
or prior to June 1, 2001, the Issuers may redeem up
to 35% of the aggregate principal amount of Senior
Subordinated Notes ever issued under the Indenture
in cash at a redemption price of 109.875% of the
principal amount thereof, plus accrued and unpaid
interest and Liquidated Damages, if any, thereon to
the redemption date, with the net cash proceeds of
one or more Public Equity Offerings; provided that
at least 65% of the aggregate principal amount of
Senior Subordinated Notes ever issued under the
Indenture remains outstanding immediately after the
occurrence of any such redemption. In addition, at
any time prior to June 1, 2003, the Issuers may, at
their option upon the occurrence of a Change of
Control, redeem the New Senior Subordinated Notes,
in whole but not in part, in cash at a redemption
price equal to (i) the present value of the sum of
all the remaining interest (excluding accrued and
unpaid interest, if any), premium and principal
payments that would become due on the New Senior
Subordinated Notes as if the New Senior
Subordinated Notes were to remain outstanding and
be redeemed on June 1, 2003, computed using a
discount rate equal to the Treasury Rate plus 50
basis points, plus (ii) accrued and unpaid interest
and Liquidated Damages, if any, to the date of
redemption. See "Description of New Senior
Subordinated Notes -- Optional Redemption."
Change of Control.......... Upon the occurrence of a Change of Control, each
Holder of New Senior Subordinated Notes will have
the right to require the Issuers to repurchase all
or any part of such Holder's New Senior
Subordinated Notes at an offer price in cash equal
to 101% of the aggregate principal amount thereof,
plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the date of repurchase.
No assurance can be given that the Issuers will
have sufficient resources to satisfy their
repurchase obligation with respect to the New
Senior Subordinated Notes following a Change of
Control. See "Risk Factors -- Possible Inability to
Repurchase New Senior Subordinated Notes upon
Change of Control" and "Description of New Senior
Subordinated Notes -- Repurchase at the Option of
Holders -- Change of Control."
10
<PAGE> 12
Ranking.................... The New Senior Subordinated Notes will be general
unsecured obligations of the Issuers and will be
subordinated in right of payment to all existing
and future Senior Indebtedness of the Issuers,
including indebtedness pursuant to the New Credit
Facility. The New Senior Subordinated Notes will
rank pari passu with any future senior subordinated
indebtedness of the Issuers and will rank senior to
all Subordinated Indebtedness of the Issuers. The
New Senior Subordinated Notes will be effectively
subordinated to all liabilities of the Issuers'
subsidiaries that are not Guarantors. On a pro
forma basis after giving effect to the Merger,
including the Merger Financing and the application
of proceeds thereof, as of March 31, 1998, the
Company and the Guarantors would have had
outstanding approximately $379.5 million of Senior
Indebtedness and the Company's non-Guarantor
subsidiaries would have had approximately $87.0
million of outstanding liabilities, including trade
payables.
Note Guarantees............ The New Senior Subordinated Notes will be
unconditionally guaranteed on a senior subordinated
basis by the Guarantors. The Note Guarantees will
be general unsecured obligations of the Guarantors,
will be subordinated in right of payment to all
existing and future Senior Indebtedness of the
Guarantors, including indebtedness under the New
Credit Facility, and will rank senior in right of
payment to any future subordinated indebtedness of
the Guarantors. See "Description of New Senior
Subordinated Notes -- Note Guarantees."
Certain Covenants.......... The Indenture pursuant to which the New Senior
Subordinated Notes will be issued (the "Indenture")
contains certain covenants that, among other
things, limit the ability of the Issuers and their
Restricted Subsidiaries (as defined herein) to:
incur indebtedness and issue preferred stock,
repurchase Capital Stock (as defined herein) and
Indebtedness subordinated to the New Senior
Subordinated Notes, engage in transactions with
affiliates, engage in sale and leaseback
transactions, incur or suffer to exist certain
liens, pay dividends or other distributions, make
investments, sell assets and engage in certain
mergers and consolidations.
Use of Proceeds............ There will be no cash proceeds to the Issuers from
the exchange pursuant to the Exchange Offer. The
net proceeds from the Original Offering, together
with the initial borrowings under the New Credit
Facility, the DLJMB Equity Investment and the
issuance of the Debentures, were used to fund
payment of the cash portion of the Merger
Consideration, the Option Cash Proceeds and the
ESPP Cash Proceeds, to refinance outstanding
indebtedness of the Company and to pay the expenses
incurred in connection with the Merger. See "Use of
Proceeds."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered in connection with an investment in the New Senior Subordinated
Notes.
11
<PAGE> 13
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION
The summary historical consolidated financial data for and as of the end of
each of the years in the five-year period ended December 31, 1997 set forth
below have been derived from the audited consolidated financial statements of
the Company and its predecessor. The pro forma financial data for the
three-month period ended March 31, 1998 and the historical financial data for
the three-month period ended March 31, 1997 are derived from unaudited financial
statements. The unaudited financial statements include all adjustments,
consisting only of normal recurring adjustments, which the Company considers
necessary for a fair presentation of the financial position and the results of
operations for these periods. Operating results for the pro forma three-month
period ended March 31, 1998 are not necessarily indicative of the results that
may be expected for the entire year ending December 31, 1998. The data should be
read in conjunction with the historical consolidated financial statements of the
Company and its predecessor, and the related notes thereto, set forth elsewhere
herein.
The unaudited summary consolidated pro forma financial data of the Company
set forth below are based on historical consolidated financial statements of
Holdings as adjusted to give effect to certain transactions described below and
the Merger, including the Merger Financing and the application of the proceeds
thereof. The pro forma balance sheet data give effect to the Merger, including
the Merger Financing and the application of the proceeds thereof, as if it had
occurred on March 31, 1998. The pro forma statement of operations data for the
three-month period ended March 31, 1998 gives effect to the Merger and the
Merger Financing and the application of the proceeds thereof as if it had
occurred at the beginning of such period. The pro forma statement of operations
data for the twelve months ended March 31, 1998 give effect to the acquisition
of the welding division of Prestolite Power Corporation ("Arcsys"), which
occurred on September 26, 1997 (the "Arcsys Acquisition"), the acquisition of
certain assets of Woodland Cryogenics, Inc. ("Woodland"), which occurred on
November 25, 1997 (the "Woodland Acquisition"), and the Merger, including the
Merger Financing and the application of the proceeds thereof, as if they all had
occurred on April 1, 1997. The pro forma statement of operations data for the
twelve months ended March 31, 1998 and the three-month period ended March 31,
1998 have been derived as if the balance sheet of the Company at the beginning
of such period was the pro forma balance sheet as of March 31, 1998. The pro
forma adjustments are based upon available information and upon certain
assumptions that management believes are reasonable under the circumstances. The
pro forma financial data do not purport to represent what the Company's actual
results of operations or actual financial position would have been if the Arcsys
Acquisition, the Woodland Acquisition and the Merger, including the Merger
Financing and the application of the proceeds thereof, had occurred on such
dates or to project the Company's results of operations or financial position
for any future period or date.
In 1996, Holdings announced plans to sell, and in 1997 consummated the sale
of, its wear resistance business; in late 1995, Holdings announced its plans to
sell, and in 1996 consummated the sale of, its gas containment and floor
maintenance businesses. These businesses are accounted for as discontinued
operations in Holdings' Consolidated Financial Statements. The following data
should be read in conjunction with "Unaudited Condensed Consolidated Pro Forma
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Holdings' Consolidated Financial Statements and
Notes thereto, in each case included elsewhere herein.
12
<PAGE> 14
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
--------------------------------------------------------------------------------- ------------
TWELVE MONTHS
ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31, FISCAL YEARS ENDED DECEMBER 31, FISCAL YEAR
------------- ------------------------- ------------------------------------- ENDED
PRO FORMA PRO FORMA DECEMBER 31,
1998 1998 1997 1997 1996 1995 1994(1) 1993
------------- ----------- ----------- ------- ------- ------- ------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS DATA(2):
Net sales.................... $ 548.2 $ 131.8 $ 117.8 $ 520.4 $ 439.7 $ 316.8 $258.1 $ 248.3
Cost of goods sold........... 342.2 81.8 70.3 320.0 259.8 176.0 141.1 132.2
Selling, general and
administrative expenses.... 114.1 27.1 26.3 110.7 95.9 74.7 60.0 57.8
Amortization of
goodwill(3)................ 1.6 0.4 0.4 1.6 83.0 92.9 83.9 4.5
Amortization of
intangibles(4)............. 5.8 0.5 1.7 6.8 12.4 48.4 10.7 8.7
Net periodic postretirement
benefits................... 2.8 0.6 0.6 2.8 2.7 2.1 2.1 3.6
------- ------- ------- ------- ------- ------- ------ -------
Operating income (loss)...... 81.7 21.4 18.5 78.5 (14.1) (77.3) (39.7) 41.5
Interest expense............. 57.1 14.6 11.5 45.3 45.7 41.3 39.1 66.9
Other expense, net(5)........ 5.3 0.3 0.1 4.7 3.7 4.8 2.0 27.4
Income (loss) from continuing
operations available to
common..................... 8.7 3.3 3.9 15.1 (62.9) (313.8) (85.1) (53.4)
CONSOLIDATED BALANCE SHEET DATA
(AT PERIOD END):
Cash and cash equivalents.... $ 0.2 $ 0.2 $ 7.5 $ 1.5 $ 1.4 $ 1.8 $ 7.3 $ 15.0
Working capital(6)........... 123.6 123.6 121.4 88.5 67.6 52.3 81.5 65.8
Total assets................. 399.2 399.2 386.6 354.5 353.4 416.4 627.8 517.5
Total debt(7)................ 587.4 587.4 444.1 358.1 421.3 456.5 497.7 693.3
Total stockholders' equity
(deficit).................. (334.0) (334.0) (184.5) (162.8) (185.3) (132.2) 20.6 (307.9)
OTHER DATA:
Adjusted EBITDA(8)........... $ 105.8 $ 26.5 $ 24.0 $ 102.1 $ 95.7 $ 74.6 $ 62.7 $ 63.8
Adjusted EBITDA with cost
savings(9)................. 115.5 -- -- -- -- -- --
Depreciation................. 13.6 3.6 2.9 12.5 11.7 8.5 5.7 5.6
Capital expenditures......... 17.8 3.8 2.4 16.3 11.4 7.2 8.0 5.0
CREDIT RATIOS:
Adjusted EBITDA/interest
expense.................... 2.0x -- -- -- -- -- -- --
Total debt/Adjusted
EBITDA(10)................. 5.1 -- -- -- -- -- -- --
</TABLE>
- ---------------
(1) Represents the eleven-month period from February 1, 1994, the effective
date of the Company's comprehensive financial restructuring under Chapter
11 of the United States Bankruptcy Code (the "Restructuring"), through
December 31, 1994.
(2) See "Business -- Business Strategy" and the discussion under the caption
"Recent Events -- Acquisitions" in Note 2 to Holdings' Consolidated
Financial Statements for information concerning the Company's business
combinations occurring during the periods presented.
(3) In conjunction with the Restructuring, Holdings' assets and liabilities
were revalued at the effective date thereof. The assets and liabilities
were stated at their reorganization value. The portion of the
reorganization value not attributable to specific assets was amortized over
a three year period.
(4) Includes $33.0 million in 1995 related to the writedown of intangible
assets in accordance with Financial Accounting Standards Board Statement
No. 121.
(5) During 1993, nonrecurring charges of $18.9 million were recorded resulting
from writing off unamortized debt discount and deferred financing costs and
other costs related to the Restructuring.
(6) Excludes net assets of discontinued operations for 1995 and 1996.
(7) For 1993, includes liabilities subject to compromise of $466.2 million.
13
<PAGE> 15
(8) "Adjusted EBITDA" is defined as operating income plus depreciation,
amortization of goodwill, amortization of intangibles and net periodic
postretirement benefits expense and is a key financial measure but should
not be construed as an alternative to operating income or cash flows from
operating activities (as determined in accordance with generally accepted
accounting principles). Adjusted EBITDA is also one of the financial
measures by which the Company's compliance with its covenants is calculated
under its debt agreements. The Company believes that Adjusted EBITDA is a
useful supplement to net income (loss) and other consolidated income
statement data in understanding cash flows generated from operations that
are available for taxes, debt service and capital expenditures. However,
the Company's method of computation may or may not be comparable to other
similarly titled measures of other companies. In addition, Adjusted EBITDA
is not necessarily indicative of amounts that may be available for
discretionary uses and does not reflect any legal or contractual
restrictions on the Company's use of funds.
(9) "Adjusted EBITDA with cost savings" represents the pro forma 1997 Adjusted
EBITDA plus $10.2 million of anticipated cost savings and operational
enhancements. The components of these cost savings and operational
enhancements are set forth below.
<TABLE>
<CAPTION>
COST SAVINGS CATEGORY (IN MILLIONS)
--------------------- -------------
<S> <C>
Vendor rationalization and consolidation.................. $ 3.0
Manufacturing process and productivity improvements and
product design changes.................................. 1.8
Personnel rationalization and expense reductions.......... 1.6
Advertising and trade show expense reductions............. 0.5
Aircraft, charter and other travel expense reductions..... 2.0
Elimination of the annual sales meeting................... 1.3
-----
$10.2
=====
</TABLE>
(10) "Total debt" equals total long-term debt, including current maturities.
14
<PAGE> 16
RISK FACTORS
In addition to the other information set forth herein, prospective
investors should carefully consider the following information in evaluating the
Company and its business before making an investment in the New Senior
Subordinated Notes.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
The information herein contains forward-looking statements that involve a
number of risks and uncertainties. A number of factors could cause actual
results, performance, achievements of the Company, or industry results to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. These factors include,
but are not limited to: the competitive environment in the cutting and welding
industry in general and in the Company's specific market areas; changes in
prevailing interest rates and the availability of and terms of financing to fund
the anticipated growth of the Company's business; inflation; changes in costs of
goods and services; economic conditions in general and in the Company's specific
market areas; changes in or failure to comply with federal, state and/or local
government regulations; liability and other claims asserted against the Company;
changes in operating strategy or development plans; the ability to attract and
retain qualified personnel; the significant indebtedness of the Company; labor
disturbances; changes in the Company's acquisition and capital expenditure
plans; and other factors referenced herein. In addition, such forward-looking
statements are necessarily dependent upon assumptions, estimates and dates that
may be incorrect or imprecise and involve known and unknown risks uncertainties
and other factors. Accordingly, any forward-looking statements included herein
do not purport to be predictions of future events or circumstances and may not
be realized. Forward-looking statements can be identified by, among other
things, the use of forward-looking terminology such as "believes," "expects,"
"may," "will," "should," "seeks," "pro forma" or "anticipates," "intends" or the
negative of any thereof, or other variations thereon or comparable terminology,
or by discussions of strategy or intentions. Given these uncertainties,
prospective investors are cautioned not to place undue reliance on such
forward-looking statements. The Company disclaims any obligations to update any
such factors or to publicly announce the results of any revisions to any of the
forward-looking statements contained herein to reflect future events or
developments.
SUBSTANTIAL LEVERAGE; LIQUIDITY; STOCKHOLDER'S DEFICIT
In connection with the Merger and the Merger Financing, including the
application of the proceeds therefrom, the Company incurred a significant amount
of indebtedness. As of March 31, 1998, after giving pro forma effect to the
Merger, including the Merger Financing and the application of the proceeds
thereof, the Company would have had (i) total consolidated indebtedness of
approximately $587.4 million, (ii) $66.8 million of additional borrowings
available under the New Credit Facility and (iii) a stockholder's deficit of
$334.0 million. In addition, subject to the restrictions in the New Credit
Facility and the Indenture, the Company may incur significant additional
indebtedness, which may be secured, from time to time.
The level of the Company's indebtedness could have important consequences
to the Company, including: (i) limiting cash flow available for general
corporate purposes, including acquisitions, because a substantial portion of the
Company's cash flow from operations must be dedicated to debt service; (ii)
limiting the Company's ability to obtain additional debt financing in the future
for working capital, capital expenditures or acquisitions; (iii) limiting the
Company's flexibility in reacting to competitive and other changes in the
industry and economic conditions generally; and (iv) exposing the Company to
risks inherent in interest rate fluctuations because certain of the Company's
borrowings may be at variable rates of interest, which could result in higher
interest expense in the event of increases in interest rates.
The Company's ability to make scheduled payments of principal of, to pay
interest on or to refinance its indebtedness and to satisfy its other debt
obligations will depend upon its future operating performance, which will be
affected by general economic, financial, competitive, legislative, regulatory,
business and other factors beyond its control. The Company anticipates that its
operating cash flow, together with borrowings under the New Credit Facility,
will be sufficient to meet its anticipated future operating expenses, capital
expenditures
15
<PAGE> 17
and to service its debt requirements as they become due. However, if the
Company's future operating cash flows are less than currently anticipated it may
be forced, in order to meet its debt service obligations, to reduce or delay
acquisitions or capital expenditures, sell assets or reduce operating expenses,
including, but not limited to, investment spending such as selling and marketing
expenses, expenditures on management information systems and expenditures on new
products. If the Company were unable to meet its debt service obligations, it
could attempt to restructure or refinance its indebtedness or to seek additional
equity capital. There can be no assurance that the Company will be able to
effect any of the foregoing on satisfactory terms, if at all. In addition,
subject to the restrictions and limitations contained in the agreements relating
to the Merger Financing, the Company may incur significant additional
indebtedness to finance future acquisitions, which could adversely affect the
Company's operating cash flows and its ability to service its indebtedness. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS
The Indenture restricts, among other things, the Company's ability to incur
additional indebtedness, incur liens, pay dividends or make certain other
restricted payments, enter into certain transactions with affiliates, impose
restrictions on the ability of a Restricted Subsidiary to pay dividends or make
certain payments to the Company, merge or consolidate with any other person or
sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of the assets of the Company. In addition, the New Credit
Facility contains other and more restrictive covenants and prohibits the Company
from prepaying its other indebtedness (including the Senior Subordinated Notes).
See "Description of New Credit Facility" and "Description of New Senior
Subordinated Notes -- Repurchase at the Option of Holders." The New Credit
Facility requires the Company to maintain specified financial ratios and satisfy
certain other financial condition tests. The Company's ability to meet those
financial ratios and tests can be affected by events beyond its control, and
there can be no assurance that the Company will meet those tests. A breach of
any of these covenants could result in a default under the New Credit Facility
and/or the New Senior Subordinated Notes. Upon the occurrence of an event of
default under the New Credit Facility, the lenders could elect to declare all
amounts outstanding under the New Credit Facility to be immediately due and
payable. If the Company were unable to repay those amounts, the lenders could
proceed against the collateral granted to them to secure that indebtedness. If
the lenders under the New Credit Facility accelerate, there can be no assurance
that the assets of the Company would be sufficient to repay in full such
indebtedness and the other indebtedness of the Company, including the New Senior
Subordinated Notes. Substantially all of the Company's domestic assets are
pledged as security under the New Credit Facility. See "Description of New
Credit Facility."
SUBORDINATION; ASSET ENCUMBRANCES
The New Senior Subordinated Notes will be general unsecured obligations of
the Issuers and will be subordinated in right of payment to all existing and
future Senior Indebtedness of the Issuers, including all indebtedness under the
New Credit Facility. In addition, the Note Guarantee of each Guarantor will be
subordinated to the prior payment in full of all Senior Indebtedness of such
Guarantor (including such Guarantor's guarantee of the New Credit Facility) to
the same extent that the Senior Subordinated Notes are subordinated to Senior
Indebtedness of the Company. As of March 31, 1998, on a pro forma basis after
giving effect to the Merger, including the Merger Financing and the application
of the proceeds thereof, the Company and the Guarantors would have had
outstanding approximately $379.5 million of Senior Indebtedness, all of which
would have been secured borrowings, and approximately $66.8 million of
additional revolving borrowings available under the New Credit Facility. By
reason of such subordination, in the event of the insolvency, liquidation,
reorganization, dissolution or other winding-up of the Issuers or the Guarantors
or upon a default in payment with respect to, or the acceleration of, any Senior
Indebtedness, the holders of such Senior Indebtedness and any other creditors
who are holders of Senior Indebtedness and creditors of subsidiaries, if any,
must be paid in full before the Holders of the New Senior Subordinated Notes may
be paid. If the Issuers or the Guarantors incur any additional pari passu debt,
the holders of such debt would be entitled to share ratably with the Holders of
the New Senior Subordinated Notes in any proceeds distributed in connection with
any insolvency, liquidation, reorganization, dissolution or other winding-up of
the Issuers or
16
<PAGE> 18
the Guarantors. This may have the effect of reducing the amount of proceeds paid
to Holders of the New Senior Subordinated Notes. In addition, no cash payments
may be made with respect to the New Senior Subordinated Notes during the
continuance of a payment default with respect to Senior Indebtedness and, under
certain circumstances, for a period of up to 179 days if a non-payment default
exists with respect to Senior Indebtedness. In addition, holders of indebtedness
and other liabilities of the Company's subsidiaries that are not Guarantors will
have claims that are effectively senior to the New Senior Subordinated Notes. On
a pro forma basis after giving effect to the Merger, including the Merger
Financing and the application of the proceeds thereof, as of March 31, 1998, the
Company's non-Guarantor subsidiaries would have had approximately $87.0 million
of outstanding liabilities, including trade payables. See "Description of New
Senior Subordinated Notes -- Subordination."
HOLDING COMPANY STRUCTURE
The Company currently conducts substantially all of its business through
subsidiaries. The Company is dependent on the cash flow of its subsidiaries and
distributions thereof from its subsidiaries to the Company in order to meet its
debt service obligations. Subject to the provisions of the Indenture, future
borrowings by the Company's subsidiaries may contain restrictions or
prohibitions on the payment of dividends by such subsidiaries to the Company.
See "Description of New Senior Subordinated Notes -- Certain Covenants." In
addition, under applicable state law, subsidiaries of the Company may be limited
in the amount that they are permitted to pay as dividends on their capital
stock.
POSSIBLE INABILITY TO REPURCHASE NEW SENIOR SUBORDINATED NOTES UPON CHANGE OF
CONTROL
Upon the occurrence of a Change of Control, each Holder of New Senior
Subordinated Notes will have the right to require the Issuers to repurchase all
or any part of such Holder's New Senior Subordinated Notes at an offer price in
cash equal to 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any, thereon to the date of
repurchase. No assurance can be given that the Issuers will have sufficient
resources to satisfy their repurchase obligation with respect to the New Senior
Subordinated Notes following a Change of Control. See "Description of New Senior
Subordinated Notes -- Repurchase at the Option of Holders -- Change of Control."
The New Credit Facility prohibits the Issuers from purchasing the Senior
Subordinated Notes (except in certain limited amounts) and will also provide
that certain change of control events with respect to the Issuers will
constitute a default thereunder. Any future credit agreements or other
agreements relating to Senior Indebtedness to which the Issuers become a party
may contain similar restrictions and provisions. In the event a Change of
Control occurs at a time when the Issuers are prohibited from purchasing the New
Senior Subordinated Notes, the Issuers could seek the consent of its lenders to
the purchase of the New Senior Subordinated Notes or could attempt to refinance
the borrowings that contain such prohibition. If the Issuers do not obtain such
consent or repay such borrowings, the Issuers will remain prohibited from
purchasing the New Senior Subordinated Notes by the relevant Senior
Indebtedness. In such case, the Issuers' failure to purchase the tendered New
Senior Subordinated Notes would constitute an event of default under the
Indenture which would, in turn, constitute a default under the New Credit
Facility and could constitute a default under other Senior Indebtedness. In such
circumstances, the subordination provisions in the Indenture would likely
restrict payments to the Holders of the New Senior Subordinated Notes. See
"Description of New Senior Subordinated Notes -- Subordination."
CONTROL BY THE DLJMB FUNDS
Approximately 80.6% of the outstanding shares of Holdings Common Stock are
held by the DLJMB Funds. As a result of their stock ownership, the DLJMB Funds
control Holdings (and through Holdings, the Issuers) and have the power to elect
a majority of its directors, appoint new management and approve any action
requiring the approval of the holders of Holdings Common Stock, including
adopting certain amendments to Holdings' certificate of incorporation and
approving mergers or sales of all or substantially all of Holdings' assets. The
directors elected by the DLJMB Funds will have the authority to effect decisions
affecting the capital structure of Holdings, including the issuance of
additional capital stock, the implementa-
17
<PAGE> 19
tion of stock repurchase programs and the declaration of dividends. The
interests of the DLJMB Funds may differ from the interests of the holders of the
New Notes.
The general partners of each of the DLJMB Funds are affiliates or employees
of Donaldson, Lufkin & Jenrette, Inc. ("DLJ, Inc."). DLJ Capital Funding, which
acted as syndication agent for the New Credit Facility in connection with the
Merger, is also an affiliate of DLJ, Inc. DLJSC, which placed the Senior
Subordinated Notes and the Debentures, is also an affiliate of DLJ, Inc.
The existence of a controlling stockholder of Holdings is likely to have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from seeking to acquire, a majority of the
outstanding Holdings Common Stock. A third party would be required to negotiate
any such transaction with the DLJMB Funds and the interests of the DLJMB Funds
may be different from the interests of the holders of the New Senior
Subordinated Notes.
ACQUISITION GROWTH STRATEGY; MANAGEMENT AND FUNDING OF GROWTH
The Company has historically pursued an aggressive acquisition strategy,
completing six acquisitions from September 13, 1994 to December 31, 1997, and
expects to continue to pursue such a strategy to promote its growth. There are
various risks associated with pursuing a growth strategy of this nature. Any
future growth of the Company will require the Company to manage its expanding
domestic and international operations, integrate new businesses and adapt its
operational and financial systems to respond to changes in its business
environment, while maintaining a competitive cost structure. The acquisition
strategy of the Company will continue to place significant demands on the
Company and its management to improve the Company's operational, financial and
management information systems, to develop further the management skills of the
Company's managers and supervisors, and to continue to retain, train, motivate
and effectively manage the Company's employees. The failure of the Company to
manage its prior or any future growth effectively could have a material adverse
effect on the Company. There also can be no assurance that suitable acquisition
candidates will be available or that acquisitions can be completed on reasonable
terms.
Additionally, the Company's ability to maintain and increase its revenue
base and to respond to shifts in customer demand and changes in industry trends
will be partially dependent on its ability to generate sufficient cash flow or
obtain sufficient capital for the purpose of, among other things, financing
acquisitions, satisfying customer contractual requirements and financing
infrastructure growth. There can be no assurance that the Company will be able
to generate sufficient cash flow or that financing will be available on
acceptable terms (or permitted to be incurred under the terms of the Merger
Financing and any future indebtedness) to fund the Company's future growth.
CYCLICALITY AND MATURITY OF THE CUTTING AND WELDING INDUSTRY
The cutting and welding industry in the United States is a mature industry
that is cyclical in nature. The substitution of plastic, concrete and other
materials impacts the use of fabricated metal parts in many products and
structures. Increased offshore manufacturing by United States companies has
contributed to slow growth rates in the domestic manufacturing industry and in
turn has led to slower growth in the United States cutting and welding industry.
During periods of economic expansion the cutting and welding industry has grown
at double digit rates but has experienced contraction during periods of slowing
industrial activity. There can be no assurance that during future periods of
economic expansion the cutting and welding industry will experience the same
growth rates as it has in the past. Although the Company believes that its
exposure to cyclical downturns is moderated by its broad customer base and the
diversity of the industries it serves, cyclical downturns could have an adverse
effect on period-to-period results.
INTERNATIONAL MARKETS
The Company's growth strategy includes increasing the marketing of existing
products into Europe, Asia, Latin America and other developing economies.
However, there can be no assurance that the Company will be successful in its
expansion efforts.
18
<PAGE> 20
Approximately 42% of the Company's net sales in 1997 (including its United
States third party export sales) were made to purchasers located in foreign
countries. Because of its foreign operations, the Company's business is subject
to the currency risks of doing business abroad, including exchange rate
fluctuations and limits on repatriation of funds.
Additionally, as a result of the current downturn in the Asian economy,
there may be a decrease in infrastructure development in the Asian region or an
overall worldwide contraction of industrial development. The impact of decreased
development could have a material adverse effect on the Company's business,
financial condition or results of operations.
Further, many developing economies have a significant degree of political
and economic uncertainty. Social unrest, the absence of trained labor pools and
the uncertainty of entering into joint ventures or other partnership
arrangements with local organizations have slowed business activities in some
large developing economies. The political and economic uncertainties present in
these promising growth markets may adversely impact the Company's ability to
implement and achieve its foreign growth objectives.
COMPETITION
The cutting and welding industry is highly competitive. While the Company
believes it is one of only a few worldwide broad line manufacturers of both
cutting and welding equipment and consumable products, the Company competes in
each of its businesses with other broad line manufacturers and numerous smaller
competitors specializing in particular products.
While the Company has historically experienced little direct foreign
competition in the United States market, fluctuations in the value of the United
States dollar against other currencies could make the United States market more
attractive to foreign exporters.
The Company currently experiences substantial competition in the foreign
markets in which it competes.
DEPENDENCE ON KEY PERSONNEL
The Company's continued success depends, to a large extent, upon the
efforts and abilities of key managerial employees, particularly Holdings'
executive officers. See "Management." Although Holdings has employment
agreements with all of its executive officers, there can be no assurance that
such persons will remain in the employ of the Company. Competition for qualified
management personnel in the industry is intense. The loss of the services of
certain of these key employees or the failure to retain qualified employees when
needed could have a material adverse effect on the Company's business, financial
condition or results of operations. See "Executive Compensation -- Employment
Arrangements -- Employment Contracts." The Company does not currently maintain
key man life insurance.
ENVIRONMENTAL MATTERS
The Company's operations are subject to federal, state, local and foreign
laws and regulations relating to the storage, handling, generation, treatment,
emission, release, discharge and disposal of certain substances and wastes. As a
result, the Company is involved from time to time in administrative or legal
proceedings relating to environmental matters and has in the past and will
continue to incur capital costs and other expenditures relating to environmental
matters. Liability under environmental laws may be imposed on current and prior
owners and operators of property or businesses without regard to fault or to
knowledge about the condition or action causing the liability. The Company may
be required to incur costs relating to the remediation of properties, including
properties at which the Company disposes of waste, and environmental conditions
could lead to claims for personal injury, property damage or damages to natural
resources. The Company is aware of environmental conditions at certain
properties which it now or previously owned or leased which are undergoing
remediation and the Company has in the past and may in the future be named a
potentially responsible party ("PRP") at off-site disposal sites to which it has
sent waste.
The Company believes, based on current information, that any costs it may
incur relating to environmental matters will not have a material adverse effect
on its business, financial condition or its result of operations.
19
<PAGE> 21
There can be no assurance, however, that the Company will not incur significant
fines, penalties or other liabilities associated with noncompliance or clean-up
liabilities or that future events, such as changes in laws or the interpretation
thereof, the development of new facts or the failure of other PRPs to pay their
share will not cause the Company to incur additional costs that could have a
material adverse effect on its business, financial condition or results of
operations. See "Business -- Legal Proceedings and Environmental Matters."
ABSENCE OF PUBLIC MARKET
The Old Senior Subordinated Notes were issued on May 22, 1998, and the
Issuers are not aware that any active trading market for the Old Senior
Subordinated Notes has developed. The Issuers do not intend to apply for a
listing of the New Senior Subordinated Notes on a securities exchange or on any
automated dealer quotation system. If any of the New Senior Subordinated Notes
are traded after their issuance, they may trade at a discount from their initial
offering price, depending upon prevailing interest rates, the market for similar
securities and other factors, including general economic conditions and the
financial condition, performance of, and prospects for, the Company. There can
be no assurance as to the development of any market or liquidity of any market
that may develop for the New Senior Subordinated Notes. The liquidity of, and
trading markets for, the New Senior Subordinated Notes may also be adversely
affected by declines in the market for high yield securities generally.
YEAR 2000
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. The Company believes that its
internal systems are Year 2000 compliant or will be upgraded or replaced in
connection with previously planned changes to information systems prior to the
need to comply with Year 2000 requirements. However, the Company is uncertain as
to the extent its customers and vendors may be affected by Year 2000 issues that
require commitment of significant resources and may cause disruptions in the
customers' and vendors' businesses.
20
<PAGE> 22
USE OF PROCEEDS
The Issuers will not receive any cash proceeds from the exchange pursuant
to the Exchange Offer.
The proceeds from the sale of the Old Senior Subordinated Notes, after
deducting expenses of the Original Offering, including discounts to the Initial
Purchaser, were approximately $198.7 million. The proceeds from the Original
Offering, together with the borrowings under the New Credit Facility, the DLJMB
Equity Investment, and the issuance of Debentures were used to finance the
conversion into cash of approximately 95.7% of the shares of Holdings Common
Stock currently outstanding, to refinance the outstanding indebtedness of the
Company, fund payments of the Option Cash Proceeds and the ESPP Cash Proceeds,
and finance the expenses and fees incurred in connection with the Merger. See
"The Merger and Merger Financing." Approximately $547 million of the proceeds to
the Company from the initial borrowings under the New Credit Facility and the
Senior Subordinated Notes was dividended to Holdings to fund a portion of the
Cash Merger Consideration (as defined herein) and fees and expenses of Holdings
in connection therewith.
21
<PAGE> 23
CAPITALIZATION
The following table sets forth the historical consolidated capitalization
of the Company as of March 31, 1998, and on a pro forma basis to give effect to
the Merger, including the Merger Financing and the application of the proceeds
thereof, as if they had occurred on March 31, 1998. See "Use of Proceeds." The
information set forth below should be read in conjunction with the Company's
Unaudited Condensed Consolidated Pro Forma Financial Data, the Company's
Consolidated Financial Statements and the related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
----------------------------
HISTORICAL PRO FORMA(1)
---------- ------------
(IN MILLIONS)
<S> <C> <C>
Cash and cash equivalents.................................. $ 0.2 $ 0.2
======= =======
Total debt (including current portion):
New Credit Facility:
Revolving credit facility........................ -- $ 33.2
Term loan facility............................... -- 330.0
Capitalized lease obligations and other debt.......... $ 18.8 18.8
Outstanding subordinated notes........................ 179.3 --
Outstanding senior notes.............................. 99.3 --
Other existing debt................................... 73.1 --
Senior Subordinated Notes............................. -- 205.4
------- -------
Total debt....................................... 370.4 587.4
Shareholders' deficit...................................... (156.8) (334.0)
------- -------
Total capitalization....................................... $ 213.6 $ 253.4
======= =======
</TABLE>
- ---------------
(1) For a description of the pro forma adjustments, see the Notes to Unaudited
Condensed Consolidated Pro Forma Balance Sheet Data.
22
<PAGE> 24
SELECTED FINANCIAL DATA
The selected financial data for and as of each of the years in the
five-year period ended December 31, 1997 set forth below have been derived from
the audited Consolidated Financial Statements of the Company's predecessor,
Holdings. The historical financial data for the three-month periods ended March
31, 1998 and 1997 are derived from unaudited financial statements. The unaudited
financial statements include all adjustments, consisting only of normal
recurring adjustments, which the Company considers necessary for a fair
presentation of the financial position and the results of operations for these
periods. Operating results for the three-month period ended March 31, 1998 are
not necessarily indicative of the results that may be expected for the entire
year ending December 31, 1998. The data should be read in conjunction with the
historical consolidated financial statements of the Company and its predecessor,
and the related notes thereafter, set forth elsewhere herein. In 1996, Holdings
announced plans to sell, and in 1997 consummated the sale of, its wear
resistance business; in late 1995, Holdings announced its plans to sell, and in
1996 consummated the sale of, its gas containment and floor maintenance
businesses. These businesses are accounted for as discontinued operations in
Holdings' Consolidated Financial Statements. The selected financial data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Holdings' Consolidated Financial
Statements and Notes thereto, in each case included elsewhere herein.
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
----------------------------------------------------------------- ------------
THREE MONTHS ENDED FISCAL YEAR
MARCH 31, FISCAL YEARS ENDED DECEMBER 31, ENDED
------------------------- ------------------------------------- DECEMBER 31,
1998 1997 1997 1996 1995 1994(1) 1993
----------- ----------- ------- ------- ------- ------- ------------
(UNAUDITED) (UNAUDITED) (IN MILLIONS, EXCEPT FOR RATIO DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS DATA(2):
Net sales..................... $ 131.8 $117.8 $ 520.4 $ 439.7 $ 316.8 $ 258.1 $ 248.3
Cost of goods sold............ 81.8 70.3 320.0 259.8 176.0 141.1 132.2
Selling, general and
administrative expenses..... 27.1 26.3 110.7 95.9 74.7 60.0 57.8
Amortization of goodwill(3)... 0.4 0.4 1.6 83.0 92.9 83.9 4.5
Amortization of
intangibles(4).............. 0.5 1.7 6.8 12.4 48.4 10.7 8.7
Net periodic postretirement
benefits.................... 0.6 0.6 2.8 2.7 2.1 2.1 3.6
------- ------ ------- ------- ------- ------- -------
Operating income (loss)....... 21.4 18.5 78.5 (14.1) (77.3) (39.7) 41.5
Interest expense.............. 10.8 11.5 45.3 45.7 41.3 39.1 66.9
Other expense, net(5)......... 0.2 0.1 4.7 3.7 4.8 2.0 27.4
Income (loss) from continuing
operations available to
common...................... 5.8 3.9 15.1 (62.9) (131.8) (85.1) (53.4)
CONSOLIDATED BALANCE SHEET DATA
(AT PERIOD END):
Cash and cash equivalents..... $ 0.2 $ 7.5 $ 1.5 $ 1.4 $ 1.8 $ 7.3 $ 15.0
Working capital(6)............ 104.3 121.4 88.5 67.6 52.3 81.5 65.8
Total assets.................. 372.5 386.6 354.5 353.4 416.4 627.8 517.5
Total debt(7)................. 370.4 444.1 358.1 421.3 456.5 497.7 693.3
Total stockholders' equity
(deficit)................... (156.8) (184.5) (162.8) (185.3) (132.2) 20.6 (307.9)
OTHER DATA:
Adjusted EBITDA(8)............ $ 26.5 $ 24.0 $ 102.1 $ 95.7 $ 74.6 $ 62.7 $ 63.8
Depreciation.................. 3.6 2.9 12.5 11.7 8.5 5.7 5.6
Capital expenditures.......... 3.8 2.4 16.3 11.4 7.2 8.0 5.0
Ratio of earnings to fixed
charges(9).................. 1.9x 1.5x 1.6x -- -- -- --
</TABLE>
- ---------------
(1) Represents the eleven-month period from February 1, 1994, the effective date
of the Restructuring, through December 31, 1994.
(2) See "Business -- Business Strategy" and the discussion under the caption
"Recent Events -- Acquisitions" in Note 2 to Holdings' Consolidated
Financial Statements for information concerning the Company's business
combinations occurring during the periods presented.
23
<PAGE> 25
(3) In conjunction with the Restructuring, Holdings' assets and liabilities were
revalued at the effective date thereof. The assets and liabilities were
stated at their reorganization value. The portion of the reorganization
value not attributable to specific assets was amortized over a three year
period.
(4) Includes $33.0 million in 1995 related to the writedown of intangible assets
in accordance with Financial Accounting Standards Board Statement No. 121.
(5) During 1993, nonrecurring charges of $18.9 million were recorded resulting
from writing off unamortized debt discount and deferred financing costs and
other costs related to the Restructuring.
(6) Excludes net assets of discontinued operations for 1995 and 1996.
(7) For 1993, includes liabilities subject to compromise of $466.2 million.
(8) "Adjusted EBITDA" is defined as operating income plus depreciation,
amortization of goodwill, amortization of intangibles and net periodic
postretirement benefits expense and is a key financial measure but should
not be construed as an alternative to operating income or cash flows from
operating activities (as determined in accordance with generally accepted
accounting principles). Adjusted EBITDA is also one of the financial
measures by which the Company's compliance with its covenants is calculated
under its debt agreements. The Company believes that Adjusted EBITDA is a
useful supplement to net income (loss) and other consolidated income
statement data in understanding cash flows generated from operations that
are available for taxes, debt service and capital expenditures. However, the
Company's method of computation may or may not be comparable to other
similarly titled measures of other companies. In addition, Adjusted EBITDA
is not necessarily indicative of amounts that may be available for
discretionary uses and does not reflect any legal or contractual
restrictions on the Company's use of funds.
(9) For purposes of calculating the ratio of earnings to fixed charges, earnings
consist of income before income taxes plus fixed charges. Fixed charges
consist of interest expense, amortization of deferred financing costs and
one-third of the rent expense from operating leases, which management
believes is a reasonable approximation of the interest component of rent
expense. Earnings were not sufficient to cover fixed charges by $52.8
million, $80.8 million, $123.3 million and $63.5 million for the fiscal
years ended December 31, 1993, 1994, 1995 and 1996, respectively.
24
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Holdings'
Consolidated Financial Statements including the notes thereto.
This discussion contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors."
OVERVIEW
Thermadyne, through its subsidiaries, is engaged in the design, manufacture
and distribution of cutting and welding products and accessories. Since 1993,
the Company has embarked on a strategy designed to focus its business
exclusively on the cutting and welding industry and enhance the Company's market
position within that industry.
The Company divested three non-core businesses: the Coyne Cylinder Company
(1996), the Clarke floor maintenance business (1996) and the Deloro Stellite
wear resistance business (1997). In addition, since 1993, the Company acquired
six cutting and welding businesses, which businesses collectively generated
approximately $169 million in annual revenue at the respective times of
acquisition, in order to broaden the Company's product offerings and expand the
Company's worldwide geographic coverage. The acquisitions of Modern Engineering
Company (1994), C&G Systems Inc. (1995), Arcsys (1997), and Woodland (1997) all
added additional or complementary product lines to the Company's product
offering. The acquisition of Cigweld (1996), an Australian based manufacturer of
welding products, provided the Company with new product offerings as well as a
significant market position in Australia and New Zealand and positioned the
Company to effectively compete in the growing Asian market. The acquisition of
GenSet (1997), an Italian manufacturer of engine-driven welders, extended the
Company's product line globally and increased the Company's European presence.
Thermadyne plans to continue its focused acquisition strategy to acquire
businesses that augment its product offering and/or geographic coverage.
The Company's revenue is now generated entirely by the sale of cutting and
welding equipment, accessories and consumables. Consumables include tips,
electrodes, parts and other products that are required to be periodically
replaced. Consumable sales accounted for over 40% of total revenue in 1997 and
are expected to continue generating a significant percentage of revenue in the
future.
As a result of the Merger, the Company and Mercury incurred various costs
in connection with consummating the transaction. See Note 2 to the Unaudited
Condensed Consolidated Pro Forma Statement of Operations for a more detailed
explanation of these expenses. While the exact timing, nature and amount of
these costs have not yet been fully determined, the Company anticipates that a
significant one-time pretax charge will be recorded in its second fiscal
quarter. As a result of the foregoing, the Company expects to record a
significant net loss in its second fiscal quarter. Because this loss will result
directly from the one-time charge incurred in connection with the Merger, and
this charge will be funded entirely through the proceeds of the Merger
Financing, the Company does not expect this loss to materially impact its
liquidity, ongoing operations or market position.
COST REDUCTION INITIATIVES
Thermadyne strives to continually improve manufacturing efficiencies and
reduce unit costs. In December 1997, the Company implemented a cost reduction
program that includes the following principal elements: (i) vendor
rationalization and consolidation; (ii) manufacturing process and productivity
improvements and product design changes; (iii) personnel rationalization and
expense reductions; (iv) advertising and trade show expense reductions; (v)
aircraft, charter and other travel expense reductions; and (vi) elimination of
the annual sales meeting. These cost reduction initiatives are expected to
generate approximately $10 million in savings on an annualized basis. In
addition, the Company has initiated the implementation of a new global
25
<PAGE> 27
information system that is designed to allow the Company to further integrate
administrative functions and improve information flow across business unit
lines.
RESULTS OF OPERATIONS
The following discussion of results of operations is presented for the
fiscal years ended December 31, 1997, 1996 and 1995 and the three months ended
March 31, 1998 and 1997. The results of operations of the Company include the
operations of C&G, Cigweld, GenSet, Arcsys and Woodland from their respective
dates of acquisition.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31,
1997
Net Sales
Net sales were $131.8 million for the three months ended March 31, 1998
compared to $117.8 million for the three months ended March 31, 1997, an
increase of 12.0%. Domestic sales for the first three months of 1998 were up
20.3% (10.5% excluding acquisitions) over the first three months of 1997.
International sales increased approximately 1.0% overall despite the continuing
economic turmoil in Asia. Europe, Latin America and the Middle East regions all
recorded significant increases over the prior year.
Costs and Expenses
Cost of goods sold as a percentage of sales for the quarter ended March 31,
1998 was 62.0% compared to 59.7% for the quarter ended March 31, 1997. This
increase is the result of (i) recent acquisitions, which generally carry a
somewhat lower average gross margin than the Company's existing businesses, and
(ii) sales mix, as the Company expanded its product offering including items in
more price-competitive markets.
Selling, general and administrative expenses were $27.1 million for the
first three months of 1998, an increase of $0.8 million, or 3.0% over the first
three months of 1997. As a percentage of sales, selling, general and
administrative expenses were 20.5% for the three months ended March 31, 1998 and
22.3% for the three months ended March 31, 1997. This improvement is due in part
to the Company's growth in sales, as well as the realization of savings from a
cost reduction program the Company initiated in December 1997.
Interest expense decreased from $11.5 million in the first quarter of 1997
to $10.8 million in the first quarter of 1998, a decrease of $0.7 million or
6.1%. This decrease is largely the result of lower debt levels in 1998 compared
to 1997.
Income tax provision was $4.6 million on pre-tax income of $10.4 million
for the three months ended March 31, 1998, compared to an income tax provision
of $3.0 million on pre-tax income of $6.9 million for the three months ended
March 31, 1997.
Adjusted EBITDA
Adjusted EBITDA was $26.5 million for the quarter ended March 31, 1998,
compared to $24.0 million for the quarter ended March 31, 1997, an increase of
$2.5 million or 10.5%.
FISCAL 1997 COMPARED TO FISCAL 1996
Net Sales
Net sales from continuing operations for the year ended December 31, 1997
were $520.4 million, compared to net sales of $439.7 million for the year ended
December 31, 1996, an increase of $80.7 million, or 18.4%. Domestic and
international sales increased 12.0% and 28.3%, respectively in 1997. Included in
net sales for the year ended December 31, 1997 are sales of $32.9 million
related to GenSet, which was acquired effective February 1, 1997, $5.6 million
related to Arcsys, which was acquired on September 26, 1997 and $0.2 million
related to Woodland, which was acquired on November 25, 1997. Excluding sales
from these acquired companies, net sales from continuing operations increased
$42.0 million, or 9.6%. New product
26
<PAGE> 28
introductions and the addition of products through acquisition have been the
most significant growth factors in domestic sales. Success with new marketing
programs and with sales through alternate channels have also contributed to this
increase. Sales in international markets have increased as a result of strategic
initiatives in Asia and Latin America, and the addition of sales personnel.
Costs and Expenses
Cost of goods sold from continuing operations as a percentage of sales for
the year ended December 31, 1997 was 61.5% compared to 59.1% for the year ended
December 31, 1996. This change is largely due to the 1997 acquisitions as these
new product lines have lower average gross margins than the blended margin in
the Company's existing businesses. Excluding the effect of the 1997
acquisitions, cost of goods sold as a percentage of sales would have been 59.9%.
Selling, general and administrative expenses from continuing operations
increased 15.4% to $110.7 million for the year ended December 31, 1997 from
$95.9 million for the year ended December 31, 1996. The 1997 acquisitions added
$4.6 million of this $14.8 million increase. The remainder of this increase is
mostly the result of spending in Asia and Latin America related to internal
infrastructure and business development as the Company pursues increased market
share in these regions. As a percentage of sales, selling, general and
administrative expenses from continuing operations decreased to 21.3% for the
year ended December 31, 1997 from 21.8% for the year ended December 31, 1996.
Amortization of goodwill decreased $81.4 million to $1.6 million for the
year ended December 31, 1997 from $83.0 million for the year ended December 31,
1996. Goodwill amortization in 1997 relates to acquisitions since the Company's
1994 financial reorganization. In 1996, goodwill recorded in connection with the
reorganization was reduced, in part, by the initial recognition of certain
deferred tax assets existing on the effective date of the Company's
comprehensive financial restructuring and the remaining amount associated with
the reorganization became fully amortized. Amortization of other intangibles
decreased from $12.4 million to $6.8 million for the years ended December 31,
1996 and 1997, respectively. This $5.6 million, or 45.3%, decrease results from
the initial recognition of the net deferred tax asset as well as adjustments
during 1997 resulting from the recognition of net operating loss carryforward
benefits and the sale of the wear resistance business.
Interest expense was essentially the same for 1997 as in 1996, even though
the Company's overall debt level decreased $63.3 million over the course of the
year. This is due to the acquisition of GenSet in February 1997 which resulted
in a higher overall debt balance the first nine months of the year. Cash
proceeds from the sale of discontinued operations were used to reduce debt at
the end of the third quarter of 1997.
Income tax expense was $13.5 million for the year ended December 31, 1997
compared to an income tax benefit of $0.5 million for the year ended December
31, 1996. The income tax benefit recorded in the fourth quarter of 1996 includes
a $13.8 million income tax benefit resulting from the initial recognition of the
Company's net deferred tax asset. The Company's decision to record the net
deferred tax asset was based on an analysis of actual taxable income in the
available carryback period and taxable income expected to be generated in the
succeeding three years. Based on this analysis, the Company believes that it is
more likely than not that the recorded net deferred tax asset will be realized.
Adjusted EBITDA
Adjusted EBITDA from continuing operations was $102.1 million and $95.7
million for the years ended December 31, 1997 and 1996, respectively. As a
percentage of sales, Adjusted EBITDA was 19.6% for the year ended December 31,
1997 compared to 21.8% for the year ended December 31, 1996. For a description
of the term "Adjusted EBITDA," see Note 9 to "Summary -- Summary Historical and
Unaudited Pro Forma Condensed Consolidated Financial Information."
27
<PAGE> 29
Recent Accounting Pronouncements
As of January 1, 1998, the Company adopted FASB Statement 130, "Reporting
Comprehensive Income" ("Statement 130"). Statement 130 establishes new rules for
the reporting and display of comprehensive income and its components; however,
the adoption of this Statement had no impact on the Company's net income or
shareholder's equity. Statement 130 requires foreign currency translation
adjustments, which prior to adoption were reported separately in shareholder's
equity, to be included in other comprehensive income. Prior year financial
statements have been reclassified to conform to the requirements of Statement
130.
In June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("FASB 131"), which requires
publicly-held companies to report financial and descriptive information about
its operating segments in financial statements issued to shareholders for
interim and annual periods. The statement also requires additional disclosures
with respect to products and services, geographical areas of operations, and
major customers. FASB 131 is effective for fiscal years beginning after December
15, 1997 and requires restatement of earlier periods presented. The Company is
evaluating the impact of adopting this standard.
FISCAL 1996 COMPARED TO FISCAL 1995
Net Sales
Net sales from continuing operations were $439.7 million for the year ended
December 31, 1996, representing an increase of $123.0 million, or 38.8%, over
comparable net sales for the year ended December 31, 1995. This increase
includes $100.2 million related to Cigweld, which was acquired effective
February 1, 1996. Excluding the effects of Cigweld, net sales from continuing
operations increased $22.8 million, or 7.2%, over 1995. This growth was realized
over all of the Company's key product lines and was the result of emphasis on
new product development, sales force expansion and increasing the Company's
international presence. The Company's overall sales increase came from domestic
growth of 7.5% and an increase in international business of 154.4% including the
effects of Cigweld. Sales have increased in all the Company's major
international markets, particularly Asia and Latin America which are two of the
key geographic areas the Company has targeted for growth.
Costs and Expenses
Cost of goods sold from continuing operations for the year ended December
31, 1996 was 59.1% of sales, which compares to 55.5% of sales for the year ended
December 31, 1995. This increase in percent of sales was expected upon
completion of the acquisition of Cigweld as the average gross margin on Cigweld
products is lower than the Company's existing businesses' blended margin.
Excluding the effect of Cigweld, cost of goods sold would have been 54.6% of
sales with the improvement over 1995 due primarily to a more favorable sales
mix.
Selling, general and administrative expenses from continuing operations
increased $21.2 million, or 28.4%, to $95.9 million for the year ended December
31, 1996. The acquisition of Cigweld accounts for $17.2 million of this
increase. As a percentage of sales, selling, general and administrative expenses
were 21.8% for the 12 months ended December 31, 1996 compared to 23.6% for the
twelve months ended December 31, 1995.
Amortization of other intangibles has decreased from 1995 due to the early
adoption of Financial Accounting Standards Board Statement No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," during the fourth quarter of 1995, which resulted in a writedown of those
assets of approximately $33.0 million.
Interest expense increased $4.4 million to $45.7 million for the year ended
December 31, 1996 from $41.3 million for the year ended December 31, 1995. This
increase results primarily from debt incurred in the acquisition of Cigweld.
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A tax benefit of $0.5 million was reported for the year ended December 31,
1996 compared to tax expense of $8.5 million reported for the year ended
December 31, 1995. In the fourth quarter of 1996, the Company reevaluated the
realizability of its net deferred tax asset, and consequently, recorded a $13.8
million reduction in income tax expense. The Company's decision to record the
net deferred tax asset was based on an analysis of actual taxable income in the
available carryback period and taxable income expected to be generated in the
succeeding three years. Based on this analysis, the Company believes that it is
more likely than not that the recorded net deferred tax asset will be realized.
Adjusted EBITDA
Adjusted EBITDA from continuing operations was $95.7 million for the twelve
months ended December 31, 1996 compared to $74.6 million for the twelve months
ended December 31, 1995. As a percentage of sales, Adjusted EBITDA was 21.8% for
the year ended December 31, 1996, compared to 23.6% for 1995. Excluding Cigweld
the Adjusted EBITDA percentage for 1996 would have been 24.8%.
Discontinued Operations
Excluding the effects of accounting for the wear resistance business as
discontinued operations, net sales and Adjusted EBITDA for the twelve months
ended December 31, 1996, were $546.1 million and $110.5 million, respectively,
increases of 31.9% and 24.4%, respectively, over the twelve months ended
December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital and Cash Flows. Cash used in operating activities was $9.1
million for the first quarter of 1998, a decrease of $12.0 million from the
first quarter of 1997, in which cash flow from operations provided $2.9 million.
This use of cash by operating activities is the result of a net increase in
operating assets and liabilities of $12.9 million. Net cash used in investing
activities decreased from $22.2 million in the first quarter of 1997 to $4.7
million in the first quarter of 1998. Cash used for acquisitions decreased $27.1
million and was offset by an increase in capital expenditures of $1.4 million
and a decrease in cash provided by other assets of $8.9 million. Cash provided
by financing activities decreased $12.9 million to $12.6 million for the quarter
ended March 31, 1998 from $25.4 million for the quarter ended March 31, 1997.
Net borrowings of long-term debt decreased $12.0 million in a comparison of
these same periods. In addition, the accounts receivable securitization program
provided $4.3 million less in the first three months of 1998 compared to 1997,
while financing activities of discontinued operations and other financing
activities used $1.2 million and $2.0 million less in the first quarter of 1998,
respectively.
Cash provided by operating activities was $15.0 million for the year ended
December 31, 1997 compared to $21.5 million for the year ended December 31,
1996. This decrease in cash provided by operating activities is the result of a
net increase in operating assets and liabilities in 1997 compared to 1996 of
$7.3 million, partially offset by an increase in earnings (adjusted for noncash
expenses) of $0.8 million in 1997 over 1996. Net cash provided by investing
activities was $36.8 million in 1997 compared to $18.7 million in 1996. Cash
used for acquisitions decreased $36.1 million and cash proceeds from the sale of
discontinued operations decreased $23.8 million in 1997 compared to 1996. In
addition, cash used for capital expenditures increased $4.9 million and other
assets provided $8.6 million more in 1997. Net cash used in financing activities
was $51.7 million for the year ended December 31, 1997, an increase of $11.1
million over the use of $40.6 million for the year ended December 31, 1996. The
net repayment of long-term obligations was $28.1 million higher in 1997 than in
1996. This was partially offset by an increase in cash provided by the accounts
receivable securitization of $15.6 million and a decrease in cash used by
financing fees of $3.9 million in the year ended December 31, 1997 compared to
the same period of 1996.
Capital Expenditures. The Company had $16.3 million of capital expenditures
related to continuing operations in 1997. The New Credit Facility contains
restrictions on the Company's ability to make capital expenditures. Based on
present estimates, management believes that the amount of capital expenditures
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<PAGE> 31
permitted to be made under the New Credit Facility will be adequate to maintain
the properties and businesses of the Company's continuing operations.
Liquidity. The Company's principal sources of liquidity are cash flow from
operations and borrowings under the New Credit Facility. The Company's principal
uses of cash will be debt service requirements, capital expenditures,
acquisitions and working capital. The Company expects that ongoing requirements
for debt service, capital expenditures and working capital will be funded from
operating cash flow and borrowings under the New Credit Facility. In connection
with future acquisitions, the Company may require additional funding which may
be provided in the form of additional debt, equity financing or a combination
thereof. There can be no assurance that any such additional financing will be
available to the Company on acceptable terms.
The Company incurred substantial indebtedness in connection with the Merger
and the Merger Financing. On a pro forma basis, after giving effect to the
Merger, the Merger Financing and the application of the proceeds thereof, the
Company would have had approximately $587.4 million of indebtedness outstanding
as of March 31, 1998 as compared to $370.4 million of indebtedness outstanding
as of March 31, 1998 on a historical basis. In addition, on the same pro forma
basis, the Company would have a stockholders' deficit of $334.0 million at March
31, 1998 as compared to a stockholders' deficit of $156.8 million as of March
31, 1998 on a historical basis. The Company's significant debt service
obligations following the Merger could, under certain circumstances, have
material consequences to security holders of the Company. See "Risk Factors."
In connection with the Merger, Mercury raised approximately $140 million
through the issuance of approximately 2,608,696 shares of Mercury Common Stock,
2,000,000 shares of Mercury Preferred Stock and the DLJMB Warrants to purchase
353,428 shares of Mercury Common Stock at an exercise price of $0.01 per share,
and approximately $94.6 million aggregate gross proceeds of the Debentures. As a
result of the Merger, the proceeds from the sale of such securities became an
asset of Holdings, each share of Mercury Common Stock became a share of Holdings
Common Stock, each share of Mercury Preferred Stock became a share of Holdings
Preferred Stock, each DLJMB Warrant by its terms became exercisable for an equal
number of shares of Holdings Common Stock and Holdings succeeded to the
obligations of Mercury with respect to the Debentures. In addition, the Company
raised approximately $205.4 million through the issuance of the Senior
Subordinated Notes and $430 million through the New Credit Facility. In
addition, in connection with the Merger, certain members of senior management
purchased 143,192 shares of Holdings Common Stock for approximately $4.9 million
through the Management Share Purchase, of which approximately $3.6 million was
provided through the Management Loans.
The term loan facility under the New Credit Facility consists of (i) a $100
million Term A loan, (ii) a $115 million Term B loan and (iii) a $115 million
Term C loan. The Term A loan will mature six years after the closing date, the
Term B Loan will mature seven years after the closing date and the Term C loan
will mature eight years after the closing date. The New Credit Facility also
includes a $100 million revolving credit facility, which is subject to increase
by up to $25 million upon request by the Company and that will terminate six
years after the closing date.
Borrowings under the New Credit Facility generally will bear interest based
on a margin over, at the Company's option, the base rate or LIBOR. The
applicable margin will vary based on the Company's ratio of consolidated
indebtedness to adjusted EBITDA. The Company's obligations under the New Credit
Facility will be secured by substantially all of the assets of the Company,
including a pledge of the capital stock of all of its subsidiaries, subject to
certain limitations with respect to foreign subsidiaries. In addition, Holdings
has guaranteed the obligations of the Company under the New Credit Facility.
Such guarantee is only recourse to Holdings' pledge of all of the outstanding
capital stock of the Company to secure the Company's obligations under the New
Credit Facility. The New Credit Facility contains customary covenants and events
of default including substantial restrictions on the Company's ability to make
dividends or other distributions to Holdings.
The Debentures were issued by Mercury, became obligations of Holdings
following the Merger and are not guaranteed by the Company or any of its
consolidated subsidiaries. The Debentures will mature in 2008
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<PAGE> 32
and will not require cash interest payments until 2003. The Debentures contain
customary covenants and events of default, including covenants that limit the
ability of the Company and its subsidiaries to incur debt, pay dividends and
make certain investments.
The Senior Subordinated Notes were issued by the Issuers and are guaranteed
by certain of the Company's domestic subsidiaries. The Senior Subordinated Notes
will mature in 2008. Interest on the Senior Subordinated Notes will be payable
semiannually in cash. The Senior Subordinated Notes contain customary covenants
and events of default, including covenants that limit the ability of the Company
and its subsidiaries to incur debt, pay dividends and make certain investments.
The Company anticipates that its operating cash flow, together with
borrowings under the New Credit Facility, will be sufficient to meet its
anticipated future operating expenses, capital expenditures and to service its
debt requirements as they become due. However, the Company's ability to make
scheduled payments of principal of, to pay interest on or to refinance its
indebtedness and to satisfy its other debt obligations will depend upon its
future operating performance, which will be affected by general economic,
financial, competitive, legislative, regulatory, business and other factors
beyond its control. See "Risk Factors."
EFFECT OF INFLATION; SEASONALITY
Inflation has not been a material factor affecting the Company's business.
In recent years, the cost of electronic components has remained relatively
stable due to competitive pressures within the industry, which has enabled the
Company to contain its service costs. The Company's general operating expenses,
such as salaries, employee benefits, and facilities costs, are subject to normal
inflationary pressures.
The operations of the Company are generally not subject to seasonal
fluctuations.
YEAR 2000 COMPLIANCE
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. The Company believes that its
internal systems are Year 2000 compliant or will be upgraded or replaced in
connection with previously planned changes to information systems prior to the
need to comply with Year 2000 requirements. However, the Company is uncertain as
to the extent its customers and vendors may be affected by Year 2000 issues that
require commitment of significant resources and may cause disruptions in the
customers' and vendors' businesses.
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BUSINESS
OVERVIEW
Thermadyne is a leading global manufacturer of cutting and welding products
and accessories. The Company manufactures a broad range of gas (oxy-fuel) and
electric arc cutting and welding products that are ultimately sold to end-user
customers principally engaged in the aerospace, automotive, construction, metal
fabrication, mining, mill and foundry, petroleum and shipbuilding industries.
Thermadyne sells its products through a long-established domestic network of
approximately 1,100 independent distributors who market Thermadyne products to
over 10,000 end-user customers. For the twelve months ended March 31, 1998, the
Company's net sales and Adjusted EBITDA, on a pro forma basis, were $548.2
million and $115.5 million, respectively.
The Company's core products enjoy leading brand recognition, a reputation
for quality and strong market positions. In 1994, following the Company's
comprehensive financial restructuring under chapter 11 of the United States
Bankruptcy Code (the "Restructuring"), current management initiated a series of
transactions to focus the Company's business exclusively on the cutting and
welding industry. As part of this strategy, the Company divested three non-core
businesses: the Clarke floor maintenance business (1996); the Coyne Cylinder
Company (1996); and the Deloro Stellite wear resistance business (1997). In
addition, the Company initiated an acquisition strategy, purchasing six cutting
and welding products businesses since the Restructuring, which businesses
collectively generated approximately $169 million in annual revenues at the
respective times of acquisition. The acquisitions of cutting and welding
businesses provided, and will continue to provide, an opportunity for Thermadyne
to expand distribution of existing product lines into new geographic regions and
to sell acquired product lines through Thermadyne's existing distribution
network. As a result of this repositioning strategy, along with ongoing new
product introductions, an extensive distribution network and market leading
brands, the Company has achieved a compound annual growth in net sales and
Adjusted EBITDA of 20.3% and 12.5%, respectively, from 1993 to 1997.
According to the United States Department of Commerce, domestic welding
industry revenues totaled over $3.6 billion in 1997. The domestic industry has
grown at an annual rate of 5.9% since 1989 and is expected to grow 4.2% in 1998.
Global welding industry revenues are estimated to total over $10.0 billion and
management believes that growth in the international market has been faster than
the domestic market, driven, in large part, by infrastructure spending in
developing markets. International markets, including Australia and Italy,
represented approximately 42% of the Company's net sales in 1997, up from
approximately 20% of net sales in 1994. Although the industry has begun to
experience global consolidation, it continues to be very fragmented.
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RECENT ACQUISITIONS
The following table sets forth certain information with respect to the
Company's recent acquisitions:
<TABLE>
<CAPTION>
YEAR ANNUAL
TARGET ACQUIRED PRINCIPAL PRODUCTS REVENUE(1)
------ -------- ------------------ -------------
(IN MILLIONS)
<S> <C> <C> <C>
Modern Engineering Company,
Inc............................ 1994 Oxy-fuel gas apparatus $ 3.0
C&G Systems, Inc................. 1995 Cutting tables 2.5
Duxtech Pty. Limited (Cigweld)... 1996 Electric arc products, oxy-fuel 100.1
products, filler metals, gas
control products and safety
products
GenSet S.p.A..................... 1997 Engine-driven welders and 38.1
generators
Prestolite Power Corporation
Welding Division (Arcsys)...... 1997 Arc welders, plasma welders and 20.3
wire feeders
Woodland Cryogenics, Inc......... 1997 Cryogenic pumps, ambient and 4.6
electric vaporizers and automatic
cylinder filling systems
------
Total......................................................................... $168.6
======
</TABLE>
- ---------------
(1) Estimated annual revenue at the respective times of acquisition.
COMPETITIVE STRENGTHS
Thermadyne possesses a number of competitive strengths that have allowed it
to develop and maintain a strong position within the cutting and welding
industry, including the following:
Market Leading Brands. Management believes that the strength and longevity
of the numerous Thermadyne brand names create a significant competitive
advantage and position Thermadyne as one of the leaders in the cutting and
welding industry. Each of the Company's major divisions maintains
industry-leading brand names with significant market shares. Management believes
that VICTOR(R), founded in 1913, is the leading brand name in domestic
gas-operated cutting and welding torches and equipment; TWECO(R), founded in
1936, is the leading domestic manufacturer of MIG and manual welding torches;
ARCAIR(R) is the leading domestic brand name of TIG torch and accessory
products; THERMAL DYNAMICS(R), founded in 1957, is a leading domestic
manufacturer of manual plasma cutting products; and CIGWELD(R), founded in 1922,
is the leading brand name in the Australia/New Zealand cutting and welding
products market. Each of the manufacturing operations associated with these
brands is ISO-9000 series certified.
Diverse and Stable Customer Base. The Company's customer base includes
cutting and welding product distributors as well as end-user customers
principally engaged in the aerospace, automotive, construction, metal
fabrication, mining, mill and foundry, petroleum and ship building industries.
No one customer accounted for more than 9% of the Company's 1997 net sales.
Further, the Company's top 20 customers have been associated with the Company
for an average of over 10 years.
Established, Effective Distribution Channels. The Company believes that its
strong, established and long-standing relationships with over 1,100 independent
cutting and welding products distributors in the United States provide a
significant competitive advantage and support the Company's strong market
position. Thermadyne's domestic distributor relationships are maintained by 11
area business managers who oversee the Company's relationships with large
distributors and by separate product-specific sales forces for each of
Thermadyne's business units. Management believes that this unique structure,
which combines relationship managers with technically trained product
specialists, will enable the Company to more effectively maintain and utilize
its distributor networks. Management also believes that this established
distribution network enables the Company to achieve market penetration when
introducing newly developed or acquired products.
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Proven and Committed Senior Management Team. Thermadyne's management team
has repositioned the Company over the past four years to focus exclusively in
its core cutting and welding markets. This repositioning was accomplished
through divestitures of non-core assets and acquisitions of strategic businesses
or product lines. In addition, through aggressive new product development and
acquisition strategies, the management team has positioned the Company to
realize a 20.3% compound annual growth rate in net sales from 1993 to 1997. In
connection with the Merger each member of the senior management team signed an
employment contract with the Company. Additionally, the Company adopted an
incentive plan to tie each member of senior management's compensation to the
Company's financial performance. See "Executive Compensation."
BUSINESS STRATEGY
Thermadyne has developed a business strategy designed to enhance its strong
market positions and continue to improve its growth and profitability. The
primary elements of the Company's business strategy are as follows:
Continue New Product Development and Enhancement. The foundation for
Thermadyne's strong market positions and leading brand names is the development
and introduction of new products and enhancements of existing products. The
Company believes it is at the forefront of cutting and welding technology with a
proven track-record of continual new product introductions and existing product
enhancements that have resulted in more than 262 issued or pending United States
and foreign patents. New products and product enhancements are designed to add
value for customers, including enhanced safety features, improved productivity
and ergonomics and an improved welding environment. Examples of recent new
product introductions include robotic welding systems and accessories,
high-purity instrumentation, automated plasma cutting and safety products as
well as underwater cutting electrodes. During 1997, the Company introduced over
135 new products or product enhancements, and the Company expects to continue
this effort in the future.
Expand Strategic Acquisitions. The Company has completed six acquisitions
since 1993, which collectively generated approximately $169 million in annual
revenues at the respective times of acquisition, including over $135 million of
revenues for Australia and Italy. The Company believes that numerous acquisition
candidates exist globally, and the Company intends to continue to seek new
acquisition opportunities in its cutting and welding business. Thermadyne
intends to continue its focused acquisition strategy that includes the following
principal elements: (i) entering and expanding in geographic areas where the
Company does not currently have a significant presence through acquisitions of
local cutting and welding businesses and (ii) expanding in geographic areas
where the Company currently maintains a strong presence through the acquisition
of complementary product lines.
Leverage Existing Distribution Network. The Company intends to leverage its
existing distribution network through the acquisition or introduction of new
products and product enhancements. Management believes that when the Company
acquires a local presence in a new geographic area, it can utilize the acquired
distribution network to sell existing Thermadyne brands into that local market.
In addition, the Company believes that significant opportunities exist to
purchase complementary product lines and expand its business by selling the new
product lines through Thermadyne's extensive distribution network. For example,
through recent acquisitions the Company has expanded its offering of filler
metals, conventional arc welding power supplies, safety equipment and
engine-driven welding power sources and began marketing such products through
its established distribution network. The Company intends to continue this
strategy of penetrating new welding product markets by leveraging its extensive
distribution network in conjunction with its new product development and focused
acquisition strategies.
Broaden International Presence. Thermadyne has maintained an international
presence for over 30 years and continues to broaden its presence throughout the
world. International sales accounted for approximately 42% of net sales in 1997
as compared to approximately 20% in 1994. The Company has established a
dedicated international market presence and maintains the leading position in
Australia/New Zealand and significant and growing positions in Europe, Asia and
Latin America. Management intends to continue the
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<PAGE> 36
expansion of its strong domestic brand names into the international market and
to continue to penetrate the growing Asian and Latin American cutting and
welding markets.
Continue Cost Reduction Efforts. Thermadyne strives to continually improve
manufacturing efficiencies and reduce unit costs. In December 1997, the Company
implemented a cost reduction program that includes the following principal
elements: (i) vendor rationalization and consolidation; (ii) manufacturing
process and productivity improvements and product design changes; (iii)
personnel rationalization and expense reductions; (iv) advertising and trade
show expense reductions; (v) aircraft, charter and other travel expense
reductions; and (vi) elimination of the annual sales meeting. In addition, the
Company has initiated the implementation of a new global information system that
is designed to allow the Company to further integrate administrative functions
and improve information flow across business unit lines.
Continue Dedicated Customer Service. The Company believes that effective
and proactive customer service has enabled the Company to build and maintain its
leading market positions and strong distributor relationships. Management plans
to continue this strategy of enhancing distributor and end-user relationships
through continuous customer service improvements. Each of Thermadyne's divisions
maintains a dedicated, well trained, technically oriented and product-specific
sales and customer service team. Management believes that the dedicated product
teams provide Thermadyne with a significant competitive advantage. In addition,
to further improve customer service, the Company has implemented a national
accounts team of 11 area business managers to support the dedicated product
sales and service teams and further support sales to the Company's key
distributors.
PRINCIPAL PRODUCTS
The Company manufactures a broad range of both gas (oxy-fuel) and arc
cutting and welding equipment (including a line of advanced plasma arc cutting
systems and oxy-fuel apparatus), accessories and consumables, including repair
parts. Over 40% of the Company's 1997 net sales were derived from the sale of
consumables and repair parts. Gas cutting and welding torches burn a mixture of
oxygen and fuel gas, typically acetylene. Arc cutting and welding systems are
powered by electricity. The major arc cutting and welding systems are plasma,
stick, MIG and TIG. Arc technology is more sophisticated than gas technology and
can be used on more types of metals. In addition, arc equipment produces less
distortion in the surrounding metal and it cuts and welds faster, reducing labor
costs. However, gas technology is more portable and generally less expensive
than arc technology and therefore remains important in many industries.
The Company conducts its operations through the following subsidiaries:
Thermal Dynamics -- Plasma Arc Cutting Products. Thermal Dynamics
Corporation ("Thermal Dynamics"), located in West Lebanon, New Hampshire and
founded in 1957, developed many of the early plasma cutting systems and
maintains its position as a leading manufacturer of plasma cutting systems and
replacement parts. Thermal Dynamics' product line ranges from a portable 20 amp
unit to large 1000 amp units. Thermal Dynamics' end-users are engaged primarily
in fabrication and repair of sheet metal and plate products found in fabricated
structural steel and non-ferrous metals, automotive products, appliances, sheet
metal, HVAC, general fabrication, shipbuilding and general maintenance.
Advantages of the plasma cutting process over other methods include faster
cutting speeds, the ability to cut ferrous and non-ferrous alloys and minimum
heat distortion on the material being cut. Plasma cutting also permits metal
cutting using only compressed air and electricity.
Tweco -- Electric Arc Products and Arc Gouging Systems. Tweco Products,
Inc. ("Tweco"), located in Wichita, Kansas and founded in 1936, manufactures a
line of arc welding replacement parts and accessories, including electrode
holders, ground clamps, cable connectors, terminal connectors and lugs and cable
splicers, and a variety of automatic and semi-automatic welding guns and cable
assemblies utilized in the arc welding process. Tweco also manufactures manual
stick electrode holders, ground clamps and accessories. Manual stick welding is
one of the oldest forms of welding and is used primarily by smaller welding
shops which perform general repair, maintenance and fabrication work. Tweco's
end-users are primarily engaged in the manufacture or repair and maintenance of
transportation equipment, including automobiles, trucks, aircraft,
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<PAGE> 37
trains and ships; the manufacture of a broad range of machinery; and the
production of fabricated metal products, including structural metal, hand tools
and general hardware.
Tweco is a leading domestic manufacturer of MIG welding guns. The MIG
process is an arc welding process utilized in the fabrication of steel,
aluminum, stainless steel and other metal products and structures. In the MIG
process, a small diameter consumable electrode wire is continuously fed into the
arc. The welding arc area is protected from the atmosphere by a "shielding' gas.
The welding guns and cable assemblies manufactured by Tweco carry the continuous
wire electrode, welding current and shielding gas to the welding arc. Tweco
manufactures a related line of robotic welding accessory products. This new
accessory line includes, but is not limited to, a robotic torch with patented
consumables, a robotic deflection mount, a robotic cleaning station, robotic
arms and an anti-splatter misting system.
Through its Arcair product line, Tweco manufactures equipment and related
consumable materials for "gouging," a technique that liquefies metal in a narrow
groove and then removes it using compressed air. Gouging products are often used
in joint preparation prior to a welding process. Numerous other applications
exist for these gouging systems, such as removal of defective welds, removal of
trim in foundries and repair of track, switches and freight cars in the railroad
industry. Arcair also manufactures a line of underwater welding and gouging
equipment.
In addition to gouging products, Arcair produces a patented exothermic
cutting system, SLICE(R). This system generates temperatures in excess of 7000
degreesF and can quickly cut through steel, concrete and other materials.
SLICE(R) has many applications, including opening clogged steel furnaces and
providing rapid entry in fire and rescue operations. Arcair has developed an
underwater version of the SLICE(R)cutting system for use in the marine repair
and salvage industry.
Arcair also manufactures TIG torches and accessories. The TIG process can
be used to fuse metals of almost all alloys and in thicknesses down to foil
size. TIG welding is used for pressure vessels, such as tanks, valves and pipes
and is relied on heavily in welding nuclear components. Fabrications involving
aluminum, magnesium and other specialty metals for use in aircraft, ships and
weapon systems also utilize the TIG process.
Arcair provides a complete line of chemicals used in the welding industry.
Chemicals are used for weld cleaning and as agents to reduce splatter adherence
on the metal being welded. Chemicals are also used to reduce splatter adherence
in welding nozzles in MIG applications.
Victor -- Oxy-Fuel Gas Products. Victor Equipment Company ("Victor") has
plants in Abilene and Denton, Texas and Gallman, Mississippi and was founded in
1913. Victor is a leading domestic manufacturer of gas operated cutting and
welding torches and gas and flow pressure regulation equipment. Victor's torches
are used to cut ferrous metals and to weld, heat, solder and braze a variety of
metals, and its regulation equipment is used to control pressure and flow of
most industrial and specialty gases. In addition, Victor manufactures a variety
of replacement parts, including welding nozzles and cutting tips of various
types and sizes and a line of specialty gas regulators purchased by end-users in
the process control, electronics and other industries. Victor also manufactures
a wide range of medical regulation equipment serving the oxygen therapy market,
including home health care and hospitals.
The torches produced by Victor are commonly referred to as oxy-fuel
torches. These torches combine a mixture of oxygen and a fuel gas, typically
acetylene, to produce a high temperature flame. These torches are designed for
maximum durability, repair ability and performance utilizing patented built-in
reverse flow check valves and flash arresters in several models. Victor also
manufactures lighter-duty hand-held heating, soldering and brazing torches.
Pressure regulators, which are basically diaphragm valves, serve a broad range
of industrial and specialty gas process control operations.
The principal uses of the Victor torch are cutting steel in metal
fabricating applications such as shipbuilding, construction of oil refineries,
power plants and manufacturing facilities, and welding, heating, brazing and
cutting in connection with maintenance of machinery, equipment and facilities.
Victor sells its lighter-duty products to end-user customers principally engaged
in the plumbing, refrigeration and heating,
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ventilation and air conditioning industries. The relative low cost, mobility and
ease of use of Victor torches makes them suitable for a wide variety of uses.
Cigweld -- Electric Arc Products, Oxy-Fuel Products, Filler Metals, Gas
Control Products and Safety Products. The business now known as Cigweld, located
in Melbourne, Australia and founded in 1922, is the leading Australian
manufacturer of gas equipment and welding products.
Cigweld manufactures arc equipment welding products for both the automatic
arc and manual arc welding markets. The Cigweld range of automatic welding
equipment includes packages specifically designed for particular market
segments. End users of this product range include the rural market and the
vehicle repair, metal fabrication, ship building, general maintenance and heavy
industries. Manual arc equipment products range from small welders designed for
the home handyman to units designed for heavy industry.
Cigweld manufactures a range of consumable products (filler metals) for
manual and automatic arc and gas welding. The range of manual arc electrodes
includes over 50 individual electrodes for different applications. Cigweld
markets its manual arc electrodes under such brand names as Satincraft,
Weldcraft, Ferrocraft(R), Alloycraft(R), Satincrome, Cobalarc(R), Castcraft and
Weldall(R).
For automatic and semi-automatic welding applications, Cigweld manufactures
a significant range of solid and flux-cored wires, principally under the
Autocraft(R), Verti-Cor, Satin-Cor, Metal-Cor and Cobalarc(R) brand names. For
gas and TIG welding, Cigweld manufactures and supplies approximately 40
individual types of wires and solders for use in different applications.
Cigweld's filler metals are manufactured to standards appropriate for their
intended use, with the majority of products approved by agencies, such as
Lloyd's Register of Shipping, American Bureau of Shipping, De Norske Veritas and
U.S. Naval Ships.
Cigweld manufactures a comprehensive range of equipment for gas welding and
cutting and ancillary products such as gas manifolds, gas regulators and
flowmeters. Gas welding and cutting equipment is sold in kit form or as
individual products. Kits are manufactured for various customer groups and their
components include combinations of oxygen and acetylene regulators, blowpipes,
cutting attachments, mixers, welding and heating tips, cutting nozzles, roller
guides, twin welding hoses, goggles, flint lighters and tip cleaners,
combination spanners and cylinder keys. In addition to its kits, Cigweld
manufactures and/or distributes a complete range of gas equipment, including a
range of blowpipes and attachments, regulators (for oxygen, acetylene, argon and
carbon dioxide), flashback arrestors, cutting nozzles, welding and heating tips,
hoses and fittings, gas manifolds and accessories.
Cigweld also manufactures a range of gas control equipment including
specialty regulators (for use with different gases, including oxygen, acetylene,
liquified petroleum gas, argon, carbon dioxide, nitrogen, air, helium, hydrogen,
carbon monoxide, ethylene, ethane and nitrous oxide), manifold systems, cylinder
valves and spares and natural gas regulators. Cigweld's gas control items are
primarily sold to gas companies.
Cigweld manufactures and/or distributes a range of safety products for use
in welding and complementary industries. The product range includes welding
helmets and accessories, respirators and masks, breathing apparatus, earmuffs
and earplugs, safety spectacles, safety goggles and gas welding goggles, safety
helmets, faceshields, flashields (see-through welding curtains and screens) and
welding apparel.
Medical products are also manufactured by Cigweld in its manufacturing
plant in Melbourne, Australia. These products are distributed through a sole
distributor in the Australian market and exported through third party
distributors and related entities. The product range includes regulators,
flowmeters, suction units, oxygen therapy, resuscitation and outlet valves for
medical gas systems.
C&G Systems -- Cutting Tables. C&G Systems Inc. ("C&G"), located in Itasca,
Illinois and founded in 1968, manufactures a line of mechanized cutting tables
for fabricating sheet metal and metal plate. The machines utilize either
oxy-fuel or plasma cutting torches produced by other divisions of the Company.
C&G has a wide range of cutting tables from the relatively inexpensive
cantilever type used in general fabrication and job shops to the large precision
gantry type found in steel service centers and specialty cutting applications.
These metal cutting tables can be used in virtually any metal fabrication plant.
37
<PAGE> 39
Stoody -- Hardfacing Products. Stoody Company ("Stoody"), located in
Bowling Green, Kentucky and with operations founded in 1921, is a recognized
world leader in the development and manufacture of hardfacing welding wires,
electrodes and rods. While Stoody's primary product line is iron-based welding
wires, Stoody also participates in the markets for cobalt-based and nickel-based
electrodes, rods and wires, which are essentially protective overlays, deposited
on softer base materials by various welding processes. This procedure, referred
to as "hardfacing" or "surface treatment," adds a more resistant surface,
thereby increasing the component's useful life. Lower initial costs, the ability
to treat large parts, and ease and speed of repairs in the field are some of the
advantages of hardfacing over solid wear resistant components. A variety of
products have been developed for hardfacing applications in industries utilizing
earth moving equipment, agricultural tools, crushing components, and steel mill
rolls, and in virtually all applications where metal is exposed to external wear
factors.
Thermal Arc -- Arc Welders, Plasma Welders and Wire Feeders. In 1997, the
inverter and plasma arc welder business of Thermal Dynamics and Arcsys were
combined to form Thermal Arc, Inc. ("Thermal Arc"). The combined operation is
located in Troy, Ohio and produces a full line of inverter and transformer-
based electric arc welders, plasma welders, engine driven welders and wire
feeders. Thermal Arc products compete in the marketplace for construction,
industrial and automated applications, and serve a large and diverse user base.
The inverter arc welding power machines use high frequency power
transistors to provide welding machines that are extremely portable and power
efficient when compared to conventional welding power sources. Plasma welding
dramatically improves productivity for the end-user. Additionally, conventional
transformer-based machines provide a cost-effective alternative for markets
where low cost and simplicity of maintenance are a high priority.
GenSet -- Engine-Driven Welders and Generators. GenSet, located in Pavia,
Italy, commenced operations in 1976 with the production of small generating
sets. In 1976, it developed its first engine-driven welder and, in 1977,
obtained its first patent for the synchronous alternator designed for welding
purposes. It now offers a full range of technologically advanced generators and
engine-driven welders that are sold throughout the world. These products are
used both where main power is not available and for stand-by power where
continuous power supply is a key requirement.
Woodland Cryogenics -- Cryogenic Pumps, Ambient and Electric Vaporizers and
Automatic Cylinder Filling Systems. Woodland, with manufacturing facilities in
Philadelphia, Pennsylvania and founded in 1986, is a leading manufacturer,
distributor and installer of cryogenic and high pressure gas fill plants,
vaporizers and pumps. Woodland's products are used to control, mix and package
both cryogenic and high pressure gases into containment vessels such as gas
cylinders.
The principal uses of Woodland products are for the filling of cryogenic
and high pressure gases for applications in industrial, medical and specialty
gas markets served by gas distributors and producers. Woodland has developed
computerized filling equipment to maximize productivity while also offering
conventional or manual filling equipment.
INTERNATIONAL BUSINESS
The Company had aggregate international sales from continuing operations of
approximately $220.2 million, $171.6 million and $67.5 million for the fiscal
years ended December 31, 1997, 1996 and 1995, respectively, or approximately
42%, 39% and 21%, respectively, of net sales in each such period. The Company's
international sales are influenced by fluctuations in exchange rates of foreign
currencies, foreign economic conditions and other risks associated with foreign
trade. The Company's international sales consist of: (a) export sales of
Thermadyne products manufactured at domestic manufacturing facilities and, to a
limited extent, products manufactured by third parties, sold through overseas
field representatives of Thermadyne International Corporation ("Thermadyne
International"), a subsidiary of Thermadyne; and (b) sales of Thermadyne
products manufactured at international manufacturing facilities, sold by
Thermadyne's foreign subsidiaries. For further information concerning the
international operations of the Company, see the notes to the Consolidated
Financial Statements of the Company included elsewhere herein.
38
<PAGE> 40
Thermadyne International was formed in 1980 to coordinate Thermadyne's
efforts to increase international sales and sells cutting and welding products
through independent distributors in more than 80 countries. In support of this
effort, the Company operates distribution centers in Canada, Australia, Italy,
Mexico, Japan, Singapore, Brazil, the Philippines, Indonesia and the United
Kingdom and employs sales people located in 23 additional countries.
DISTRIBUTION
The Company's cutting and welding products are distributed through a
domestic network of approximately 1,100 independent welding products
distributors with over 2,800 locations who carry one or more of its product
lines. Relationships with the distributors are maintained by a separate sales
force for each of the Company's principal product lines. In addition, a team of
11 area business managers exists to support the sale of all of the Company's
product lines to its key distributors. The Company's products are distributed
internationally through a direct sales force and independent distributors.
RESEARCH AND DEVELOPMENT
The Company has research and development groups for each of its product
lines that primarily conduct process and product development to meet market
needs. As of December 31, 1997, the Company employed approximately 125 persons
in its research and development groups, most of which are engineers.
PATENTS, LICENSES AND TRADEMARKS
The Company's products are sold under a variety of trademarks and trade
names. The Company owns trademark registrations or has filed trademark
applications for all trademarks and has registered all trade names that the
Company believes are material to the operation of its businesses. The Company
also owns various patents and from time to time acquires licenses from owners of
patents to apply such patents to its operations. As of December 31, 1997, the
Company had 740 registered and pending trademarks and 262 registered and pending
patents. The Company does not believe any single patent or license is material
to the operation of its businesses taken as a whole.
COMPETITION
The Company competes principally with a number of domestic manufacturers of
cutting and welding products, the majority of which compete only in limited
segments of the overall market. Management believes that competition is based
primarily on product quality, brand name, breadth and depth of product lines,
effectiveness of distribution channels, acumen of sales force, price and quality
of customer service. To date, the Company has experienced little direct foreign
competition in its U.S. markets due to the relatively limited size of such
markets, the inability of foreign manufacturers to establish effective
distribution channels and the relatively non-labor intensive nature of the
cutting and welding product manufacturing process. The Company also competes in
certain international markets in which it faces substantial competition from
foreign manufacturers of cutting and welding products.
RAW MATERIALS
The Company has not experienced any difficulties in obtaining raw materials
for its operations because its principal raw materials, copper, brass, steel and
plastic, are widely available and need not be specially manufactured for use by
the Company. Certain of the raw materials used in hardfacing products, such as
cobalt and chromium, are available primarily from sources outside the United
States, some of which are located in countries that may be subject to economic
and political conditions which could affect pricing and disrupt supply. Although
the Company has historically been able to obtain adequate supplies of these
materials at acceptable prices and has been able to recover the costs of any
increases in the price of raw materials in the form of higher unit sales prices,
restrictions in supply or significant fluctuations in the prices of cobalt,
chromium and other raw materials could adversely affect the Company's business.
39
<PAGE> 41
The Company also purchases certain products which it either uses in its
manufacturing processes or resells. These products include, but are not limited
to, electronic components, circuit boards, semi-conductors, motors, engines,
pressure gauges, springs, switches, lenses and chemicals. The Company believes
its sources of such products are adequate to meet foreseeable demand.
EMPLOYEES
As of December 31, 1997, the Company employed 3,563 people, of which
approximately 637 were engaged in sales and marketing activities, 225 were
engaged in administrative activities, 2,584 were engaged in manufacturing
activities and 117 were engaged in engineering activities. Labor unions
represent none of the Company's work force in the United States and virtually
all of the manufacturing employees in its foreign operations. The Company
believes that its employee relations are good. The Company has not experienced
any significant work stoppages.
FACILITIES
The Company operates 12 manufacturing facilities in the United States,
Italy, the Philippines and Australia. All domestic manufacturing facilities,
leases and leasehold interests are encumbered by liens securing the Company's
obligations under the New Credit Facility. The Company considers its plants and
equipment to be modern and well-maintained and believes its plants have
sufficient capacity to meet future anticipated expansion needs.
The Company leases and maintains a 43,600 square foot facility located in
St. Louis, Missouri, which houses the executive offices of the Company and its
operating subsidiaries, as well as all centralized services.
The following table describes the location and general character of the
Company's principal properties:
<TABLE>
<CAPTION>
SUBSIDIARY/ BUILDING SPACE/
LOCATION OF FACILITY NUMBER OF BUILDINGS PROPERTY SIZE
-------------------- ------------------- -------------
<S> <C> <C>
Thermal Dynamics/West Lebanon, New
Hampshire............................ 187,000 sq. ft. 8.0 acres
5 buildings (office, manufacturing,
sales training, future expansion)
Tweco/Wichita, Kansas.................. 220,816 sq. ft. 21.7 acres
3 buildings (office, manufacturing,
storage space)
Victor/Denton, Texas................... 222,403 sq. ft. 30.0 acres
4 buildings (office, manufacturing,
storage, sales training center)
Victor/Abilene, Texas.................. 123,740 sq. ft. 32.0 acres
1 building (office and manufacturing)
Thermadyne Canada/Oakville, Ontario,
Canada............................... 57,000 sq. ft. 8.3 acres
1 building (office and warehouse)
Modern Engineering Company/
Gallman, Mississippi................. 60,000 sq. ft. 60.0 acres
1 building (office and manufacturing)
Thermadyne Australia/Melbourne,
Australia............................ 588,000 sq. ft. 32.4 acres
8 buildings (office, manufacturing,
storage, research)
Thermadyne Australia/Cebu,
Philippines.......................... 34,600 sq. ft. 1.2 acres
1 building (office and manufacturing)
C&G/Itasca, Illinois................... 38,000 sq. ft. 2.0 acres
1 building (office, manufacturing,
future expansion)
Stoody/Bowling Green, Kentucky......... 185,000 sq. ft. 37.0 acres
1 building (office and manufacturing)
</TABLE>
40
<PAGE> 42
<TABLE>
<CAPTION>
SUBSIDIARY/ BUILDING SPACE/
LOCATION OF FACILITY NUMBER OF BUILDINGS PROPERTY SIZE
-------------------- ------------------- -------------
<S> <C> <C>
GenSet/Pavia, Italy.................... 193,000 sq. ft. 7.9 acres
2 buildings (office, manufacturing,
warehouse)
Thermal Arc/Troy, Ohio................. 120,000 sq. ft. 6.5 acres
1 building (office, manufacturing,
warehouse, sales training)
Woodland/Philadelphia, Pennsylvania.... 25,537 sq. ft. 32.4 acres
1 building (office and manufacturing)
</TABLE>
All of the above facilities are leased, except for the facilities located
in Melbourne, Cebu, Pavia and Gallman, which are owned. The Company also has
additional assembly and warehouse facilities in Canada, the United Kingdom,
Italy, Japan, Singapore, Mexico, the Philippines, Indonesia, Brazil and
Australia.
In addition, the Company has subleased 264,000 square feet of its 325,000
square foot facility in City of Industry, California, which formerly was the
manufacturing facility for certain products now manufactured at the Company's
Bowling Green, Kentucky facility.
The leases for the Company's leased and subleased properties will expire
from 1999 through 2010.
LEGAL PROCEEDINGS AND ENVIRONMENTAL MATTERS
The Company is a party to ordinary litigation incidental to its businesses,
including a number of product liability cases seeking substantial damages. The
Company maintains insurance against any product liability claims. Coverage for
most years has a $500,000 self insured retention with $500,000 of primary
insurance per claim. In addition, the Company maintains umbrella policies
providing an aggregate of $50,000,000 in coverage for product liability claims.
Although it is difficult to predict the outcome of litigation with any
certainty, the Company believes that the liabilities which might reasonably
result from such lawsuits, to the extent not covered by insurance, will not have
a material adverse effect on the Company's financial condition or results of
operations.
The Company's operations are subject to federal, state, local and foreign
laws and regulations relating to the storage, handling, generation, treatment,
emission, release, discharge and disposal of certain substances and wastes. The
Company is currently not aware of any citations or claims filed against it by
any local, state, federal and foreign governmental agencies which, if
successful, would have a material adverse effect on the Company's financial
condition or results of operations.
The Company may be required to incur costs relating to remediation of
properties, including properties at which the Company disposes of waste, and
environmental conditions could lead to claims for personal injury, property
damage or damages to natural resources. The Company is aware of environmental
conditions at certain properties which it now or previously owned or leased
which are undergoing remediation. The Company does not believe that the cost of
such remediation will have a material adverse effect on the Company's business,
financial condition or results of operations.
Certain environmental laws, including but not limited to, the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA" or "Superfund")
and the equivalent state Superfund laws, provide for strict, joint and several
liability for investigation and remediation of spills or other releases of
hazardous substances. Such laws may apply to conditions at properties presently
or formerly owned or operated by the Company or by its predecessors or
previously owned business entities, as well as to conditions at properties at
which wastes or other contamination attributable to the Company or its
predecessors or previously owned business entities come to be located. The
Company has in the past and may in the future be named a PRP at off-site
disposal sites to which it has sent waste. The Company does not believe that the
ultimate cost relating to Superfund sites will have a material adverse effect on
the Company's financial condition or results of operations. See "Risk
Factors -- Environmental Matters."
41
<PAGE> 43
THE MERGER AND MERGER FINANCING
THE MERGER FINANCING
The funding required to pay the cash portion of the Merger Consideration,
the Option Cash Proceeds and the ESPP Cash Proceeds, to refinance and/or retire
outstanding indebtedness of the Company, and to pay expenses incurred in
connection with the Merger was approximately $808 million. These cash
requirements were funded with the proceeds obtained from concurrent equity and
debt financings. The Issuers issued the Senior Subordinated Notes and the
Company entered into a syndicated senior secured loan facility providing for
term loan borrowings in the aggregate principal amount of approximately $330
million and revolving loan borrowings of $100 million. In connection with the
Merger, the Company borrowed all term loans available under the New Credit
Facility plus approximately $25 million of revolving loans. The remaining
revolving loans will be available to fund the working capital requirements of
the Company. The proceeds of such financings were distributed to Holdings in the
form of a dividend. See "Description of New Credit Facility" and "Certain
Relationships and Related Transactions."
Mercury issued approximately $94.6 million aggregate gross proceeds of the
Debentures. In connection with the Merger, Holdings succeeded to the obligations
of Mercury with respect to the Debentures. The DLJMB Funds also purchased
2,608,696 shares of Mercury Common Stock, 2,000,000 shares of Mercury Preferred
Stock and the DLJMB Warrants for approximately $140 million. As a result of the
Merger, the proceeds of such purchases became an asset of Holdings, each share
of Mercury Common Stock became a share of Holdings Common Stock, each share of
Mercury Preferred Stock will become a share of Holdings Preferred Stock and each
DLJMB Warrant to acquire Mercury Common Stock became exercisable for an equal
number of shares of Holdings Common Stock. In addition, in connection with the
Merger, certain members of senior management purchased 143,192 shares of
Holdings Common Stock for approximately $4.9 million through the Management
Share Purchase, of which approximately $3.6 million was provided through the
Management Loans.
THE MERGER
As a result of the Merger, each share of Holdings Common Stock held by
Holdings as treasury stock or owned by Mercury immediately prior to the
effectiveness of the Merger was cancelled, and no payment was made with respect
thereto; each share of Mercury Common Stock outstanding immediately prior to the
effectiveness of the Merger was converted into and became one share of Holdings
Common Stock with the same rights, powers and privileges as the shares so
converted; each share of Mercury Preferred Stock, outstanding immediately prior
to the effectiveness of the Merger was converted into and became one share of
preferred stock of Holdings with the same rights, powers and privileges as the
shares of preferred stock so converted; each outstanding DLJMB Warrant to
purchase Mercury Common Stock became exercisable for an equal number of shares
of Holdings Common Stock on the same terms and conditions as the DLJMB Warrant;
and each share of Holdings Common Stock outstanding immediately prior to the
effectiveness of the Merger converted into the following (the "Merger
Consideration"): for each such share with respect to which an election to retain
Holdings Common Stock was effectively made and not revoked ("Stock Electing
Shares"), the right to retain approximately one share of Holdings Common Stock,
and for each such share (other than Stock Electing Shares), the right to receive
in cash from Mercury an amount equal to $34.50 (the "Cash Merger
Consideration"). Because the Merger required approximately 4.3% (or 485,010) of
the outstanding shares of Holdings Common Stock prior to the Merger to be
retained by existing stockholders of Holdings, the right to receive the Merger
Consideration was subject to proration. As a result of proration, each Stock
Electing Share was converted into .076 of a share of Holdings Common Stock and
the right to receive $34.50 in cash in lieu of shares not converted into
Holdings Common Stock. As a result of the Merger, 10,690,283 shares of Holdings
Common Stock (approximately 95.7% of the presently issued and outstanding
shares) were converted into cash and approximately 4.3% (or 485,010) of such
shares were retained by existing stockholders. As a result of the Merger, the
shares of Mercury Common Stock were converted into Holdings Common Stock
representing approximately 80.6% of Holdings Common Stock (or 75.7% on a fully
diluted basis) after the Merger.
42
<PAGE> 44
As a result of the Merger, the DLJMB Warrants permit the holders thereof to
purchase an additional 353,428 shares of Holdings Common Stock.
As a result of the Merger, each outstanding option to acquire shares of
Holding Common Stock granted to employees and directors (excluding shares
subject to purchase under the Holding's Employee Stock Purchase Plan (the
"ESPP")), whether vested or not (the "Options"), were canceled. In lieu thereof
the holders of such Options received, with respect to each Option, a cash
payment in an amount equal to the product of (x) the excess, if any, of $34.50
over the exercise price of such Option and (y) the number of shares of Holding
Common Stock subject to such Option (the "Option Cash Proceeds").
In addition, upon effectiveness of the Merger, rights to purchase shares of
Holding Common Stock under the ESPP were canceled. In lieu thereof participants
in the ESPP received a cash payment in the amount equal to the product of the
number of shares of Holding Common Stock subject to purchase by such
participants thereunder and $34.50 (the "ESPP Cash Proceeds").
43
<PAGE> 45
MANAGEMENT
THE ISSUERS
The following table sets forth certain information concerning the members
of the board of directors and executive officers of Thermadyne LLC. Each
director of Thermadyne LLC also serves as a director of Thermadyne Capital, and
each officer of Thermadyne LLC serves in the same capacity for Thermadyne
Capital.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Randall E. Curran........ 43 Director, Chairman of the Board, President and Chief
Executive Officer
James H. Tate............ 50 Director, Senior Vice President and Chief Financial Officer
Peter T. Grauer.......... 52 Director
William F. Dawson, Jr.... 33 Director
Stephanie N. Josephson... 44 Vice President, General Counsel and Corporate Secretary
Thomas C. Drury.......... 41 Vice President, Human Resources
Robert D. Maddox......... 38 Vice President and Corporate Controller
</TABLE>
Randall E. Curran has been a director, Chairman of the Board, President and
Chief Executive Officer of Thermadyne LLC since May 1998. Mr. Curran has also
served as a Director of Holdings since February 1994 and was elected Chairman of
the Board and Chief Executive Officer of Holdings in February 1995, having
previously served as President of Holdings from August 1994 and as Executive
Vice President and Chief Operating Officer of Holdings from February 1994. He
also serves as President of Thermadyne Industries, Inc., a position he has held
since 1992. From 1986 to 1992, Mr. Curran was Chief Financial Officer of
Holdings and/or its predecessors. Prior to 1986, Mr. Curran held various
executive positions with Cooper Industries, Inc.
James H. Tate has been a director, Senior Vice President and Chief
Financial Officer of Thermadyne LLC since May 1998. Mr. Tate has also served as
a Director of Holdings since October 1995. He was elected Senior Vice President
and Chief Financial Officer in February 1995, having previously served as Vice
President of Holdings and Vice President and Chief Financial Officer of
Holdings' subsidiaries since April 1993. Prior to joining Holdings, Mr. Tate was
employed by the accounting firm of Ernst & Young LLP for eighteen years, the
last six of which he was a partner.
Peter T. Grauer has been a director of Thermadyne LLC since May 1998 and a
Managing Director of DLJ Merchant Banking II, Inc. ("DLJMB Inc."), and its
predecessor, since September 1992. Mr. Grauer is a director of Doane Products
Co., Total Renal Care Holdings, Inc., DecisionOne Holdings Corp., Nebco Evans
Holding Company, Ameriserve Food Distribution, Inc. and Bloomberg, Inc.
William F. Dawson, Jr. has been a director of Thermadyne LLC since May 1998
and a Principal of DLJMB Inc. since August 1997. From December 1995 to August
1997, he was a Senior Vice President in DLJSC's High Yield Capital Markets
Group. Prior thereto, Mr. Dawson was a Vice President in the Leveraged Finance
Group within DLJSC's Investment Banking Group. Mr. Dawson serves as a Director
of Von Hoffmann Corporation.
Stephanie N. Josephson has been Vice President, General Counsel and
Corporate Secretary of Thermadyne LLC since May 1998. Ms. Josephson is also Vice
President, General Counsel and Corporate Secretary of Holdings. Prior to joining
Holdings, Ms. Josephson was Corporate Counsel for Mills & Partners, Inc. from
1993 to 1995 and an Adjunct Professor at St. Louis University School of Business
in the MBA program from 1991 to 1993. Prior thereto, Ms. Josephson was employed
in Houston, Texas as Counsel for Cooper Industries, Inc. and in private practice
with the law firms Andrews & Kurth and Weycer and Kaplan from 1979 to 1991.
44
<PAGE> 46
Thomas C. Drury has been Vice President -- Human Resources of Thermadyne
LLC since May 1998. Mr. Drury has also been Vice President -- Human Resources
for Holdings since March 1995. Prior to that time, Mr. Drury served as Director
of Human Resources for Holdings since November 1991. Prior to joining Holdings,
Mr. Drury was Manager -- Human Resources at McDonnell Douglas Systems
Integration Company from 1988 through 1991.
Robert D. Maddox has been Vice President and Corporate Controller of
Thermadyne LLC since May 1998. Mr. Maddox has also served as Vice President and
Corporate Controller of Holdings since April 1996. Prior to that time, Mr.
Maddox served as Vice President and Controller of Holdings' operating
subsidiaries from April 1995 to April 1996 and Controller from May 1992 to April
1995. Prior to joining Holdings, Mr. Maddox was a senior audit manager with the
accounting firm of Ernst & Young LLP.
HOLDINGS
Board of Directors. The following table sets forth the name, age and
position with Holdings of each director of Holdings:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Randall E. Curran..................... 43 Chairman of the Board
James H. Tate......................... 50 Director
Peter T. Grauer....................... 52 Director
William F. Dawson, Jr................. 33 Director
John F. Fort III...................... 56 Director
Harold A. Poling...................... 72 Director
Lawrence M.v.D. Schloss............... 43 Director
</TABLE>
The following are brief biographies of each Holdings director who is not
also a director or executive officer of the Issuers.
John F. Fort III retired as Chairman of the Board of Tyco International LTD
in January of 1993. In 1964, after receiving degrees in Aeronautical Engineering
and Industrial Management from Princeton and MIT's Sloan School of Business
respectively, he joined the Simplex Wire & Cable Company (now a subsidiary of
Tyco). Mr. Fort held a broad range of positions throughout his thirty years at
Tyco. He currently holds directorships at Tyco International Ltd., Dover
Corporation, and Roper Industries. He is an active participant on advisory
boards at MIT, Princeton University, Full Circle Investments and the Appalachian
Mountain Club.
Harold A. Poling retired as Chairman of the Board and Chief Executive
Officer of Ford Motor Company on January 1, 1994, a position he held since 1990.
Mr. Poling is a director of Shell Oil Company, LTV Corporation, Flint Ink
Corporation and the Kellogg Company, and is a member of BHP International
Advisory Council, The VIAG International Board and the PGA Tour Policy Board. He
is a director of the Monmouth (Ill.) College Senate and Chairman of the Dean's
Advisory Council for the Indiana University School of Business. He was national
chairman of Indiana University's Annual Fund campaigns from 1986 to 1998.
Lawrence M.v.D. Schloss has been the Managing Partner of DLJ Merchant
Banking II, Inc. since November 1995. Prior to November 1995, he was the Chief
Operating Officer and a Managing Director of DLJ Merchant Banking, Inc. Mr.
Schloss currently serves as Chairman of the Board of McCulloch Corporation and
as a director of Wilson Greatbatch, Inc. and DecisionOne Holdings Corp. Mr.
Schloss has previously served as a director of GTECH Corporation (NYSE:GTK),
Krueger International, Inc., OSi Specialties, Inc. and MPB Corporation.
45
<PAGE> 47
Executive Officers. The following table sets forth certain information
concerning the current executive officers of Holdings:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Randall E. Curran..................... 43 President and Chief Executive Officer
James H. Tate......................... 50 Senior Vice President and Chief
Financial Officer
Stephanie N. Josephson................ 44 Vice President, General Counsel and
Corporate Secretary
Thomas C. Drury....................... 41 Vice President, Human Resources
Robert D. Maddox...................... 38 Vice President and Corporate
Controller
</TABLE>
46
<PAGE> 48
EXECUTIVE COMPENSATION
The following table sets forth for the years ended December 31, 1997, 1996
and 1995 certain compensation paid by Holdings to its Chief Executive Officer
and the four other most highly paid executive officers of Holdings whose cash
compensation exceeded $100,000 for the year ended December 31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)(1)
--------------------------- ---- --------- -------- ------------ ------------------
<S> <C> <C> <C> <C> <C>
Randall E. Curran..................... 1997 517,847 538,400 30,600 33,807
Chairman of the Board, President and 1996 498,921 385,050 91,000 8,008
Chief Executive Officer(2) 1995 482,919 409,116 65,000 7,728
James H. Tate......................... 1997 275,093 188,614 27,000 18,039
Director, Senior Vice President and 1996 241,012 169,114 36,000 7,403
Chief Financial Officer(3) 1995 221,454 158,965 20,000 3,991
Stephanie N. Josephson................ 1997 168,719 84,625 10,000 10,210
Vice President, General Counsel and 1996 129,573 70,208 6,000 6,489
Corporate Secretary(4) 1995 100,127 44,760 25,000 3,024
Thomas C. Drury....................... 1997 132,206 66,479 10,000 7,444
Vice President -- Human Resources(5) 1996 107,115 53,708 6,000 5,982
1995 92,557 32,669 25,000 4,160
Robert D. Maddox...................... 1997 134,254 67,417 5,000 7,749
Vice President and Controller(6) 1996 113,658 60,055 6,000 6,272
1995 98,039 36,556 10,000 4,378
</TABLE>
- ---------------
(1) All other compensation includes group life insurance premiums paid by
Holdings and contributions made on behalf of the named executive officers to
Holdings' 401(k) retirement and profit sharing plan. The amount of insurance
premiums paid and 401(k) contributions made on behalf of the named executive
officers for 1997 are as follows: Mr. Curran, $3,978 and $29,829,
respectively; Mr. Tate, $2,544 and $15,495, respectively; Ms. Josephson,
$1,138 and $9,072, respectively; Mr. Drury, $361 and $7,083, respectively;
and Mr. Maddox, $254 and $7,495, respectively.
(2) Mr. Curran was elected Chairman of the Board and Chief Executive Officer of
Holdings effective as of February 23, 1995, having previously served as
President of Holdings from August 1994 and as Executive Vice President and
Chief Operating Officer of Holdings from February 1994.
(3) Mr. Tate was elected Senior Vice President and Chief Financial Officer of
Holdings effective as of February 23, 1995, having previously served as Vice
President of Holdings and as Chief Financial Officer of Holdings'
subsidiaries. Mr. Tate was elected as a director of Holdings on October 26,
1995.
(4) Ms. Josephson was elected Corporate Counsel and Corporate Secretary of
Holdings on March 7, 1995, and was elected Vice President and General
Counsel of Holdings on April 26, 1995.
(5) Mr. Drury was elected Vice President -- Human Resources of Holdings on March
7, 1995.
(6) Mr. Maddox was elected Controller of Holdings on June 1, 1992, Vice
President and Controller of Thermadyne Industries, Inc. on April 1, 1995,
and Vice President of Holdings on April 18, 1996.
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<PAGE> 49
The following table sets forth certain information related to stock options
granted to the named executive officers in 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE OR GRANT DATE
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION PRESENT VALUE
NAME GRANTED(#)(1) FISCAL YEAR (%) ($/SH) DATE ($)(2)
---- ------------- --------------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Randall E. Curran............. 30,600 14.1 26.875 02/05/07 491,742
James H. Tate................. 27,000 12.4 26.875 02/05/07 433,890
Stephanie N. Josephson........ 10,000 4.6 26.875 02/05/07 160,700
Thomas C. Drury............... 10,000 4.6 26.875 02/05/07 160,700
Robert D. Maddox.............. 5,000 2.3 26.875 02/05/07 80,350
</TABLE>
- ---------------
(1) The options to purchase Holdings Common Stock were granted under Holdings'
1993 Management Option Plan or the Holdings' 1996 Employee Stock Option Plan
and become exercisable in five equal annual installments commencing on the
first anniversary of the date of grant. As a result of the Merger, all
outstanding Options, whether or not vested, were canceled, and the holders
of such Options received a cash payment in an amount equal to the product of
(x) the excess, if any, of $34.50 over the exercise price of such Option
multiplied by (y) the number of shares of Holdings Common Stock subject to
such Option.
(2) The grant date present value of each option grant was determined using a
variation of the Black-Scholes option pricing model. The estimated values
presented are based on the following assumptions made as of the time of
grant: an expected dividend yield of 0%; an expected option term of 10
years; volatility of .339 (based on historical stock price observations just
prior to each grant); and a risk-free rate of 6.72%. As a result of the
Merger, all outstanding Options, whether or not vested, were canceled, and
the holders of such Options received a cash payment in an amount equal to
the product of (x) the excess, if any, of $34.50 over the exercise price of
such Option multiplied by (y) the number of shares of Holdings Common Stock
subject to such Option.
The following table provides information related to the number and value of
options held by the named executive officers at the end of 1997. On December 31,
1997, the closing sale price of Holdings Common Stock on NASDAQ was $29 1/2. No
named executive officer exercised any options during 1997.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
FISCAL YEAR-END AT FISCAL YEAR-END
--------------------------------- ---------------------------------
NAME EXERCISABLE(#) UNEXERCISABLE(#) EXERCISABLE($) UNEXERCISABLE($)
---- -------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Randall E. Curran.................. 244,200 142,400 4,139,725 1,574,850
James H. Tate...................... 53,700 67,800 893,975 624,275
Stephanie N. Josephson............. 11,200 29,800 177,975 328,775
Thomas C. Drury.................... 11,200 29,800 177,975 328,775
Robert D. Maddox................... 5,200 15,800 81,225 170,525
</TABLE>
As a result of the Merger, all outstanding Options, whether or not vested,
were canceled, and the holders of such Options received a cash payment in an
amount equal to the product of (x) the excess, if any, of $34.50 over the
exercise price of such Option multiplied by (y) the number of shares of Holdings
Common Stock subject to such Option.
EMPLOYMENT ARRANGEMENTS
Employment Contracts. In connection with the Merger, Holdings entered into
employment agreements with, among others, the following executive officers:
Randall E. Curran, James H. Tate, Stephanie N.
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<PAGE> 50
Josephson, Robert D. Maddox and Thomas C. Drury. The employment agreements
terminate on May 22, 2001; however, such agreements automatically renew on each
May 22 for an additional period so that a new three-year term begins upon each
extension (unless the agreements are earlier terminated). Each such employee
serves in their current executive capacities with Holdings as a requirement of
their respective employment agreements.
Messrs. Curran, Tate, Maddox and Drury and Ms. Josephson are entitled to
base salaries (subject to increase at the Board of Directors' discretion) of
$538,400, $290,175, $145,000, $145,000 and $175,000, respectively. In addition,
each employee is entitled to participate in an annual bonus plan providing for
an annual bonus opportunity. Pursuant to such bonus plan, Mr. Curran is entitled
to an annual bonus opportunity of not less than 100% of his base salary, Mr.
Tate is entitled to an annual bonus opportunity of not less than 75% of his base
salary and Ms. Josephson and Messrs. Maddox and Drury are each entitled to an
annual bonus opportunity of not less than 55% of his or her base salary. Each
such executive also is entitled to such benefits as are customarily provided to
the executives of Holdings and its subsidiaries. Each such executive is required
to devote all of his or her business time and attention to the business of
Holdings and its subsidiaries.
Each employment agreement provides that upon termination without cause or
constructive termination of such executive's employment (which includes, among
other things, reductions of compensation, title, position or duties), such
executive will be entitled to receive such executive's then current salary and
other benefits through the later to occur of the termination date of the
agreement or 18 months from the date of termination of such executive's
employment.
Management Plans.
Management Incentive Plan. In connection with the Merger, Holdings adopted
the Thermadyne Holdings Corporation Management Incentive Plan (the "Incentive
Plan"), which provides for the granting of up to 500,000 shares of Holdings
Common Stock to certain officers and employees of the Company. In connection
with the Merger options to purchase approximately 322,966 shares of Holdings
Common Stock were granted to certain officers and employees of the Company at an
exercise price of $34.50. Pursuant to the terms of the Incentive Plan, options
granted to certain members of senior management provide for both a "Time Vesting
Option" and a "Cliff Vesting Option." Under the Time Vesting Option, the option
vests and is exercisable with respect to twenty percent of the shares subject to
the option on the day it was granted. Then, on each of the first five
anniversaries from that date the Time Vesting Option was granted, an additional
sixteen percent of the shares subject to the option vests and becomes
exercisable as long as the option recipient is still employed by Holdings or its
subsidiary. The Cliff Vesting Option becomes vested and exercisable with respect
to twenty percent of the shares on the thirtieth day after the availability of
the audited financial statements for each of the fiscal years ended December 31,
1998 through December 31, 2003, provided that the option recipient is still
employed by Holdings or its subsidiary, and further provided, that the targeted
implied common equity value of Holdings was met for each such fiscal year. If
the targeted implied common equity value of Holdings is not attained for any of
the fiscal years ending on or before December 31, 2002, the Cliff Vesting Option
will be treated as vested and exercisable if the target is attained for the
subsequent year as long as the Option recipient is still employed by Holdings or
its subsidiary. If, after eight years from receipt of the Cliff Vesting Option,
all shares subject to such option have not vested, such shares shall become
fully vested and exercisable as long as the option recipient is still employed
by Holdings or its subsidiary.
Direct Investment Program. In connection with the Merger, Holdings adopted
the Thermadyne Holdings Corporation Direct Investment Program (the "Investment
Program"), which provides for the purchase by certain members of management of
143,192 shares of Holdings Common Stock, of which 71,596 shares have been
designated as "Reinvestment Shares" and 71,596 shares have been designated as
"Coinvestment Shares." In connection with the Merger, Holdings issued all shares
available for issuance under the Investment Program. Of the Coinvestment Shares,
20% vest on each of the first five anniversaries of the date of purchase, so
long as the participant is employed by the Company or its subsidiary as of such
anniversary. Additionally, upon the occurrence of a Change of Control (as
defined therein), all unvested Coinvestment Shares held by a participant that is
employed by the Company or its subsidiary at such time shall vest. All
Reinvestment Shares became immediately vested at the time of purchase. A portion
of the
49
<PAGE> 51
funds required to purchase the shares under the Investment Program were provided
through the proceeds of loans made by the Company to participants in the
Investment Program. In the event of a participant's termination for Cause (as
defined therein), the Company has the right to purchase shares of such
participant purchased under the Investment Program at a price equal to (i) the
lesser of (A) $34.50 and (B) the fair market value of such shares on the date of
purchase by the Company, with respect to Coinvestment Shares (whether or not
vested), and (ii) the fair market value of such shares on the date of purchase
by the Company, with respect to Reinvestment Shares. In the event of a
participant's termination other than for Cause or the participant's death, the
Company has the right to purchase shares of such participant purchased under the
Investment Program at a price equal to (i) the lesser of (A) the sum of $34.50
and the Allocable Interest (as defined therein) and (B) the fair market value of
such shares on the date of purchase by the Company, with respect to unvested
Coinvestment Shares, and (ii) the fair market value of such shares on the date
of purchase by the Company, with respect to Reinvestment Shares.
COMPENSATION OF DIRECTORS
Prior to the Merger, each director of Holdings, other than Messrs. Curran
and Tate, received a $12,000 annual retainer plus a $1,000 fee for each regular
meeting of the Board of Directors attended and a $500 fee for each meeting of a
board committee attended (other than meetings of the Executive Committee, for
which members of the committee other than Charles F. Moran, a former director of
Holdings, received a fee of $750). In addition to those fees, Mr. Moran, as the
Chairman of the Executive Committee, received aggregate compensation of $60,000
for services he provided during the twelve-month period ending February 28,
1997. For the period ending February 28, 1998, Mr. Moran received aggregate
compensation of $60,000 for services provided by him in his capacity as Chairman
of the Executive Committee during such period. Directors were also reimbursed
for all reasonable travel and other expenses of attending meetings of the Board
of Directors or committees of the Board of Directors.
On November 1, 1997, the Board of Directors granted options to purchase
1,000 shares of Holdings Common Stock to the following former directors of
Holdings pursuant to Holdings' Non-Employee Directors Stock Option Plan: Messrs.
Fletcher L. Byrom, Henry L. Druker, Richard L. Berger and Moran.
Compensation arrangements for directors of Holdings and the Company for
periods following the Merger have not yet been determined.
50
<PAGE> 52
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF HOLDINGS
All of the Company's issued and outstanding capital stock is owned by
Holdings. The following table sets forth certain information with respect to the
beneficial ownership of Holdings Common Stock as of May 31, 1998 by (i) any
person or group who beneficially owns more than five percent of Holdings Common
Stock, (ii) by each executive officer and director of Holdings and (iii) all
directors and executive officers of Holdings and the Issuers as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER: SHARES BENEFICIALLY OWNED COMMON STOCK
- ------------------------------------- ------------------------- -------------------------
<S> <C> <C>
DLJ Merchant Banking Partners II, L.P. and
related investors(1)(2)........................ 2,962,124 82.5%
Lawrence M.v.D. Schloss(3)....................... -- --
DLJMB Inc.
277 Park Avenue
New York, NY 10172
Peter T. Grauer(3)............................... -- --
DLJMB Inc.
277 Park Avenue
New York, NY 10172
William F. Dawson, Jr.(3)........................ -- --
DLJMB Inc.
277 Park Avenue
New York, NY 10172
John F. Fort III................................. -- --
Harold A. Poling................................. -- --
Randall E. Curran(4)............................. 59,566 1.8
James H. Tate(5)................................. 19,660 *
Stephanie N. Josephson(6)........................ 12,430 *
Thomas C. Drury(6)............................... 9,860 *
Robert D. Maddox(6).............................. 10,428 *
All directors and officers as a group (10
persons)(3)(7)................................. 111,944 3.4
</TABLE>
- ---------------
* Represents less than 1 percent
(1) Includes 353,428 shares of Holdings Common Stock issuable upon the exercise
of the DLJMB Warrants. See "The Merger and the Merger Financing."
(2) Consists of shares held directly by the following investors related to
DLJMB: DLJ Offshore Partners II, C.V. ("Offshore"), a Netherlands Antilles
limited partnership, DLJ Diversified Partners, L.P. ("Diversified"), a
Delaware limited partnership, DLJMB Funding II, Inc. ("Funding"), a Delaware
corporation, DLJ Merchant Banking Partners II-A, L.P. ("DLJMBPIIA"), a
Delaware limited partnership, DLJ Diversified Partners-A L.P. ("Diversified
A"), a Delaware limited partnership, DLJ Millennium Partners, L.P.
("Millennium"), a Delaware limited partnership, DLJ Millennium Partners-A,
L.P. ("Millennium A"), a Delaware limited partnership, DLJ EAB Partners,
L.P. ("EAB"), UK Investment Plan 1997 Partners ("UK Partners"), a Delaware
partnership, DLJ First ESC L.P., a Delaware limited partnership ("DLJ First
ESC"), and DLJ ESC II, L.P., a Delaware limited partnership ("DLJ ESC II").
See "Certain Relationships and Related Transactions." The address of each of
DLJMB, Diversified, Funding, DLJMBPIIA, Diversified A, Millennium,
Millennium A, DLJ First ESC, DLJ ESC II and EAB is 277 Park Avenue, New
York, New York 10172. The address of Offshore is John B. Gorsiraweg 14,
Willemstad, Curacao, Netherlands Antilles. The address of UK Partners is
2121 Avenue of the Stars, Fox Plaza, Suite 3000, Los Angeles, California
90067.
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<PAGE> 53
(3) Messrs. Schloss, Grauer and Dawson are officers of DLJMB Inc., an affiliate
of DLJMB and the Initial Purchaser. Share data shown for such individuals
excludes shares shown as held by the DLJMB Funds, as to which such
individuals disclaim beneficial ownership.
(4) Includes 9,939 shares of Holdings Common Stock issuable upon the exercise of
vested stock options.
(5) Includes 5,168 shares of Holdings Common Stock issuable upon the exercise of
vested stock options.
(6) Includes 1,060 shares of Holdings Common Stock issuable upon the exercise of
vested stock options.
(7) Includes 18,287 shares of Holdings Common Stock issuable upon the exercise
of vested stock options.
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<PAGE> 54
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
DLJ Capital Funding received customary fees and reimbursement of expenses
in connection with the arrangement and syndication of the New Credit Facility
and as a lender thereunder. DLJSC also received customary fees in connection
with the distribution of the Old Senior Subordinated Notes and the Debentures,
and the offer to purchase and consent solicitation for the Company's outstanding
Senior Notes and Subordinated Notes. Additionally, DLJ Bridge Finance, Inc.
received customary fees in connection with its commitment to provide bridge
financing in the event that the issuance of the Senior Subordinated Notes and
the Debentures did not occur. The aggregate fees received by these DLJ entities
for these services were approximately $20 million.
Pursuant to a letter agreement dated January 16, 1998 (the "Engagement
Letter"), DLJMB engaged DLJSC to act as DLJMB's exclusive financial advisor with
respect to the Merger and, following the Merger, to act as the Company's
exclusive financial advisor for a period of five years (the "Engagement Period")
with respect to the review and analysis of financial and structural alternatives
available to the Company. Upon the consummation of the Merger, DLJMB's
obligations under the Engagement Letter were assumed by the Company.
As compensation for the services to be provided by DLJSC under the
Engagement Letter, DLJSC received a fee of $4,000,000 upon the consummation of
the Merger and will be entitled to receive an annual advisory fee of $300,000,
payable quarterly in equal installments of $75,000. DLJSC will also be entitled
to reimbursement for all of its out-of-pocket expenses incurred in connection
with its engagement.
During the Engagement Period, DLJSC is also entitled to act as the
Company's exclusive financial advisor, sole placement agent, sole initial
purchaser, sole managing underwriter or sole dealer-manager, as the case may be,
with respect to any Transaction (as hereinafter defined) the Company determines
to pursue. The term "Transaction" includes the following: (i) the sale, merger,
consolidation or any other business combination, in one or a series of
transactions, involving any portion of the business, securities or assets of the
Company; (ii) the acquisition (and any related matters such as financings,
divestitures, etc.) in one or a series of transactions, of all or a portion of
the business, securities or assets of another entity or person; (iii) any
recapitalization, refinancing, repurchase or restructuring of the Company's
equity or debt securities or indebtedness or any amendments or modifications to
the Company's debt securities or indentures whether or not in connection
therewith, involving, by or on behalf of the Company, an offer to purchase or
exchange for cash, property, securities, indebtedness or other consideration, or
a solicitation of consents, waivers of authorizations with respect thereto; (iv)
any spin-off, split-off or other extraordinary dividend of cash, securities or
other assets to stockholders of the Company; or (v) any sale of securities of
the Company effected pursuant to a private sale or an underwritten public
offering.
The Company has agreed to indemnify and hold harmless DLJSC and its
affiliates, and the respective directors, officers, agents and employees of
DLJSC and its affiliates (each, an "Indemnified Person") from and against any
losses, claims, damages, judgments, assessments, costs and other liabilities and
will reimburse such Indemnified Persons for all fees and expenses (including the
reasonable fees and expenses of counsel) as they are incurred in investigating,
repairing, pursuing or defending any claim, action, proceeding or investigation
arising out of or in connection with advice or services rendered or to be
rendered by any Indemnified Person pursuant to the Engagement Letter, the
transactions contemplated by the Engagement Letter or any Indemnified Person's
action or inactions in connection with any such advice, services or
transactions, other than liabilities or expenses that are determined by a
judgment of a court of competent jurisdiction to have resulted solely from such
Indemnified Person's gross negligence or willful misconduct.
The Engagement Letter makes available the resources of DLJSC concerning a
variety of financial and operational matters. The services that have been and
will continue to be provided by DLJSC could not otherwise be obtained by the
Company without the addition of personnel or the engagement of outside
professional advisors. In the opinion of management, the fees provided for under
the Engagement Letter reasonably reflect the benefits received and to be
received by the Company.
53
<PAGE> 55
The Company has entered into an Investors' Agreement with the DLJMB Funds
and the senior executive officers of the Company (the "Investors' Agreement").
The Investors' Agreement, among other things, contains provisions regarding the
composition of the Board of Directors of the Company, grants the parties thereto
certain registration rights and contains provisions requiring the senior
executive officers parties thereto to sell their shares of Holdings Common Stock
in connection with certain sales of the Holdings Common Stock by the DLJMB Funds
("drag-along rights") and granting the senior executive officers parties thereto
the right to include a portion of their shares of Holdings Common Stock in
certain sales of the Holdings Common Stock by the DLJMB Funds ("tag-along
rights").
In connection with the Merger, a portion of the funds required to purchase
the shares under the Investment Program were provided through the Management
Loans. Messrs. Curran, Tate, Maddox and Drury and Ms. Josephson received
secured, non-recourse loans from the Company in the amount of $1,249,890,
$367,606, $237,630, $223,222 and $288,413, respectively. The loans bear interest
at the rate of 5.69% per annum and are due in full on May 22, 2006. Upon the
termination of a participant's employment with the Company, other than as a
result of the participant's death, any outstanding loan will become due and
payable.
54
<PAGE> 56
LIMITED LIABILITY COMPANY AGREEMENT
Pursuant to a limited liability company agreement dated May 5, 1998 (the
"LLC Agreement"), Holdings formed Thermadyne LLC as a limited liability company
in accordance with the laws of Delaware. The LLC Agreement governs the relative
rights and duties of the members, directors and officers of the Company and
provides that initially Thermadyne LLC shall have only one member, Holdings.
Holdings' membership interest in Thermadyne LLC is not transferable and new
members in Thermadyne LLC may be admitted only with the written consent of, and
upon such terms and conditions as are approved by, Holdings.
LIMITED LIABILITY
As with a corporation, the sole member of Thermadyne LLC is not liable for
the debts, liabilities, contracts or other obligations of Thermadyne LLC in
excess of their capital contributions.
MANAGEMENT
Thermadyne LLC is managed by the board of directors (the "Board"),
currently consisting of four members. See "Management -- The Issuers." Directors
will be elected at an annual meeting of the members of Thermadyne LLC, which
currently only consists of Holdings. At all meetings of the Board, a majority of
the directors shall constitute a quorum for the transaction of business.
Thermadyne LLC's officers are appointed by the Board.
DISSOLUTION
Thermadyne LLC shall be dissolved upon the first to occur of the following
events: (i) the election of the member to dissolve the Company; or (ii) the
entry of a decree of judicial dissolution under Section 18-802 of the Delaware
Limited Liability Company Act. In any such dissolution, Holdings will be
appointed as the liquidator of Thermadyne LLC.
LIABILITY, EXCULPATION AND INDEMNIFICATION
The LLC Agreement provides that no officer, director or certain other
persons shall have any liability to Thermadyne LLC by reason of any action taken
or failure to act on behalf of Thermadyne LLC, except to the extent such person
has been found to have acted with willful misconduct. Thermadyne LLC is also
required to indemnify such persons in the event they are made, or threatened to
be made, party to any legal proceeding by reason of the fact that they are
acting in such capacity on behalf of Thermadyne LLC to the fullest extent
permitted by Delaware corporate law.
55
<PAGE> 57
THE EXCHANGE OFFER
PURPOSE AND EFFECT
The Old Senior Subordinated Notes were sold by the Issuers on May 22, 1998,
in the Original Offering. In connection with that placement, the Issuers and the
Guarantors entered into the Registration Rights Agreement, which requires that
the Issuers and the Guarantors file the Registration Statement under the
Securities Act with respect to the New Senior Subordinated Notes and, upon the
effectiveness of the Registration Statement, offer to the holders of the Old
Senior Subordinated Notes the opportunity to exchange their Old Senior
Subordinated Notes for a like principal amount of New Senior Subordinated Notes,
which will be issued without a restrictive legend and which generally may be
reoffered and resold by the holder without registration under the Securities
Act. The Registration Rights Agreement further provides that the Issuers and the
Guarantors must use their best efforts to (i) cause the Registration Statement
with respect to the Exchange Offer to be declared effective on or before
November 30, 1998 and (ii) consummate the Exchange Offer on or before December
30, 1998. Except as provided below, upon the completion of the Exchange Offer,
the Company's obligations with respect to the registration of the Old Senior
Subordinated Notes and the New Senior Subordinated Notes will terminate. A copy
of the Registration Rights Agreement has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part and the summary herein
of certain provisions thereof does not purport to be complete and is qualified
in its entirety by reference thereto. As a result of the filing and the
effectiveness of the Registration Statement, certain liquidated damages provided
for in the Registration Rights Agreement will not become payable by the Issuers.
Following the completion of the Exchange Offer (except as set forth in the
paragraph immediately below), holders of Old Senior Subordinated Notes not
tendered will not have any further registration rights and those Old Senior
Subordinated Notes will continue to be subject to certain restrictions on
transfer. Accordingly, the liquidity of the market for the Old Senior
Subordinated Notes could be adversely affected upon completion of the Exchange
Offer.
In order to participate in the Exchange Offer, a holder must represent to
the Issuers and the Guarantors, among other things, that (i) the New Senior
Subordinated Notes acquired pursuant to the Exchange Offer are being obtained in
the ordinary course of business of the person receiving the New Senior
Subordinated Notes, (ii) neither the holder nor any such other person is
engaging in or intends to engage in a distribution of the New Senior
Subordinated Notes, (iii) neither the holder nor any such other person has an
arrangement or understanding with any person to participate in the distribution
of the New Senior Subordinated Notes and (iv) neither the holder nor any such
other person is an "affiliate," as defined under Rule 405 promulgated under the
Securities Act, of the Issuers or any Guarantor. Pursuant to the Registration
Rights Agreement, the Issuers and the Guarantors are required to file a "shelf"
registration statement for a continuous offering pursuant to Rule 415 under the
Securities Act in respect of the Old Senior Subordinated Notes if (a) they are
prohibited from consummating the Exchange Offer because the Exchange Offer is
not permitted by applicable law or Commission policy or (b) any holder of
Transfer Restricted Securities (as defined) notifies the Issuers in writing
prior to the 20th business day following consummation of the Exchange Offer that
(i) based on an opinion of counsel, it is prohibited by law or Commission policy
from participating in the Exchange Offer or (ii) it is a broker-dealer and owns
Senior Subordinated Notes acquired directly from the Issuers. In the event that
the Issuers and the Guarantors are obligated to file a "shelf" registration
statement, they will be required to keep such "shelf" registration statement
effective until the later of (a) the date on which the Initial Purchaser is no
longer deemed to be an affiliate of the Issuers or any Guarantor and (b) the
earlier of May 22, 2000 and such earlier date when no Transfer Restricted
Securities covered by such "shelf" registration statement remain outstanding.
Other than as set forth in this paragraph, no holder will have the right to
participate in the "shelf" registration statement nor otherwise to require that
the Issuers register such holder's shares of Old Senior Subordinated Notes under
the Securities Act. See "-- Procedures for Tendering."
Based on an interpretation by the Commission's staff set forth in no-action
letters issued to third-parties unrelated to the Issuers and the Guarantors, the
Issuers and the Guarantors believe that, with the exceptions set forth below,
New Senior Subordinated Notes issued pursuant to the Exchange Offer in exchange
for Old Senior Subordinated Notes may be offered for resale, resold and
otherwise transferred by any person receiving
56
<PAGE> 58
such New Senior Subordinated Notes, whether or not such person is the registered
holder (other than any such holder or such other person which is an "affiliate"
of the Issuers or any Guarantor within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that the New Senior Subordinated
Notes are acquired in the ordinary course of business of the holder or such
other person and neither the holder nor such other person has an arrangement or
understanding with any person to participate in the distribution of such New
Senior Subordinated Notes. Any holder who tenders in the Exchange Offer for the
purpose of participating in a distribution of the New Senior Subordinated Notes
cannot rely on this interpretation by the Commission's staff and must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with a secondary resale transaction. Each broker-dealer that
receives New Senior Subordinated Notes for its own account in exchange for Old
Senior Subordinated Notes, where the Old Senior Subordinated Notes were acquired
by such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such New Senior Subordinated Notes. See "Plan of
Distribution."
CONSEQUENCES OF FAILURE TO EXCHANGE
Following the completion of the Exchange Offer (except as set forth under
"-- Purpose and Effect" above), holders of Old Senior Subordinated Notes not
tendered will not have any further registration rights and those Old Senior
Subordinated Notes will continue to be subject to certain restrictions on
transfer. Accordingly, the liquidity of the market for a holder's Old Senior
Subordinated Notes could be adversely affected upon completion of the Exchange
Offer if the holder does not participate in the Exchange Offer.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Issuers and the Guarantors will accept any
and all Old Senior Subordinated Notes validly tendered and not withdrawn prior
to 5:00 p.m., New York City time, on the Expiration Date. The Issuers will issue
$1,000 principal amount at maturity of New Senior Subordinated Notes in exchange
for each $1,000 principal amount at maturity of outstanding Old Senior
Subordinated Notes accepted in the Exchange Offer. Holders may tender some or
all of their Old Senior Subordinated Notes pursuant to the Exchange Offer.
However, Old Senior Subordinated Notes may be tendered only in integral
multiples of $1,000 in principal amount.
The form and terms of the New Senior Subordinated Notes are substantially
the same as the form and terms of the Old Senior Subordinated Notes except that
the New Senior Subordinated Notes have been registered under the Securities Act
and will not bear legends restricting their transfer. The New Senior
Subordinated Notes will evidence the same debt as the Old Senior Subordinated
Notes and will be issued pursuant to, and entitled to the benefits of, the
Indenture pursuant to which the Old Senior Subordinated Notes were issued.
As of May 31, 1998, Old Senior Subordinated Notes representing $207,000,000
aggregate principal amount at maturity were outstanding and there was one
registered holder, a nominee of DTC. This Prospectus, together with the Letter
of Transmittal, is being sent to such registered Holder and to others believed
to have beneficial interests in the Old Senior Subordinated Notes. The Issuers
intend to conduct the Exchange Offer in accordance with the applicable
requirements of the Exchange Act and the rules and regulations of the Commission
promulgated thereunder.
The Issuers shall be deemed to have accepted validly tendered Old Senior
Subordinated Notes when, as and if the Issuers have given oral or written notice
thereof to the Exchange Agent. The Exchange Agent will act as agent for the
tendering holders for the purpose of receiving the New Senior Subordinated Notes
from the Issuers and the Guarantors. If any tendered Old Senior Subordinated
Notes are not accepted for exchange because of an invalid tender, the occurrence
of certain other events set forth herein or otherwise, certificates for any such
unaccepted Old Senior Subordinated Notes will be returned, without expense, to
the tendering holder thereof as promptly as practicable after the Expiration
Date.
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Holders who tender Old Senior Subordinated Notes in the Exchange Offer will
not be required to pay brokerage commissions or fees or, subject to the
instructions in the Letter of Transmittal, transfer taxes with respect to the
exchange of Old Senior Subordinated Notes pursuant to the Exchange Offer. The
Issuers will pay all charges and expenses, other than certain applicable taxes,
in connection with the Exchange Offer. See "-- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
September 3, 1998, unless the Issuers, in their sole discretion, extend the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended. In order to extend the
Exchange Offer, the Issuers will issue a notice of any extension by press
release or other public announcement prior to 9:00 a.m., New York City time, on
the next business day after the previously scheduled Expiration Date. The
Issuers reserve the right, in their sole discretion, (i) to delay accepting any
Old Senior Subordinated Notes, to extend the Exchange Offer or, if any of the
conditions set forth under "-- Conditions to the Exchange Offer" shall not have
been satisfied, to terminate the Exchange Offer, by giving oral or written
notice of such delay, extension or termination to the Exchange Agent, or (ii) to
amend the terms of the Exchange Offer in any manner.
PROCEDURES FOR TENDERING
Only a registered holder of Old Senior Subordinated Notes may tender the
Old Senior Subordinated Notes in the Exchange Offer. Except as set forth under
"-- Book Entry Transfer," to tender in the Exchange Offer a holder must
complete, sign, and date the Letter of Transmittal, or a copy thereof, have the
signatures thereon guaranteed if required by the Letter of Transmittal, and mail
or otherwise deliver the Letter of Transmittal or copy to the Exchange Agent
prior to the Expiration Date. In addition, either (i) certificates for such Old
Senior Subordinated Notes must be received by the Exchange Agent along with the
Letter of Transmittal, prior to the Expiration Date or (ii) a timely
confirmation of a book-entry transfer (a "Book-Entry Confirmation") of such Old
Senior Subordinated Notes, if that procedure is available, into the Exchange
Agent's account at DTC (the "Book-Entry Transfer Facility") pursuant to the
procedure for book-entry transfer described below, must be received by the
Exchange Agent prior to the Expiration Date, or (iii) the holder must comply
with the guaranteed delivery procedures described below. To be tendered
effectively, the Letter of Transmittal and other required documents must be
received by the Exchange Agent at the address set forth under "-- Exchange
Agent" prior to the Expiration Date.
The tender by a holder that is not withdrawn before the Expiration Date
will constitute an agreement between that holder and the Issuers in accordance
with the terms and subject to the conditions set forth herein and in the Letter
of Transmittal.
THE METHOD OF DELIVERY OF OLD SENIOR SUBORDINATED NOTES AND THE LETTER OF
TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE
ELECTION AND RISK OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED
THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT
TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE
EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OLD SENIOR SUBORDINATED NOTES
SHOULD BE SENT TO THE ISSUERS. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS,
DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THESE
TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Old Senior Subordinated Notes are registered in
the name of a broker, dealer, commercial bank, trust company or other nominee
and who wishes to tender should contact the registered holder promptly and
instruct the registered holder to tender on the beneficial owner's behalf. If
the beneficial owner wishes to tender on the owner's own behalf, the owner must,
prior to completing and executing the Letter of Transmittal and delivering the
owner's Old Senior Subordinated Notes, either make
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<PAGE> 60
appropriate arrangements to register ownership of the Old Senior Subordinated
Notes in the beneficial owner's name or obtain a properly completed bond power
from the registered holder. The transfer of registered ownership may take
considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless Old Senior Subordinated Notes tendered pursuant thereto are tendered (i)
by a registered holder who has not completed the box entitled "Special
Registration Instructions" or "Special Delivery Instructions" on the Letter of
Transmittal or (ii) for the account of an Eligible Institution. If signatures on
a Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, the guarantee must be by any eligible guarantor
institution that is a member of or participant in the Securities Transfer Agents
Medallion Program, the New York Stock Exchange Medallion Signature Program or an
"eligible guarantor institution" within the meaning of Rule 17Ad-15 under the
Exchange Act (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered holder of any Old Senior Subordinated Notes listed therein, the Old
Senior Subordinated Notes must be endorsed or accompanied by a properly
completed bond power, signed by the registered holder as that registered
holder's name appears on the Old Senior Subordinated Notes.
If the Letter of Transmittal or any Old Senior Subordinated Notes or bond
powers are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, such persons should so indicate when signing, and
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal unless waived by the Issuers.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Old Senior Subordinated Notes
will be determined by the Issuers in their sole discretion, which determination
will be final and binding. The Issuers reserve the absolute right to reject any
and all Old Senior Subordinated Notes not properly tendered or any Old Senior
Subordinated Notes the Issuers' acceptance of which would, in the opinion of
counsel for the Issuers, be unlawful. The Issuers also reserve the right to
waive any defects, irregularities or conditions of tender as to particular Old
Senior Subordinated Notes. The Issuers' interpretation of the terms and
conditions of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Senior Subordinated
Notes must be cured within such time as the Issuers shall determine. Although
the Issuers intend to notify holders of defects or irregularities with respect
to tenders of Old Senior Subordinated Notes, neither the Issuers, the Exchange
Agent, nor any other person shall incur any liability for failure to give such
notification. Tenders of Old Senior Subordinated Notes will not be deemed to
have been made until such defects or irregularities have been cured or waived.
Any Old Senior Subordinated Notes received by the Exchange Agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned by the Exchange Agent to the tendering holders,
unless otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
In addition, the Issuers reserve the right in their sole discretion to
purchase or make offers for any Old Senior Subordinated Notes that remain
outstanding after the Expiration Date or, as set forth under "-- Conditions to
the Exchange Offer," to terminate the Exchange Offer and, to the extent
permitted by applicable law, purchase Old Senior Subordinated Notes in the open
market, in privately negotiated transactions, or otherwise. The terms of any
such purchases or offers could differ from the terms of the Exchange Offer.
By tendering, each holder will represent to the Issuers that, among other
things, (i) the New Senior Subordinated Notes acquired pursuant to the Exchange
Offer are being obtained in the ordinary course of business of the person
receiving such New Senior Subordinated Notes, whether or not such person is the
registered holder, (ii) neither the holder nor any such other person is engaging
in or intends to engage in a distribution of such New Senior Subordinated Notes,
(iii) neither the holder nor any such other person has an arrangement or
understanding with any person to participate in the distribution of such New
Senior
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Subordinated Notes, and (iv) neither the holder nor any such other person is an
"affiliate," as defined under Rule 405 of the Securities Act, of the Issuers or
any Guarantor.
In all cases, issuance of New Senior Subordinated Notes for Old Senior
Subordinated Notes that are accepted for exchange pursuant to the Exchange Offer
will be made only after timely receipt by the Exchange Agent of certificates for
such Old Senior Subordinated Notes or a timely Book-Entry Confirmation of such
Old Senior Subordinated Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility, a properly completed and duly executed Letter of
Transmittal (or, with respect to the DTC and its participants, electronic
instructions in which the tendering holder acknowledges its receipt of and
agreement to be bound by the Letter of Transmittal), and all other required
documents. If any tendered Old Senior Subordinated Notes are not accepted for
any reason set forth in the terms and conditions of the Exchange Offer or if Old
Senior Subordinated Notes are submitted for a greater principal amount than the
holder desires to exchange, such unaccepted or non-exchanged Old Senior
Subordinated Notes will be returned without expense to the tendering Holder
thereof (or, in the case of Old Senior Subordinated Notes tendered by book-entry
transfer into the Exchange Agent's account at the Book-Entry Transfer Facility
pursuant to the book-entry transfer procedures described below, such
nonexchanged Old Senior Subordinated Notes will be credited to an account
maintained with such Book-Entry Transfer Facility) as promptly as practicable
after the expiration or termination of the Exchange Offer.
Each broker-dealer that receives New Senior Subordinated Notes for its own
account in exchange for Old Senior Subordinated Notes, where the Old Senior
Subordinated Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such New Senior
Subordinated Notes. See "Plan of Distribution."
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Senior Subordinated Notes at the Book-Entry Transfer Facility for
purposes of the Exchange Offer within two business days after the date of this
Prospectus, and any financial institution that is a participant in the Book-
Entry Transfer Facility's systems may make book-entry delivery of Old Senior
Subordinated Notes being tendered by causing the Book-Entry Transfer Facility to
transfer such Old Senior Subordinated Notes into the Exchange Agent's account at
the Book-Entry Transfer Facility in accordance with such Book-Entry Transfer
Facility's procedures for transfer. However, although delivery of Old Senior
Subordinated Notes may be effected through book-entry transfer at the Book-Entry
Transfer Facility, the Letter of Transmittal or copy thereof, with any required
signature guarantees and any other required documents, must, in any case other
than as set forth in the following paragraph, be transmitted to and received by
the Exchange Agent at the address set forth under "-- Exchange Agent" on or
prior to the Expiration Date or the guaranteed delivery procedures described
below must be complied with.
DTC's Automated Tender Offer Program ("ATOP") is the only method of
processing exchange offers through DTC. To accept the Exchange Offer through
ATOP, participants in DTC must send electronic instructions to DTC through DTC's
communication system in lieu of sending a signed, hard copy Letter of
Transmittal. DTC is obligated to communicate those electronic instructions to
the Exchange Agent. To tender Old Senior Subordinated Notes through ATOP, the
electronic instructions sent to DTC and transmitted by DTC to the Exchange Agent
must contain the character by which the participant acknowledges its receipt of
and agrees to be bound by the Letter of Transmittal.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Old Senior Subordinated Notes desires to
tender such Old Senior Subordinated Notes and the Old Senior Subordinated Notes
are not immediately available, or time will not permit such holder's Old Senior
Subordinated Notes or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if (i) the tender is made
through an Eligible Institution, (ii) prior to the Expiration Date, the Exchange
Agent received from such Eligible Institution a properly completed and duly
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executed Letter of Transmittal and Notice of Guaranteed Delivery, substantially
in the form provided by the Issuers (by mail or hand delivery), setting forth
the name and address of the holder of Old Senior Subordinated Notes and the
amount of Old Senior Subordinated Notes tendered, stating that the tender is
being made thereby and guaranteeing that within three New York Stock Exchange
("NYSE") trading days after the date of execution of the Notice of Guaranteed
Delivery, the certificates for all physically tendered Old Senior Subordinated
Notes, in proper form for transfer, or a Book-Entry Confirmation, as the case
may be, and any other documents required by the Letter of Transmittal will be
deposited by the Eligible Institution with the Exchange Agent, and (iii) the
certificates for all physically tendered Old Senior Subordinated Notes, in
proper form for transfer, or a Book-Entry Confirmation, as the case may be, and
all other documents required by the Letter of Transmittal, are received by the
Exchange Agent within three NYSE trading days after the date of execution of the
Notice of Guaranteed Delivery.
WITHDRAWAL RIGHTS
Tenders of Old Senior Subordinated Notes may be withdrawn at any time prior
to 5:00 p.m., New York City time, on the Expiration Date.
For a withdrawal of a tender of Old Senior Subordinated Notes to be
effective, a written or (for DTC participants) electronic ATOP transmission
notice of withdrawal must be received by the Exchange Agent at its address set
forth under "-- Exchange Agent" prior to 5:00 p.m., New York City time, on the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having deposited the Old Senior Subordinated Notes to be withdrawn (the
"Depositor"), (ii) identify the Old Senior Subordinated Notes to be withdrawn
(including the certificate number or numbers and principal amount of such Old
Senior Subordinated Notes), (iii) be signed by the holder in the same manner as
the original signature on the Letter of Transmittal by which such Old Senior
Subordinated Notes were tendered (including any required signature guarantees)
or be accompanied by documents of transfer sufficient to have the Trustee
register the transfer of such Old Senior Subordinated Notes into the name of the
person withdrawing the tender, and (iv) specify the name in which any such Old
Senior Subordinated Notes are to be registered, if different from that of the
Depositor. All questions as to the validity, form and eligibility (including
time of receipt) of such notices will be determined by the Issuers, whose
determination shall be final and binding on all parties. Any Old Senior
Subordinated Notes so withdrawn will be deemed not to have been validly tendered
for exchange for purposes of the Exchange Offer. Any Old Senior Subordinated
Notes which have been tendered for exchange but which are not exchanged for any
reason will be returned to the holder thereof without cost to such holder as
soon as practicable after withdrawal, rejection of tender, or termination of the
Exchange Offer. Properly withdrawn Old Senior Subordinated Notes may be
retendered by following one of the procedures under "-- Procedures for
Tendering" at any time on or prior to the Expiration Date.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Issuers and
the Guarantors shall not be required to accept for exchange, or to issue New
Senior Subordinated Notes in exchange for, any Old Senior Subordinated Notes and
may terminate or amend the Exchange Offer if at any time before the acceptance
of such Old Senior Subordinated Notes for exchange or the exchange of the New
Senior Subordinated Notes for such Old Senior Subordinated Notes, the Issuers
determine that the Exchange Offer violates applicable law, any applicable
interpretation of the staff of the Commission or any order of any governmental
agency or court of competent jurisdiction.
The foregoing conditions are for the sole benefit of the Issuers and the
Guarantors and may be asserted by the Issuers and the Guarantors regardless of
the circumstances giving rise to any such condition or may be waived by the
Issuers and the Guarantors in whole or in part at any time and from time to time
in its sole discretion. The failure by the Issuers and the Guarantors at any
time to exercise any of the foregoing rights shall not be deemed a waiver of any
such right and each such right shall be deemed an ongoing right which may be
asserted at any time and from time to time.
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In addition, the Issuers and the Guarantors will not accept for exchange
any Old Senior Subordinated Notes tendered, and no New Senior Subordinated Notes
will be issued in exchange for any such Old Senior Subordinated Notes, if at
such time any stop order shall be threatened or in effect with respect to the
Registration Statement of which this Prospectus constitutes a part or the
qualification of the Indenture under the Trust Indenture Act of 1939, as amended
(the "TIA"). In any such event the Issuers and the Guarantors are required to
use every reasonable effort to obtain the withdrawal of any stop order at the
earliest possible time.
EXCHANGE AGENT
All executed Letters of Transmittal should be directed to the Exchange
Agent. State Street Bank and Trust Company has been appointed as Exchange Agent
for the Exchange Offer. Questions, requests for assistance and requests for
additional copies of this Prospectus or of the Letter of Transmittal should be
directed to the Exchange Agent addressed as follows:
Deliver to:
STATE STREET BANK AND TRUST COMPANY, EXCHANGE AGENT
<TABLE>
<S> <C>
By Mail: Overnight Courier:
State Street Bank and Trust Company State Street Bank and Trust Company
P.O. Box 778 Two International Place
Boston, Massachusetts 02102 Boston, Massachusetts 02110
Attention: Corporate Trust Department Attention: Corporate Trust Department
Kellie Mullen Kellie Mullen
By Hand in New York (as Drop Agent): By Hand in Boston:
State Street Bank and Trust Company, N.A. State Street Bank and Trust Company
61 Broadway, 15th Floor Two International Plaza
Corporate Trust Window Fourth Floor, Corporate Trust
New York, New York 10006 Boston, Massachusetts 02110
</TABLE>
Telephone Number
(617) 664-5587
FEES AND EXPENSES
The Issuers will not make any payments to brokers, dealers, or others
soliciting acceptances of the Exchange Offer. The principal solicitation is
being made by mail; however, additional solicitations may be made in person or
by telephone by officers and employees of the Issuers.
The estimated cash expenses to be incurred in connection with the Exchange
Offer will be paid by the Issuers and are estimated in the aggregate to be
$188,085.15, which includes fees and expenses of the Exchange Agent, accounting,
legal, printing, and related fees and expenses.
TRANSFER TAXES
Holders who tender their Old Senior Subordinated Notes for exchange will
not be obligated to pay any transfer taxes in connection therewith, except that
holders who instruct the Issuers to register New Senior Subordinated Notes in
the name of, or request that Old Senior Subordinated Notes not tendered or not
accepted in the Exchange Offer be returned to, a person other than the
registered tendering holder will be responsible for the payment of any
applicable transfer tax thereon.
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DESCRIPTION OF NEW CREDIT FACILITY
The New Credit Facility has been provided by a syndicate of banks and other
financial institutions led by DLJSC, as arranger (the "Arranger"), DLJ Capital
Funding, Inc., as syndication agent (the "Syndication Agent"), ABN AMRO Bank
N.V., Chicago Branch, as administrative agent (the "Administrative Agent"), and
Societe Generale, as documentation agent. The New Credit Facility includes a
$330 million term loan facility (the "Term Loan Facility") and a $100 million
revolving credit facility (subject to adjustment as provided below), which
provides for revolving loans and up to $50 million of letters of credit (the
"Revolving Credit Facility"). The Term Loan Facility is comprised of a term A
facility of $100 million (the "Term A Facility"), which has a maturity of six
years, a term B facility of $115 million (the "Term B Facility"), which has a
maturity of seven years, and a term C facility of $115 million (the "Term C
Facility"), which has a maturity of eight years. The Revolving Credit Facility
terminates six years after the date of initial funding of the New Credit
Facility and is subject to a potential, but uncommitted, increase of up to $25
million at the Company's request at any time prior to such sixth anniversary.
Such increase is available only if one or more financial institutions agrees, at
the time of the Company's request, to provide it.
The New Credit Facility bears interest, at the Company's option, at the
Administrative Agent's alternate base rate or at the reserve-adjusted London
Interbank Offered Rate ("LIBOR") plus, in each case, applicable margins of (i)
in the case of alternate base rate loans, (x) 1.00% for revolving and Term A
loans, (y) 1.25% for Term B loans and (z) 1.50% for Term C loans and (ii) in the
case of LIBOR loans, (x) 2.25% for revolving and Term A loans, (y) 2.50% for
Term B loans and (z) 2.75% for Term C loans.
The Company pays a commitment fee calculated at a rate of 0.50% per annum
on the daily average unused commitment under the Revolving Credit Facility
(whether or not then available). Such fee is payable quarterly in arrears and
upon termination of the Revolving Credit Facility (whether at stated maturity or
otherwise).
Beginning six months after the consummation of the Merger and the Merger
Financing, the applicable margins for the Term A Facility and the Revolving
Credit Facility, as well as the commitment fee and letter of credit fee, is
subject to possible reductions based on the ratio of consolidated Debt to EBITDA
(each as defined in the New Credit Facility).
The Company pays a letter of credit fee calculated (i) in the case of
standby letters of credit, at a rate per annum equal to the then applicable
margin for LIBOR loans under the Revolving Credit Facility minus 0.125% and (ii)
in the case of documentary letters of credit, at a rate per annum equal to 1.25%
plus, in each case, a fronting fee on the stated amount of each letter of
credit. Such fees are payable quarterly in arrears. In addition, the Company
pays customary transaction charges in connection with any letters of credit.
The Term Loan Facility is subject to the following amortization schedule:
<TABLE>
<CAPTION>
YEAR TERM LOAN A TERM LOAN B TERM LOAN C
---- ----------- ----------- -----------
<S> <C> <C> <C>
1............................... 0.0% 1.0% 1.0%
2............................... 5.0% 1.0% 1.0%
3............................... 10.0% 1.0% 1.0%
4............................... 20.0% 1.0% 1.0%
5............................... 25.0% 1.0% 1.0%
6............................... 40.0% 1.0% 1.0%
7............................... -- 94.0% 1.0%
8............................... -- -- 93.0%
------ ------ ------
100.0% 100.0% 100.0%
</TABLE>
The Term Loan Facility is subject to mandatory prepayment: (i) with 100% of
the net cash proceeds from the issuance of debt, subject to certain exceptions,
(ii) with 100% of the net cash proceeds of asset sales and casualty events,
subject to certain exceptions, (iii) with 50% of the Company's excess cash flow
(as defined in the New Credit Facility) to the extent that the Leverage Ratio
(as defined in the New Credit Facility) exceeds 3.5 to 1.0, and (iv) with 50% of
the net cash proceeds from the issuance of equity to the
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extent that the Leverage Ratio exceeds 4.0 to 1.0. The Company's obligations
under the New Credit Facility are secured by a first-priority perfected lien on:
(i) substantially all domestic property and assets, tangible and intangible
(other than accounts receivable sold or to be sold into the accounts receivable
program and short term real estate leases), of the Company and its domestic
subsidiaries (other than the special purpose subsidiaries involved in the
accounts receivable program); (ii) the capital stock of (a) the Company held by
Holdings and (b) all subsidiaries of the Company (provided that no more than 65%
of the equity interest in non-U.S. subsidiaries held by the Company and its
domestic subsidiaries and no equity interests in subsidiaries held by foreign
subsidiaries are required to be pledged); and (iii) all intercompany
indebtedness. Holdings has guaranteed the obligations of the Company under the
New Credit Facility. In addition, obligations under the New Credit Facility are
guaranteed by all domestic subsidiaries.
The New Credit Facility contains customary covenants and restrictions on
the Company's ability to engage in certain activities, including, but not
limited to: (i) limitations on the incurrence of liens and indebtedness, (ii)
restrictions on sale lease-back transactions, consolidations, mergers, sale of
assets, capital expenditures, transactions with affiliates and investments, and
(iii) severe restrictions on dividends, and other similar distributions.
The New Credit Facility contains financial covenants requiring the Company
to maintain a minimum level of adjusted EBITDA (as defined in the New Credit
Facility); a minimum Interest Coverage Ratio (as defined in the New Credit
Facility); a minimum Fixed Charge Coverage Ratio (as defined in the New Credit
Facility); and a maximum Leverage Ratio (as defined in the New Credit Facility).
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DESCRIPTION OF NEW SENIOR SUBORDINATED NOTES
GENERAL
The New Senior Subordinated Notes will be issued pursuant to an Indenture
(the "Indenture") among the Issuers and State Street Bank and Trust Company, as
trustee (the "Trustee"). The terms of the New Senior Subordinated Notes include
those stated in the Indenture and those made part of the Indenture by reference
to the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The
New Senior Subordinated Notes are subject to all such terms, and Holders of New
Senior Subordinated Notes are referred to the Indenture and the Trust Indenture
Act for a statement thereof. A copy of the Indenture has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part and the
summary herein of certain provisions thereof does not purport to be complete and
is qualified in its entirety by reference thereto. The definitions of certain
terms used in the following summary are set forth below under "-- Certain
Definitions." For purposes of this summary, the term "Company' refers only to
Thermadyne LLC and not to any of its Subsidiaries.
The New Senior Subordinated Notes will be general unsecured obligations of
the Issuers and will be subordinated in right of payment to all existing and
future Senior Indebtedness of the Issuers (including borrowings under the New
Credit Facility). The New Senior Subordinated Notes will rank pari passu with
any future senior subordinated Indebtedness of the Issuers and will rank senior
in right of payment to all future subordinated Indebtedness of the Issuers. The
New Senior Subordinated Notes will be effectively subordinated to all
liabilities of the Issuers' subsidiaries that are not Guarantors. The New Senior
Subordinated Notes will be unconditionally guaranteed on a senior subordinated
basis by certain of the Company's existing domestic subsidiaries. The Note
Guarantees will be general unsecured obligations of the Guarantors, will be
subordinated in right of payment to all existing and future Senior Indebtedness
of the Guarantors, including indebtedness under the New Credit Facility, and
will rank senior in right of payment to any future subordinated indebtedness of
the Guarantors. On a pro forma basis after giving effect to the Merger,
including the Merger Financing and the application of the proceeds thereof, as
of March 31, 1998, the Company and the Guarantors would have had outstanding
approximately $379.5 million of Senior Indebtedness and the Company's
non-Guarantor subsidiaries would have had approximately $87.0 million of
outstanding liabilities, including trade payables. The Indenture will permit the
Company and its Subsidiaries to incur additional Indebtedness, including Senior
Indebtedness, in the future. See "Risk Factors -- Subordination; Asset
Encumbrances" and "-- Certain Covenants -- Incurrence of Indebtedness and
Issuance of Preferred Stock."
Thermadyne Capital, a wholly-owned subsidiary of the Company incorporated
in Delaware, was formed for the purpose of serving as a co-issuer of the Senior
Subordinated Notes in order to facilitate the Original Offering. The Company
believes that certain prospective purchasers of the Senior Subordinated Notes
may be restricted in their ability to purchase debt securities of limited
liability companies, such as the Company, unless such debt securities are
jointly issued by a corporation. Thermadyne Capital will not have any
substantial operations or assets and will not have any revenues. As a result,
prospective purchasers of the New Senior Subordinated Notes should not expect
Thermadyne Capital to participate in servicing the interest and principal
obligations on the New Senior Subordinated Notes.
All of the Company's Subsidiaries (other than Thermadyne Capital and
Thermadyne Receivables, Inc.) are Restricted Subsidiaries. However, under
certain circumstances, the Company will be permitted to designate current or
future Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries will
not be subject to the restrictive covenants set forth in the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The New Senior Subordinated Notes will initially be limited in aggregate
principal amount to $207.0 million and will mature on June 1, 2008. Interest on
the New Senior Subordinated Notes will accrue at the rate of 9 7/8% per annum
and will be payable semi-annually in arrears on June 1 and December 1,
commencing on December 1, 1998, to Holders of record on the immediately
preceding May 15 and November 15. Interest on the New Senior Subordinated Notes
will accrue from the most recent date to which
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interest has been paid or, if no interest has been paid, from the date of
original issuance. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months. Principal of, premium, if any, and interest
and Liquidated Damages, if any, on the New Senior Subordinated Notes will be
payable at the office or agency of the Issuers maintained for such purpose
within the City and State of New York or, at the option of the Issuers, payment
of interest and Liquidated Damages may be made by check mailed to the Holders of
the New Senior Subordinated Notes at their respective addresses set forth in the
register of Holders of New Senior Subordinated Notes; provided that all payments
of principal, premium, interest and Liquidated Damages with respect to New
Senior Subordinated Notes represented by one or more permanent global New Senior
Subordinated Notes will be paid by wire transfer of immediately available funds
to the account of the Depository Trust Company or any successor thereto. Until
otherwise designated by the Issuers, the Issuers' office or agency in New York
will be the office of the Trustee maintained for such purpose. The New Senior
Subordinated Notes will be issued in denominations of $1,000 and integral
multiples thereof.
Subject to the covenants described below, the Issuers may issue additional
notes under the Indenture having the same terms in all respects as the New
Senior Subordinated Notes (or in all respects except for the payment of interest
on the New Senior Subordinated Notes (i) scheduled and paid prior to the date of
issuance of such notes or (ii) payable on the first Interest Payment Date
following such date of issuance). The New Senior Subordinated Notes and any such
additional notes would be treated as a single class for all purposes under the
Indenture.
SUBORDINATION
The payment of Subordinated Note Obligations will be subordinated in right
of payment, as set forth in the Indenture, to the prior payment in full in cash
or cash equivalents of all Senior Indebtedness, whether outstanding on the date
of the Indenture or thereafter incurred.
Upon any distribution to creditors of the Issuers in a liquidation or
dissolution of the Issuers or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Issuers or their property, an
assignment for the benefit of creditors or any marshalling of the Issuers'
assets and liabilities, the holders of Senior Indebtedness will be entitled to
receive payment in full in cash or cash equivalents of all Obligations due in
respect of such Senior Indebtedness (including interest after the commencement
of any such proceeding at the rate specified in the applicable Senior
Indebtedness) before the Holders of New Senior Subordinated Notes will be
entitled to receive any payment with respect to the Subordinated Note
Obligations, and until all Obligations with respect to Senior Indebtedness are
paid in full in cash or cash equivalents, any distribution to which the Holders
of New Senior Subordinated Notes would be entitled shall be made to the holders
of Senior Indebtedness (except that Holders of Senior Subordinated Notes may
receive and retain Permitted Junior Securities and payments made from the trust
described under "-- Legal Defeasance and Covenant Defeasance").
The Issuers also may not make any payment upon or in respect of the
Subordinated Note Obligations (except in Permitted Junior Securities or from the
trust described under "-- Legal Defeasance and Covenant Defeasance") if (a) a
default in the payment of the principal of, premium, if any, or interest on or
commitment fees relating to, Designated Senior Indebtedness occurs and is
continuing beyond any applicable period of grace or (b) any other default occurs
and is continuing with respect to Designated Senior Indebtedness that permits
holders of the Designated Senior Indebtedness as to which such default relates
to accelerate its maturity and the Trustee receives a notice of such default (a
"Payment Blockage Notice") from the Issuers or the holders of any Designated
Senior Indebtedness. Payments on the Senior Subordinated Notes may and shall be
resumed (a) in the case of a payment default, upon the date on which such
default is cured or waived and (b) in case of a nonpayment default, the earlier
of the date on which such nonpayment default is cured or waived or 179 days
after the date on which the applicable Payment Blockage Notice is received,
unless the maturity of any Designated Senior Indebtedness has been accelerated.
No new period of payment blockage may be commenced unless and until 360 days
have elapsed since the effectiveness of the immediately prior Payment Blockage
Notice. No nonpayment default that existed or was continuing on the date of
delivery of any Payment Blockage Notice to the Trustee shall be, or be made, the
basis for a
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subsequent Payment Blockage Notice unless such default shall have been waived or
cured for a period of not less than 90 days.
"Designated Senior Indebtedness" means (a) any Indebtedness outstanding
under the New Credit Facility and (b) any other Senior Indebtedness permitted
under the Indenture the principal amount of which is $25.0 million or more and
that has been designated by the Issuers as "Designated Senior Indebtedness."
"Permitted Junior Securities" means Equity Interests in the Issuers or debt
securities of the Issuers that are subordinated to all Senior Indebtedness (and
any debt securities issued in exchange for Senior Indebtedness) to substantially
the same extent as, or to a greater extent than, the Senior Subordinated Notes
are subordinated to Senior Indebtedness.
"Senior Indebtedness" means, with respect to any Person, (a) all
Obligations of such Person outstanding under the New Credit Facility and all
Hedging Obligations payable to a lender or an Affiliate thereof or to a Person
that was a lender or an Affiliate thereof at the time the contract was entered
into under the New Credit Facility or any of its Affiliates, including, without
limitation, interest accruing subsequent to the filing of, or which would have
accrued but for the filing of, a petition for bankruptcy, whether or not such
interest is an allowable claim in such bankruptcy proceeding, (b) any other
Indebtedness, unless the instrument under which such Indebtedness is incurred
expressly provides that it is subordinated in right of payment to any other
Senior Indebtedness of such Person and (c) all Obligations with respect to the
foregoing. Notwithstanding anything to the contrary in the foregoing, Senior
Indebtedness will not include (i) any liability for federal, state, local or
other taxes, (ii) any Indebtedness of such Person (other than pursuant to the
New Credit Facility) to any of its Subsidiaries or other Affiliates, (iii) any
trade payables or (iv) any Indebtedness that is incurred in violation of the
Indenture.
"Subordinated Note Obligations" means all Obligations with respect to the
Senior Subordinated Notes, including, without limitation, principal, premium (if
any), interest and Liquidated Damages payable pursuant to the terms of the
Senior Subordinated Notes (including upon the acceleration or redemption
thereof), together with and including any amounts received or receivable upon
the exercise of rights of rescission or other rights of action (including claims
for damages) or otherwise.
The Indenture further requires that the Issuers promptly notify holders of
Senior Indebtedness if payment of the Senior Subordinated Notes is accelerated
because of an Event of Default. As a result of the subordination provisions
described above, in the event of a liquidation or insolvency, New Holders of
Senior Subordinated Notes may recover less ratably than creditors of the Issuers
who are holders of Senior Indebtedness.
NOTE GUARANTEES
The Company's payment obligations under the New Senior Subordinated Notes
will be jointly and severally guaranteed (the "Note Guarantees") by the
Guarantors. The Note Guarantee of each Guarantor will be subordinated to the
prior payment in full in cash or cash equivalents of all Senior Indebtedness of
such Guarantor (including such Guarantor's guarantee of the New Credit Facility)
to the same extent that the New Senior Subordinated Notes are subordinated to
Senior Indebtedness of the Company. The obligations of each Guarantor under its
Note Guarantee will be limited so as not to constitute a fraudulent conveyance
under applicable law.
The Indenture provides that no Guarantor may consolidate with or merge with
or into (whether or not such Guarantor is the surviving Person), another
corporation, Person or entity whether or not affiliated with such Guarantor
unless: (i) subject to the provisions of the following paragraph, the Person
formed by or surviving any such consolidation or merger (if other than such
Guarantor) assumes all the obligations of such Guarantor pursuant to a
supplemental indenture in form and substance reasonably satisfactory to the
Trustee, under the Senior Subordinated Notes, the Indenture and the Registration
Rights Agreement; (ii) immediately after giving effect to such transaction, no
Default or Event of Default exists; (iii) the Company would, at the time of such
transaction and after giving pro forma effect thereto as if such transaction had
occurred at the beginning of the applicable four-quarter period, be permitted to
incur at least $1.00 of
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additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the covenant described under the caption " -- Incurrence of
Indebtedness and Issuance of Preferred Stock." The requirements of clause (iii)
of this paragraph will not apply in the case of a consolidation with or merger
with or into the Company or another Guarantor.
The Indenture provides that, in the event of a sale or other disposition of
all of the assets of any Guarantor, by way of merger, consolidation or
otherwise, or a sale or other disposition of all of the capital stock of any
Guarantor, such Guarantor (in the event of a sale or other disposition, by way
of such a merger, consolidation or otherwise, of all of the capital stock of
such Guarantor) or the corporation acquiring the property (in the event of a
sale or other disposition of all of the assets of such Guarantor) will be
released and relieved of any obligations under its Note Guarantee; provided that
the Net Proceeds of such sale or other disposition are applied in accordance
with the applicable provisions of the Indenture. See "Repurchase at the Option
of Holders."
OPTIONAL REDEMPTION
Except as provided below, the New Senior Subordinated Notes will not be
redeemable at the Issuers' option prior to June 1, 2003. Thereafter, the New
Senior Subordinated Notes will be subject to redemption at any time at the
option of the Issuers, in whole or in part, upon not less than 30 nor more than
60 days' notice, in cash at the redemption prices (expressed as percentages of
principal amount) set forth below, plus accrued and unpaid interest and
Liquidated Damages, if any, thereon to the applicable redemption date, if
redeemed during the twelve-month period beginning on June 1 of the years
indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2003..................................................... 104.938%
2004..................................................... 103.292%
2005..................................................... 101.646%
2006 and thereafter...................................... 100.000%
</TABLE>
Notwithstanding the foregoing, on or prior to June 1, 2001, the Issuers may
redeem up to 35% of the aggregate principal amount of Senior Subordinated Notes
ever issued under the Indenture in cash at a redemption price of 109.875% of the
principal amount thereof, plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the redemption date, with the net cash proceeds of
one or more Public Equity Offerings; provided that at least 65% of the aggregate
principal amount of Senior Subordinated Notes ever issued under the Indenture
remains outstanding immediately after the occurrence of any such redemption; and
provided further that such redemption shall occur within 90 days of the date of
the closing of any such Public Equity Offering.
In addition, at any time prior to June 1, 2003, the Issuers may, at their
option upon the occurrence of a Change of Control, redeem the New Senior
Subordinated Notes, in whole but not in part, upon not less than 30 nor more
than 60 days' prior notice (but in no event may any such redemption occur more
than 60 days after the occurrence of such Change of Control), in cash at a
redemption price equal to (i) the present value of the sum of all the remaining
interest (excluding accrued and unpaid interest, if any), premium and principal
payments that would become due on the New Senior Subordinated Notes as if the
New Senior Subordinated Notes were to remain outstanding and be redeemed on June
1, 2003, computed using a discount rate equal to the Treasury Rate plus 50 basis
points, plus (ii) accrued and unpaid interest and Liquidated Damages, if any, to
the date of redemption.
"Treasury Rate" means, as of any redemption date, the yield to maturity as
of such redemption date of United States Treasury securities with a constant
maturity (as compiled and published in the most recent Federal Reserve
Statistical Release H.15 (519) that has become publicly available at least two
Business Days prior to the redemption date (or, if such Statistical Release is
no longer published, any publicly available source of similar market data)) most
nearly equal to the period from the redemption date to June 1, 2003; provided
that if the period from the redemption date to June 1, 2003 is less than one
year, the weekly average
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yield on actually traded United States Treasury securities adjusted to a
constant maturity of one year shall be used.
SELECTION AND NOTICE
If less than all of the Senior Subordinated Notes are to be redeemed at any
time, selection of New Senior Subordinated Notes for redemption will be made by
the Trustee in compliance with the requirements of the principal national
securities exchange, if any, on which the New Senior Subordinated Notes are
listed, or, if the New Senior Subordinated Notes are not so listed, on a pro
rata basis, by lot or by such method as the Trustee shall deem fair and
appropriate; provided that no New Senior Subordinated Notes of $1,000 or less
shall be redeemed in part. Notices of redemption shall be mailed by first class
mail at least 30 but not more than 60 days before the redemption date to each
Holder of New Senior Subordinated Notes to be redeemed at its registered
address. Notices of redemption may not be conditional. If any New Senior
Subordinated Note is to be redeemed in part only, the notice of redemption that
relates to such New Senior Subordinated Note shall state the portion of the
principal amount thereof to be redeemed. A new Senior Subordinated Note in
principal amount equal to the unredeemed portion thereof will be issued in the
name of the Holder thereof upon cancellation of the original New Senior
Subordinated Note. New Senior Subordinated Notes called for redemption become
due on the date fixed for redemption. On and after the redemption date, interest
ceases to accrue on New Senior Subordinated Notes or portions of them called for
redemption.
MANDATORY REDEMPTION
The Issuers are not required to make mandatory redemption of, or sinking
fund payments with respect to, the New Senior Subordinated Notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of New Senior
Subordinated Notes will have the right to require the Issuers to repurchase all
or any part (equal to $1,000 or an integral multiple thereof) of such Holder's
New Senior Subordinated Notes pursuant to the offer described below (the "Change
of Control Offer") at an offer price in cash equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the date of repurchase (the "Change of Control
Payment"). Within 60 days following any Change of Control, the Issuers will (or
will cause the Trustee to) mail a notice to each Holder describing the
transaction or transactions that constitute the Change of Control and offering
to repurchase New Senior Subordinated Notes on the date specified in such
notice, which date shall be no earlier than 30 days and no later than 60 days
from the date such notice is mailed (the "Change of Control Payment Date"),
pursuant to the procedures required by the Indenture and described in such
notice. The Issuers will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the New Senior Subordinated Notes as a result of a Change of
Control. To the extent that the provisions of any securities laws or regulations
conflict with the provisions of the Indenture relating to such Change of Control
Offer, the Issuers will comply with the applicable securities laws and
regulations and shall not be deemed to have breached their obligations described
in the Indenture by virtue thereof.
On the Change of Control Payment Date, the Issuers will, to the extent
lawful, (a) accept for payment all New Senior Subordinated Notes or portions
thereof properly tendered pursuant to the Change of Control Offer, (b) deposit
with the Paying Agent an amount equal to the Change of Control Payment in
respect of all New Senior Subordinated Notes or portions thereof so tendered and
(c) deliver or cause to be delivered to the Trustee the New Senior Subordinated
Notes so accepted together with an Officers' Certificate stating the aggregate
principal amount of New Senior Subordinated Notes or portions thereof being
purchased by the Issuers. The Paying Agent will promptly mail to each Holder of
New Senior Subordinated Notes so tendered the Change of Control Payment for such
New Senior Subordinated Notes, and the Trustee will promptly authenticate and
mail (or cause to be transferred by book-entry) to each Holder a new New Senior
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Subordinated Note equal in principal amount to any unpurchased portion of the
Senior Subordinated Notes surrendered, if any; provided that each such new
Senior Subordinated Note will be in a principal amount of $1,000 or an integral
multiple thereof. The Indenture will provide that, prior to complying with the
provisions of this covenant, but in any event within 90 days following a Change
of Control, the Issuers will either repay all outstanding Senior Indebtedness or
obtain the requisite consents, if any, under all agreements governing
outstanding Senior Indebtedness to permit the repurchase of Senior Subordinated
Notes required by this covenant. The Issuers will publicly announce the results
of the Change of Control Offer on or as soon as practicable after the Change of
Control Payment Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the Holders of the New Senior Subordinated Notes to
require that the Issuers repurchase or redeem the New Senior Subordinated Notes
in the event of a takeover, recapitalization or similar transaction.
The New Credit Facility prohibits the Issuers from purchasing any Senior
Subordinated Notes and also will provide that certain change of control events
(which may include events not otherwise constituting a Change of Control under
the Indenture) with respect to the Issuers would constitute a default
thereunder. Any future credit agreements or other agreements relating to Senior
Indebtedness to which any Issuer becomes a party may contain similar
restrictions and provisions. In the event a Change of Control occurs at a time
when the Issuers are prohibited from purchasing Senior Subordinated Notes, the
Issuers could seek the consent of its lenders to the purchase of Senior
Subordinated Notes or could attempt to refinance the borrowings that contain
such prohibition. If the Issuers do not obtain such a consent or repay such
borrowings, the Issuers will remain prohibited from purchasing Senior
Subordinated Notes. In such case, the Issuers' failure to purchase tendered
Senior Subordinated Notes would constitute an Event of Default under the
Indenture, which would, in turn, constitute a default under the New Credit
Facility. In such circumstances, the subordination provisions in the Indenture
would likely restrict payments to the Holders of Senior Subordinated Notes.
The Issuers will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all New Senior Subordinated Notes validly tendered and not withdrawn
under such Change of Control Offer.
"Change of Control" means the occurrence of any of the following: (a) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Subsidiaries, taken as a
whole, to any "person" or "group" (as such terms are used in Section 13(d) of
the Exchange Act), other than the Principals and their Related Parties; (b) the
adoption of a plan for the liquidation or dissolution of one or both of the
Issuers; (c) the consummation of any transaction (including, without limitation,
any merger or consolidation) the result of which is that any "person" or "group"
(as such terms are used in Section 13(d) of the Exchange Act), other than the
Principals and their Related Parties, becomes the "beneficial owner" (as such
term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly
or indirectly through one or more intermediaries, of 50% or more of the voting
power of the outstanding voting stock of the Company; (d) the first day on which
a majority of the members of the board of directors of the Company are not
Continuing Members or (e) the first day on which the Company fails to own 100%
of the issued and outstanding Equity Interests of Thermadyne Capital (other than
by reason of the merger of Thermadyne Capital with and into a corporate
successor to the Company).
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precise established definition of the phrase under applicable
law. Accordingly, the ability of a Holder of New Senior Subordinated Notes to
require the Issuers to repurchase such New Senior Subordinated Notes as a
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result of a sale, lease, transfer, conveyance or other disposition of less than
all of the assets of the Company and its Subsidiaries taken as a whole to
another Person or group may be uncertain.
"Continuing Members" means, as of any date of determination, any member of
the board of directors of the Company who (a) was a member of such board of
directors immediately after consummation of the Merger or (b) was nominated for
election or elected to such board of directors with the approval of, or whose
election to the board of directors was ratified by, at least a majority of the
Continuing Members who were members of such board of directors at the time of
such nomination or election.
ASSET SALES
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, consummate an Asset Sale unless (a) the
Company or such Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the fair market
value (evidenced by a resolution of the board of directors set forth in an
Officers' Certificate delivered to the Trustee) of the assets or Equity
Interests issued or sold or otherwise disposed of and (b) at least 75% of the
consideration therefor received by the Company or such Restricted Subsidiary is
in the form of (i) cash or Cash Equivalents or (ii) property or assets that are
used or useful in a Permitted Business, or the Capital Stock of any Person
engaged in a Permitted Business if, as a result of the acquisition by the
Company or any Restricted Subsidiary thereof, such Person becomes a Restricted
Subsidiary; provided that the amount of (x) any liabilities (as shown on the
Company's or such Restricted Subsidiary's most recent balance sheet), of the
Company or any Restricted Subsidiary (other than contingent liabilities and
liabilities that are by their terms subordinated to the Senior Subordinated
Notes or any guarantee thereof) that are assumed by the transferee of any such
assets pursuant to a customary novation agreement that releases the Company or
such Restricted Subsidiary from further liability, (y) any securities, notes or
other obligations received by the Company or any such Restricted Subsidiary from
such transferee that are contemporaneously (subject to ordinary settlement
periods) converted by the Company or such Restricted Subsidiary into cash or
Cash Equivalents (to the extent of the cash or Cash Equivalents received), and
(z) any Designated Noncash Consideration received by the Company or any of its
Restricted Subsidiaries in such Asset Sale having an aggregate fair market
value, taken together with all other Designated Noncash Consideration received
pursuant to this clause (z) that is at that time outstanding, not to exceed 15%
of Total Assets at the time of the receipt of such Designated Noncash
Consideration (with the fair market value of each item of Designated Noncash
Consideration being measured at the time received and without giving effect to
subsequent changes in value), shall be deemed to be cash for purposes of this
provision; and provided further that the 75% limitation referred to in clause
(b) above will not apply to any Asset Sale in which the cash or Cash Equivalents
portion of the consideration received therefrom, determined in accordance with
the foregoing proviso, is equal to or greater than what the after-tax proceeds
would have been had such Asset Sale complied with the aforementioned 75%
limitation.
Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
the Company or any such Restricted Subsidiary shall apply such Net Proceeds, at
its option (or to the extent the Company is required to apply such Net Proceeds
pursuant to the terms of the New Credit Facility), to (a) repay or purchase
Senior Indebtedness or Pari Passu Indebtedness of the Company or any
Indebtedness of any Restricted Subsidiary, provided that, if the Company shall
so repay or purchase Pari Passu Indebtedness of the Company, it will equally and
ratably reduce Indebtedness under the Senior Subordinated Notes if the Senior
Subordinated Notes are then redeemable, or, if the Senior Subordinated Notes may
not then be redeemed, the Company shall make an offer (in accordance with the
procedures set forth below for an Asset Sale Offer) to all Holders of Senior
Subordinated Notes to purchase at a purchase price equal to 100% of the
principal amount of the Senior Subordinated Notes, plus accrued and unpaid
interest and Liquidated Damages, if any, thereon to the date of purchase, the
Senior Subordinated Notes that would otherwise be redeemed, or (b) an investment
in property, the making of a capital expenditure or the acquisition of assets
that are used or useful in a Permitted Business, or Capital Stock of any Person
primarily engaged in a Permitted Business if (i) as a result of the acquisition
by the Company or any Restricted Subsidiary thereof, such Person becomes a
Restricted Subsidiary or (ii) the Investment in such Capital Stock is permitted
by clause (f) of the definition of Permitted Investments. Pending the final
application of any such Net Proceeds, the Company may
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temporarily reduce Indebtedness or otherwise invest such Net Proceeds in any
manner that is not prohibited by the Indenture. Any Net Proceeds from Asset
Sales that are not applied or invested as provided in the first sentence of this
paragraph will be deemed to constitute "Excess Proceeds." When the aggregate
amount of Excess Proceeds exceeds $15.0 million, the Company will be required to
make an offer to all Holders of Senior Subordinated Notes (an "Asset Sale
Offer") to purchase the maximum principal amount of Senior Subordinated Notes
that may be purchased out of the Excess Proceeds, at an offer price in cash in
an amount equal to 100% of the principal amount thereof, plus accrued and unpaid
interest and Liquidated Damages, if any, thereon to the date of purchase, in
accordance with the procedures set forth in the Indenture. To the extent that
any Excess Proceeds remain after consummation of an Asset Sale Offer, the
Company may use such Excess Proceeds for any purpose not otherwise prohibited by
the Indenture. If the aggregate principal amount of Senior Subordinated Notes
surrendered by Holders thereof in connection with an Asset Sale Offer exceeds
the amount of Excess Proceeds, the Trustee shall select the Senior Subordinated
Notes to be purchased as set forth under "-- Selection and Notice." Upon
completion of such offer to purchase, the amount of Excess Proceeds shall be
reset at zero.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Senior Subordinated Notes pursuant to an Asset Sale Offer. To
the extent that the provisions of any securities laws or regulations conflict
with the provisions of the Indenture relating to such Asset Sale Offer, the
Company will comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations described in the Indenture
by virtue thereof.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, (a) declare or pay
any dividend or make any other payment or distribution on account of the
Company's or any of its Restricted Subsidiaries' Equity Interests (other than
dividends or distributions payable in Equity Interests (other than Disqualified
Stock) of the Company or dividends or distributions payable to the Company or
any Wholly Owned Restricted Subsidiary of the Company); (b) purchase, redeem or
otherwise acquire or retire for value any Equity Interests of the Company, any
of its Restricted Subsidiaries or any other Affiliate of the Company (other than
any such Equity Interests owned by the Company or any Restricted Subsidiary of
the Company); (c) make any principal payment on or with respect to, or purchase,
redeem, defease or otherwise acquire or retire for value, any Indebtedness of
the Company that is subordinated in right of payment to the Senior Subordinated
Notes, except in accordance with the mandatory redemption or repayment
provisions set forth in the original documentation governing such Indebtedness
(but not pursuant to any mandatory offer to repurchase upon the occurrence of
any event); or (d) make any Restricted Investment (all such payments and other
actions set forth in clauses (a) through (d) above being collectively referred
to as "Restricted Payments"), unless, at the time of and after giving effect to
such Restricted Payment:
(i) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(ii) the Company would, immediately after giving pro forma effect
thereto as if such Restricted Payment had been made at the beginning of the
applicable four-quarter period, have been permitted to incur at least $1.00
of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test
set forth in the first paragraph of the covenant described under caption
"-- Incurrence of Indebtedness and Issuance of Preferred Stock"; and
(iii) such Restricted Payment, together with the aggregate amount of
all other Restricted Payments made by the Company and its Restricted
Subsidiaries after the date of the Indenture (excluding Restricted Payments
permitted by clauses (a) (to the extent that the declaration of any
dividend referred to therein reduces amounts available for Restricted
Payments pursuant to this clause (iii)), (b), (c),
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(e) through (j), (l), (m), (p), (q) and (r) of the next succeeding
paragraph), is less than the sum, without duplication, of (A) 50% of the
Consolidated Net Income of the Company for the period (taken as one
accounting period) commencing July 1, 1998 to the end of the Company's most
recently ended fiscal quarter for which internal financial statements are
available at the time of such Restricted Payment (or, if such Consolidated
Net Income for such period is a deficit, less 100% of such deficit), plus
(B) 100% of the Qualified Proceeds received by the Company on or after the
date of the Indenture from contributions to the Company's capital or from
the issue or sale on or after the date of the Indenture of Equity Interests
of the Company or of Disqualified Stock or convertible debt securities of
the Company to the extent that they have been converted into such Equity
Interests (other than Equity Interests, Disqualified Stock or convertible
debt securities sold to a Subsidiary of the Company and other than
Disqualified Stock or convertible debt securities that have been converted
into Disqualified Stock), plus (C) the amount equal to the net reduction in
Investments in Persons after the date of the Indenture who are not
Restricted Subsidiaries (other than Permitted Investments) resulting from
(x) Qualified Proceeds received as a dividend, repayment of a loan or
advance or other transfer of assets (valued at the fair market value
thereof) to the Company or any Restricted Subsidiary from such Persons, (y)
Qualified Proceeds received upon the sale or liquidation of such Investment
and (z) the redesignation of Unrestricted Subsidiaries (other than any
Unrestricted Subsidiary designated as such pursuant to clause (k) or (o) of
the following paragraph) whose assets are used or useful in, or which is
engaged in, one or more Permitted Business as Restricted Subsidiaries
(valued (proportionate to the Company's equity interest in such Subsidiary)
at the fair market value of the net assets of such Subsidiary at the time
of such redesignation).
The foregoing provisions will not prohibit:
(a) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would have
complied with the provisions of the Indenture;
(b) (i) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Indebtedness or Equity Interests of the Company
(the "Retired Capital Stock") in exchange for, or out of the net cash proceeds
of the substantially concurrent sale (other than to a Subsidiary of the Company)
of, other Equity Interests of the Company (other than any Disqualified Stock)
(the "Refunding Capital Stock"), provided that the amount of any such net cash
proceeds that are utilized for any such redemption, repurchase, retirement,
defeasance or other acquisition shall be excluded from clause (iii)(B) of the
preceding paragraph and (ii) if immediately prior to the retirement of Retired
Capital Stock, the declaration and payment of dividends thereon was permitted
under clause (f) of this paragraph, the declaration and payment of dividends on
the Refunding Capital Stock in an aggregate amount per year no greater than the
aggregate amount of dividends per annum that was declarable and payable on such
Retired Capital Stock immediately prior to such retirement; provided that, at
the time of the declaration of any such dividends, no Default or Event of
Default shall have occurred and be continuing or would occur as a consequence
thereof;
(c) the defeasance, redemption, repurchase, retirement or other acquisition
of subordinated Indebtedness of the Company with the net cash proceeds from an
incurrence of, or in exchange for, Permitted Refinancing Indebtedness;
(d) the repurchase, redemption or other acquisition or retirement for value
of any Equity Interests of the Company or Holdings held by any member of
Holdings' or the Company's (or any of its Restricted Subsidiaries') management
pursuant to any management equity subscription agreement or stock option
agreement and any dividend to Holdings to fund any such repurchase, redemption,
acquisition or retirement, provided that the aggregate price paid for all such
repurchased, redeemed, acquired or retired Equity Interests shall not exceed (x)
$7.5 million in any calendar year (with unused amounts in any calendar year
being carried over to succeeding calendar years subject to a maximum (without
giving effect to the following clause (y)) of $15.0 million in any calendar
year), plus (y) the aggregate cash proceeds received by the Company during such
calendar year from any reissuance of Equity Interests by the Company or Holdings
to members of management of the Company and its Restricted Subsidiaries and (ii)
no Default or Event of Default shall have occurred and be continuing immediately
after such transaction;
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(e) payments and transactions in connection with the Recapitalization, the
New Credit Facility (including commitment, syndication and arrangement fees
payable thereunder) and the application of the proceeds thereof, and the payment
of fees and expenses with respect thereto;
(f) the declaration and payment of dividends to holders of any class or
series of preferred stock (other than Disqualified Stock), provided that, at the
time of such issuance, after giving effect to such issuance on a pro forma
basis, the Fixed Charge Coverage Ratio for the Company for the most recently
ended four full fiscal quarters for which internal financial statements are
available immediately preceding the date of such issuance would have been no
less than 2.0 to 1;
(g) the payment of dividends or the making of loans or advances by the
Company to Holdings not to exceed $5.0 million in any fiscal year for costs and
expenses incurred by Holdings in its capacity as a holding company or for
services rendered by Holdings on behalf of the Company;
(h) payments or distributions to Holdings pursuant to any Tax Sharing
Agreement;
(i) the payment of dividends by a Restricted Subsidiary on any class of
common stock of such Restricted Subsidiary if (i) such dividend is paid pro rata
to all holders of such class of common stock and (ii) at least 51% of such class
of common stock is held by the Company or one or more of its Restricted
Subsidiaries;
(j) the repurchase of any class of common stock of a Restricted Subsidiary
if (i) such repurchase is made pro rata with respect to such class of common
stock and (ii) at least 51% of such class of common stock is held by the Company
or one or more of its Restricted Subsidiaries;
(k) any other Restricted Investment made in a Permitted Business which,
together with all other Restricted Investments made pursuant to this clause (k)
since the date of the Indenture, does not exceed $25.0 million (in each case,
after giving effect to all subsequent reductions in the amount of any Restricted
Investment made pursuant to this clause (k), either as a result of (i) the
repayment or disposition thereof for cash or (ii) the redesignation of an
Unrestricted Subsidiary as a Restricted Subsidiary (valued proportionate to the
Company's equity interest in such Subsidiary at the time of such redesignation)
at the fair market value of the net assets of such Subsidiary at the time of
such redesignation), in the case of clause (i) and (ii), not to exceed the
amount of such Restricted Investment previously made pursuant to this clause
(k); provided that no Default or Event of Default shall have occurred and be
continuing immediately after making such Restricted Investment;
(l) the declaration and payment of dividends to holders of any class or
series of Disqualified Stock of the Company or any Restricted Subsidiary issued
on or after the date of the Indenture in accordance with the covenant described
under the caption " -- Incurrence of Indebtedness and Issuance of Preferred
Stock"; provided that no Default or Event of Default shall have occurred and be
continuing immediately after making such Restricted Payment;
(m) repurchases of Equity Interests deemed to occur upon exercise of stock
options if such Equity Interests represent a portion of the exercise price of
such options;
(n) the payment of dividends or distributions on the Company's membership
interests, following the first public offering of the Company's membership
interests or Holdings' common stock after the date of the Indenture, of up to
6.0% per annum of (i) the net proceeds received by the Company from such public
offering of its membership interests or (ii) the net proceeds received by the
Company from such public offering of Holdings' common stock as common equity or
preferred equity (other than Disqualified Stock), other than, in each case, with
respect to public offerings with respect to the Company's membership interests
or Holdings' common stock registered on Form S-8; provided that no Default or
Event of Default shall have occurred and be continuing immediately after any
such payment of dividends or distributions;
(o) any other Restricted Payment which, together with all other Restricted
Payments made pursuant to this clause (o) since the date of the Indenture, does
not exceed $25.0 million (in each case, after giving effect to all subsequent
reductions in the amount of any Restricted Investment made pursuant to this
clause (o) either as a result of (i) the repayment or disposition thereof for
cash or (ii) the redesignation of an Unrestricted Subsidiary as a Restricted
Subsidiary (valued proportionate to the Company's equity interest in
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such Subsidiary at the time of such redesignation) at the fair market value of
the net assets of such Subsidiary at the time of such redesignation), in the
case of clause (i) and (ii), not to exceed the amount of such Restricted
Investment previously made pursuant to this clause (o); provided that no Default
or Event of Default shall have occurred and be continuing immediately after
making such Restricted Payment;
(p) the pledge by the Company of the Capital Stock of an Unrestricted
Subsidiary of the Company to secure Non-Recourse Debt of such Unrestricted
Subsidiary;
(q) the purchase, redemption or other acquisition or retirement for value
of any Equity Interests of any Restricted Subsidiary issued after the date of
the Indenture, provided that the aggregate price paid for any such repurchased,
redeemed, acquired or retired Equity Interests shall not exceed the sum of (i)
the amount of cash and Cash Equivalents received by such Restricted Subsidiary
from the issue or sale thereof and (ii) any accrued dividends thereon the
payment of which would be permitted pursuant to clause (l) above;
(r) distributions or payments of Receivables Fees; and
(s) dividends or distributions to Holdings solely in connection with the
purchase, redemption or other acquisition or retirement for value of rights
issued pursuant to Holdings' Rights Plan as in effect on the date of the
Indenture.
The board of directors of the Company may designate any Restricted
Subsidiary to be an Unrestricted Subsidiary if such designation would not cause
a Default. For purposes of making such designation, all outstanding Investments
by the Company and its Restricted Subsidiaries (except to the extent repaid in
cash) in the Subsidiary so designated will be deemed to be Restricted Payments
at the time of such designation and will reduce the amount available for
Restricted Payments under the first paragraph of this covenant. All such
outstanding Investments will be deemed to constitute Restricted Investments in
an amount equal to the greater of (i) the net book value of such Investments at
the time of such designation and (ii) the fair market value of such Investments
at the time of such designation. Such designation will only be permitted if such
Restricted Investment would be permitted at such time and if such Restricted
Subsidiary otherwise meets the definition of an Unrestricted Subsidiary.
The amount of (i) all Restricted Payments (other than cash) shall be the
fair market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the Company or such
Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment
and (ii) Qualified Proceeds (other than cash) shall be the fair market value on
the date of receipt thereof by the Company of such Qualified Proceeds. The fair
market value of any non-cash Restricted Payment shall be determined by the board
of directors of the Company whose resolution with respect thereto shall be
delivered to the Trustee. Not later than the date of making any Restricted
Payment, the Company shall deliver to the Trustee an Officers' Certificate
stating that such Restricted Payment is permitted and setting forth the basis
upon which the calculations required by the covenant "Restricted Payments" were
computed.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Indenture provides that (a) the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create, incur,
issue, assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Indebtedness), (b) the Company will not, and
will not permit any of its Restricted Subsidiaries to, issue any shares of
Disqualified Stock and (c) the Company will not permit any of its Restricted
Subsidiaries to issue any shares of preferred stock; provided that the Company
or any Restricted Subsidiary may incur Indebtedness (including Acquired
Indebtedness) or issue shares of Disqualified Stock if the Fixed Charge Coverage
Ratio for the Company's most recently ended four full fiscal quarters for which
internal financial statements are available immediately preceding the date on
which such additional Indebtedness is incurred or such Disqualified Stock is
issued would have been at least 2.0 to 1, determined on a consolidated pro forma
basis (including a pro forma application of the net proceeds therefrom), as if
the additional Indebtedness had been incurred, or the Disqualified Stock had
been issued, as the case may be, at the beginning of such four-quarter period.
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The provisions of the first paragraph of this covenant will not apply to
the incurrence of any of the following items of Indebtedness (collectively,
"Permitted Indebtedness"):
(i) the incurrence by the Company and its Restricted Subsidiaries of
Indebtedness under the New Credit Facility; provided that the aggregate
principal amount of all Indebtedness (with letters of credit being deemed
to have a principal amount equal to the maximum potential liability of the
Company and such Restricted Subsidiaries thereunder) then classified as
having been incurred in reliance upon this clause (i) that remains
outstanding under the New Credit Facility after giving effect to such
incurrence does not exceed an amount equal to $430.0 million;
(ii) the incurrence by the Company and its Restricted Subsidiaries of
Existing Indebtedness;
(iii) the incurrence by the Issuers of Indebtedness represented by
the Senior Subordinated Notes and the Indenture and by the Guarantors of
Indebtedness represented by the Note Guarantees;
(iv) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness represented by Capital Expenditure
Indebtedness, Capital Lease Obligations or purchase money obligations, in
each case, incurred for the purpose of financing all or any part of the
purchase price or cost of construction or improvement of property, plant or
equipment used in the business of the Company or such Restricted
Subsidiary, in an aggregate principal amount (or accreted value, as
applicable) not to exceed $40.0 million outstanding after giving effect to
such incurrence;
(v) Indebtedness arising from agreements of the Company or any
Restricted Subsidiary providing for indemnification, adjustment of purchase
price or similar obligations, in each case, incurred or assumed in
connection with the disposition of any business, assets or a Subsidiary,
other than guarantees of Indebtedness incurred by any Person acquiring all
or any portion of such business, assets or Restricted Subsidiary for the
purpose of financing such acquisition; provided that (A) such Indebtedness
is not reflected on the balance sheet of the Company or any Restricted
Subsidiary (contingent obligations referred to in a footnote or footnotes
to financial statements and not otherwise reflected on the balance sheet
will not be deemed to be reflected on such balance sheet for purposes of
this clause (A)) and (B) the maximum assumable liability in respect of such
Indebtedness shall at no time exceed the gross proceeds including non-cash
proceeds (the fair market value of such non-cash proceeds being measured at
the time received and without giving effect to any subsequent changes in
value) actually received by the Company and/or such Restricted Subsidiary
in connection with such disposition;
(vi) the incurrence by the Company or any of its Restricted
Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the
net proceeds of which are used to refund, refinance or replace Indebtedness
(other than intercompany Indebtedness) that was permitted by the Indenture
to be incurred;
(vii) the incurrence by the Company or any of its Restricted
Subsidiaries of intercompany Indebtedness between or among the Company
and/or any of its Restricted Subsidiaries; provided that (i) if the Company
is the obligor on such Indebtedness, such Indebtedness is expressly
subordinated to the prior payment in full in cash of all Obligations with
respect to the Senior Subordinated Notes and (ii)(A) any subsequent
issuance or transfer of Equity Interests that results in any such
Indebtedness being held by a Person other than the Company or a Restricted
Subsidiary thereof and (B) any sale or other transfer of any such
Indebtedness to a Person that is not either the Company or a Restricted
Subsidiary thereof shall be deemed, in each case, to constitute an
incurrence of such Indebtedness by the Company or such Restricted
Subsidiary, as the case may be, that was not permitted by this clause
(vii);
(viii) the incurrence by the Company or any of its Restricted
Subsidiaries of Hedging Obligations that are incurred for the purpose of
fixing or hedging (A) interest rate risk with respect to any floating rate
Indebtedness that is permitted by the terms of this Indenture to be
outstanding and (B) exchange rate risk with respect to agreements or
Indebtedness of such Person payable denominated in a currency other than
U.S. dollars, provided that such agreements do not increase the
Indebtedness of the obligor outstanding at any time other than as a result
of fluctuations in foreign currency exchange rates or interest rates or by
reason of fees, indemnities and compensation payable thereunder;
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(ix) the guarantee by the Company or any of its Restricted
Subsidiaries of Indebtedness of the Company or a Restricted Subsidiary of
the Company that was permitted to be incurred by another provision of this
covenant;
(x) the incurrence by the Company or any of its Restricted
Subsidiaries of Acquired Indebtedness in an aggregate principal amount (or
accreted value, as applicable) not to exceed $25.0 million outstanding
after giving effect to such incurrence;
(xi) obligations in respect of performance and surety bonds and
completion guarantees provided by the Company or any Restricted Subsidiary
in the ordinary course of business; and
(xii) the incurrence by the Company or any of its Restricted
Subsidiaries of additional Indebtedness in an aggregate principal amount
(or accreted value, as applicable) outstanding after giving effect to such
incurrence, including all Permitted Refinancing Indebtedness incurred to
refund, refinance or replace any Indebtedness incurred pursuant to this
clause (xii), not to exceed $50.0 million.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Indebtedness described in clauses (i) through (xii)
above or is entitled to be incurred pursuant to the first paragraph of this
covenant, the Company shall, in its sole discretion, classify such item of
Indebtedness in any manner that complies with this covenant and such item of
Indebtedness will be treated as having been incurred pursuant to only one of
such clauses or pursuant to the first paragraph hereof. In addition, the Company
may, at any time, change the classification of an item of Indebtedness (or any
portion thereof) to any other clause or to the first paragraph hereof provided
that the Company would be permitted to incur such item of Indebtedness (or such
portion thereof) pursuant to such other clause or the first paragraph hereof, as
the case may be, at such time of reclassification. Accrual of interest,
accretion or amortization of original issue discount will not be deemed to be an
incurrence of Indebtedness for purposes of this covenant.
All Indebtedness under the New Credit Facility outstanding on the date on
which Senior Subordinated Notes are first issued and authenticated under the
Indenture shall be deemed to have been incurred on such date in reliance on the
first paragraph of the covenant described under the caption " -- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock." As a
result, the Company will be permitted to incur significant additional secured
indebtedness under clause (i) of the definition of "Permitted Indebtedness." See
"Risk Factors."
LIENS
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume
or suffer to exist any Lien, other than a Permitted Lien, that secures
obligations under any Pari Passu Indebtedness or subordinated Indebtedness of
the Company on any asset or property now owned or hereafter acquired by the
Company or any of its Restricted Subsidiaries, or any income or profits
therefrom or assign or convey any right to receive income therefrom, unless the
Senior Subordinated Notes are equally and ratably secured with the obligations
so secured until such time as such obligations are no longer secured by a Lien;
provided that, in any case involving a Lien securing subordinated Indebtedness
of the Company, such Lien is subordinated to the Lien securing the Senior
Subordinated Notes to the same extent that such subordinated Indebtedness is
subordinated to the Senior Subordinated Notes.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to (a)(i) pay dividends or make any
other distributions to the Company or any of its Restricted Subsidiaries (A) on
its Capital Stock or (B) with respect to any other interest or participation in,
or measured by, its profits, or (ii) pay any Indebtedness owed to the Company or
any of its Restricted Subsidiaries, (b) make loans or advances to the Company or
any of its Restricted Subsidiaries or (c) transfer any of its properties or
assets to the Company or any of its Restricted Subsidiaries.
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However, the foregoing restrictions will not apply to encumbrances or
restrictions existing under or by reason of (a) Existing Indebtedness as in
effect on the date of the Indenture, (b) the New Credit Facility as in effect as
of the date of the Indenture, and any amendments, modifications, restatements,
renewals, increases, supplements, refundings, replacements or refinancings
thereof, (c) the Indenture and the Senior Subordinated Notes, (d) applicable law
and any applicable rule, regulation or order, (e) any agreement or instrument of
a Person acquired by the Company or any of its Restricted Subsidiaries as in
effect at the time of such acquisition (except to the extent created in
contemplation of such acquisition), which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person, other than
the Person, or the property or assets of the Person, so acquired, provided that,
in the case of Indebtedness, such Indebtedness was permitted by the terms of the
Indenture to be incurred, (f) customary non-assignment provisions in leases
entered into in the ordinary course of business and consistent with past
practices, (g) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions of the nature described in clause
(e) above on the property so acquired, (h) contracts for the sale of assets,
including, without limitation, customary restrictions with respect to a
Subsidiary pursuant to an agreement that has been entered into for the sale or
disposition of all or substantially all of the Capital Stock or assets of such
Subsidiary, (i) Permitted Refinancing Indebtedness, provided that the
restrictions contained in the agreements governing such Permitted Refinancing
Indebtedness are, in the good faith judgment of the Company's board of
directors, not materially less favorable, taken as a whole, to the Holders of
the Senior Subordinated Notes than those contained in the agreements governing
the Indebtedness being refinanced, (j) secured Indebtedness otherwise permitted
to be incurred pursuant to the covenants described under "-- Incurrence of
Indebtedness and Issuance of Preferred Stock" and "-- Liens" that limit the
right of the debtor to dispose of the assets securing such Indebtedness, (k)
restrictions on cash or other deposits or net worth imposed by customers under
contracts entered into in the ordinary course of business, (l) other
Indebtedness or Disqualified Stock of Restricted Subsidiaries permitted to be
incurred subsequent to the Issuance Date pursuant to the provisions of the
covenant described under "-- Incurrence of Indebtedness and Issuance of
Preferred Stock", (m) customary provisions in joint venture agreements and other
similar agreements entered into in the ordinary course of business, and (n)
restrictions created in connection with any Receivables Facility that, in the
good faith determination of the board of directors of the Company, are necessary
or advisable to effect such Receivables Facility.
MERGER, CONSOLIDATION, OR SALE OF ASSETS
The Indenture provides that the Company may not consolidate or merge with
or into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, convey or otherwise dispose of all or substantially all of its
properties or assets in one or more related transactions, to another Person
unless (a) the Company is the surviving corporation or the Person formed by or
surviving any such consolidation or merger (if other than the Company) or to
which such sale, assignment, transfer, conveyance or other disposition shall
have been made is a corporation organized or existing under the laws of the
United States, any state thereof or the District of Columbia, (b) the Person
formed by or surviving any such consolidation or merger (if other than the
Company) or the Person to which such sale, assignment, transfer, conveyance or
other disposition shall have been made assumes all the obligations of the
Company under the Registration Rights Agreement, the Senior Subordinated Notes
and the Indenture pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee, (c) immediately after such transaction no Default
or Event of Default exists and (d) the Company or the Person formed by or
surviving any such consolidation or merger (if other than the Company), or to
which such sale, assignment, transfer, conveyance or other disposition shall
have been made (i) will, at the time of such transaction and after giving pro
forma effect thereto as if such transaction had occurred at the beginning of the
applicable four-quarter period, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the first paragraph of the covenant described under the caption
"-- Incurrence of Indebtedness and Issuance of Preferred Stock" or (ii) would
(together with its Restricted Subsidiaries) have a higher Fixed Charge Coverage
Ratio immediately after such transaction (after giving pro forma effect thereto
as if such transaction had occurred at the beginning of the applicable
four-quarter period) than the Fixed Charge Coverage Ratio of the Company and its
Restricted Subsidiaries immediately prior to such transaction. The foregoing
clause (d) will not prohibit
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(a) a merger between the Company and a Wholly Owned Subsidiary of Holdings
created for the purpose of holding the Capital Stock of the Company, (b) a
merger between the Company and a Wholly Owned Restricted Subsidiary or (c) a
merger between the Company and an Affiliate incorporated solely for the purpose
of reincorporating the Company in another State of the United States so long as,
in each case, the amount of Indebtedness of the Company and its Restricted
Subsidiaries is not increased thereby. The Indenture provides that the Company
will not lease all or substantially all of its assets to any Person.
TRANSACTIONS WITH AFFILIATES
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer
or otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any transaction,
contract, agreement, understanding, loan, advance or guarantee with, or for the
benefit of, any Affiliate of the Company (each of the foregoing, an "Affiliate
Transaction"), unless (a) such Affiliate Transaction is on terms that are no
less favorable to the Company or such Restricted Subsidiary than those that
would have been obtained in a comparable transaction by the Company or such
Restricted Subsidiary with an unrelated Person and (b) the Company delivers to
the Trustee, with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of $7.5
million, either (i) a resolution of the board of directors set forth in an
Officers' Certificate certifying that such Affiliate Transaction complies with
clause (a) above and that such Affiliate Transaction has been approved by a
majority of the disinterested members of the board of directors or (ii) an
opinion as to the fairness to the Holders of such Affiliate Transaction from a
financial point of view issued by an accounting, appraisal or investment banking
firm of national standing.
Notwithstanding the foregoing, the following items shall not be deemed to
be Affiliate Transactions: (a) customary directors' fees, indemnification or
similar arrangements or any employment agreement or other compensation plan or
arrangement entered into by the Company or any of its Restricted Subsidiaries in
the ordinary course of business (including ordinary course loans to employees
not to exceed (i) $5.0 million outstanding in the aggregate at any time and (ii)
$2.0 million to any one employee) and consistent with the past practice of the
Company or such Restricted Subsidiary; (b) transactions between or among the
Company and/or its Restricted Subsidiaries; (c) payments of customary fees by
the Company or any of its Restricted Subsidiaries to DLJMB and its Affiliates
made for any financial advisory, financing, underwriting or placement services
or in respect of other investment banking activities, including, without
limitation, in connection with acquisitions or divestitures which are approved
by a majority of the board of directors in good faith; (d) any agreement as in
effect on the date of the Indenture or any amendment thereto (so long as such
amendment is not disadvantageous to the Holders of the Senior Subordinated Notes
in any material respect) or any transaction contemplated thereby; (e) payments
and transactions in connection with the Merger, the New Credit Facility
(including commitment, syndication and arrangement fees payable thereunder) and
the Original Offerings (including underwriting discounts and commissions in
connection therewith) and the application of the proceeds thereof, and the
payment of the fees and expenses with respect thereto; (f) Restricted Payments
that are permitted by the provisions of the Indenture described under the
caption "-- Restricted Payments"; (g) sales of accounts receivable, or
participations therein, in connection with any Receivables Facility; and (h)
transactions pursuant to the Management Loans.
SALE AND LEASEBACK TRANSACTIONS
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, enter into any sale and leaseback
transaction; provided that the Company or any Restricted Subsidiary may enter
into a sale and leaseback transaction if (a) the Company or such Restricted
Subsidiary, as the case may be, could have (i) incurred Indebtedness in an
amount equal to the Attributable Indebtedness relating to such sale and
leaseback transaction pursuant to the Fixed Charge Coverage Ratio test set forth
in the first paragraph of the covenant described under the caption
"-- Incurrence of Indebtedness and Issuance of Preferred Stock" and (ii)
incurred a Lien to secure such Indebtedness pursuant to the covenant described
under the caption "-- Liens," (b) the gross cash proceeds of such sale and
leaseback transaction are at least equal to the fair market value (as determined
in good faith by the board of directors and set forth in an
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Officers' Certificate delivered to the Trustee) of the property that is the
subject of such sale and leaseback transaction and (c) the transfer of assets in
such sale and leaseback transaction is permitted by, and the Company applies the
proceeds of such transaction in compliance with, the covenant described under
the caption "Repurchase at the Option of Holders -- Asset Sales."
NO SENIOR SUBORDINATED INDEBTEDNESS
The Indenture provides that (i) the Company will not Incur any Indebtedness
that is subordinate or junior in right of payment to any Senior Indebtedness and
senior in right of payment to the Senior Subordinated Notes, and (ii) no
Guarantor will Incur any Indebtedness that is subordinate or junior in right of
payment to any Senior Indebtedness and senior in any respect in right of payment
to the Note Guarantees.
ACCOUNTS RECEIVABLE FACILITY
The Indenture provides that no Accounts Receivable Subsidiary will incur
any Indebtedness if immediately after giving effect to such incurrence the
aggregate outstanding Indebtedness of all Accounts Receivable Subsidiaries
(excluding any Indebtedness owed to the Company or any Restricted Subsidiary)
would exceed $60.0 million.
RESTRICTIONS ON ACTIVITIES OF THERMADYNE CAPITAL
The Indenture provides that Thermadyne Capital may not hold any assets,
become liable for any obligations or engage in any business activities; provided
that Thermadyne Capital may be a co-obligor with respect to Senior Subordinated
Notes issued pursuant to the Indenture and the Senior Indebtedness and engage in
any activities directly related or necessary in connection therewith.
ADDITIONAL NOTE GUARANTEES
The Indenture provides that, if any Restricted Subsidiary of the Company
that is a Domestic Subsidiary guarantees any Indebtedness under the New Credit
Facility, then such Restricted Subsidiary shall become a Guarantor and execute a
Supplemental Indenture and deliver an Opinion of Counsel, in accordance with the
terms of the Indenture.
REPORTS
The Indenture provides that, whether or not required by the rules and
regulations of the Securities and Exchange Commission (the "Commission"), so
long as any Senior Subordinated Notes are outstanding, the Company will furnish
to the Holders of Senior Subordinated Notes (a) all quarterly and annual
financial information that would be required to be contained in a filing with
the Commission on Forms 10-Q and 10-K if the Company were required to file such
Forms, including a "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and, with respect to the annual information only, a
report thereon by the Company's certified independent accountants and (b) all
current reports that would be required to be filed with the Commission on Form
8-K if the Company were required to file such reports, in each case, within the
time periods specified in the Commission's rules and regulations. In addition,
following the consummation of the Exchange Offer, whether or not required by the
rules and regulations of the Commission, the Company will file a copy of all
such information and reports with the Commission for public availability within
the time periods specified in the Commission's rules and regulations (unless the
Commission will not accept such a filing) and make such information available to
securities analysts and prospective investors upon request. In addition, the
Company and the Guarantors have agreed that, for so long as any Senior
Subordinated Notes remain outstanding, they will furnish to the Holders and to
securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act.
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EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (a) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the Senior Subordinated Notes (whether or
not prohibited by the subordination provisions of the Indenture); (b) default in
payment when due of the principal of or premium, if any, on the Senior
Subordinated Notes (whether or not prohibited by the subordination provisions of
the Indenture); (c) failure by the Company or any of its Restricted Subsidiaries
for 30 days after receipt of notice from the Trustee or Holders of at least 25%
in principal amount of the Senior Subordinated Notes then outstanding to comply
with the provisions described under the captions "Repurchase at the Option of
Holders -- Change of Control," "-- Asset Sales," "Certain Covenants --
Restricted Payments," "-- Incurrence of Indebtedness and Issuance of Preferred
Stock" or "Merger, Consolidation or Sale of Assets"; (d) failure by the Company
for 60 days after notice from the Trustee or the Holders of at least 25% in
principal amount of the Senior Subordinated Notes then outstanding to comply
with any of its other agreements in the Indenture or the Senior Subordinated
Notes; (e) default under any mortgage, indenture or instrument under which there
may be issued or by which there may be secured or evidenced any Indebtedness for
money borrowed by the Company or any of its Restricted Subsidiaries (or the
payment of which is guaranteed by the Company or any of its Restricted
Subsidiaries), whether such Indebtedness or guarantee now exists, or is created
after the date of the Indenture, which default (i) is caused by a failure to pay
Indebtedness at its stated final maturity (after giving effect to any applicable
grace period provided in such Indebtedness) (a "Payment Default") or (ii)
results in the acceleration of such Indebtedness prior to its stated final
maturity and, in each case, the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness under which
there has been a Payment Default or the maturity of which has been so
accelerated, aggregates $10.0 million or more; (f) failure by the Company or any
of its Restricted Subsidiaries to pay final judgments aggregating in excess of
$10.0 million (net of any amounts with respect to which a reputable and
creditworthy insurance company has acknowledged liability in writing), which
judgments are not paid, discharged or stayed for a period of 60 days; (g) except
as permitted by the Indenture, any Note Guarantee shall be held in any judicial
proceeding to be unenforceable or invalid or shall cease for any reason to be in
full force and effect or any Guarantor, or any Person acting of behalf of any
Guarantor, shall deny or disaffirm its obligations under its Note Guarantee; and
(h) certain events of bankruptcy or insolvency with respect to the Company or
any of its Restricted Subsidiaries that is a Significant Subsidiary.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Senior
Subordinated Notes may declare all the Senior Subordinated Notes to be due and
payable immediately; provided that, so long as any Indebtedness permitted to be
incurred pursuant to the New Credit Facility shall be outstanding, such
acceleration shall not be effective until the earlier of (a) an acceleration of
any such Indebtedness under the New Credit Facility or (b) five business days
after receipt by the Issuers and the administrative agent under the New Credit
Facility of written notice of such acceleration. Notwithstanding the foregoing,
in the case of an Event of Default arising from certain events of bankruptcy or
insolvency with respect to the Company or any Significant Subsidiary, all
outstanding Senior Subordinated Notes will become due and payable without
further action or notice. Holders of the Senior Subordinated Notes may not
enforce the Indenture or the Senior Subordinated Notes except as provided in the
Indenture. In the event of a declaration of acceleration of the Senior
Subordinated Notes because an Event of Default has occurred and is continuing as
a result of the acceleration of any Indebtedness described in clause (e) of the
preceding paragraph, the declaration of acceleration of the Senior Subordinated
Notes shall be automatically annulled if the holders of any Indebtedness
described in clause (e) have rescinded the declaration of acceleration in
respect of such Indebtedness within 30 days of the date of such declaration and
if (i) the annulment of the acceleration of the Senior Subordinated Notes would
not conflict with any judgment or decree of a court of competent jurisdiction
and (ii) all existing Events of Default, except non-payment of principal or
interest on the Senior Subordinated Notes that became due solely because of the
acceleration of the Senior Subordinated Notes, have been cured or waived.
Subject to certain limitations, Holders of a majority in principal amount
of the then outstanding Senior Subordinated Notes may direct the Trustee in its
exercise of any trust or power. The Trustee may withhold
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from Holders of the Senior Subordinated Notes notice of any continuing Default
or Event of Default (except a Default or Event of Default relating to the
payment of principal or interest) if it determines that withholding notice is in
their interest.
The Holders of a majority in aggregate principal amount of the Senior
Subordinated Notes then outstanding by notice to the Trustee may on behalf of
the Holders of all of the Senior Subordinated Notes waive any existing Default
or Event of Default and its consequences under the Indenture except a continuing
Default or Event of Default in the payment of interest on, or the principal of,
the Senior Subordinated Notes.
The Issuers are required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Issuers are required upon
becoming aware of any Default or Event of Default to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF MEMBER, DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No member, director, officer, employee, incorporator or stockholder of any
Issuer, as such, shall have any liability for any obligations of any Issuer
under the Senior Subordinated Notes or the Indenture or for any claim based on,
in respect of, or by reason of, such obligations or their creation. Each Holder
of Senior Subordinated Notes by accepting a Senior Subordinated Note waives and
releases all such liability. The waiver and release are part of the
consideration for issuance of the Senior Subordinated Notes. Such waiver may not
be effective to waive liabilities under the federal securities laws, and it is
the view of the Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Issuers may, at their option and at any time, elect to have all of
their and the Guarantors' obligations discharged with respect to the outstanding
Senior Subordinated Notes, the Note Guarantees and the Indenture ("Legal
Defeasance") except for (a) the rights of Holders of outstanding Senior
Subordinated Notes to receive payments in respect of the principal of, premium,
if any, and interest and Liquidated Damages, if any, on such Senior Subordinated
Notes when such payments are due from the trust referred to below, (b) the
Issuers' obligations with respect to the Senior Subordinated Notes concerning
issuing temporary Senior Subordinated Notes, registration of Senior Subordinated
Notes, mutilated, destroyed, lost or stolen Senior Subordinated Notes and the
maintenance of an office or agency for payment and money for security payments
held in trust, (c) the rights, powers, trusts, duties and immunities of the
Trustee, and the Issuers' obligations in connection therewith and (d) the Legal
Defeasance provisions of the Indenture. In addition, the Issuers may, at their
option and at any time, elect to have their obligations released with respect to
certain covenants that are described in the Indenture ("Covenant Defeasance")
and thereafter any omission to comply with such obligations shall not constitute
a Default or Event of Default with respect to the Senior Subordinated Notes. In
the event Covenant Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, rehabilitation and insolvency events) described under
"Events of Default and Remedies" will no longer constitute an Event of Default
with respect to the Senior Subordinated Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (a)
the Issuers must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Senior Subordinated Notes, cash in U.S. dollars,
non-callable Government Securities, or a combination thereof, in such amounts as
will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, premium, if any, and
interest and Liquidated Damages, if any, on the outstanding Senior Subordinated
Notes on the stated maturity or on the applicable redemption date, as the case
may be, and the Issuers must specify whether the Senior Subordinated Notes are
being defeased to maturity or to a particular redemption date, (b) in the case
of Legal Defeasance, the Issuers shall have delivered to the Trustee an opinion
of counsel in the United States reasonably acceptable to the Trustee confirming
that (i) the Issuers has received from, or there has been published by, the
Internal Revenue Service a ruling or (ii) since the date of the Indenture, there
has been a change in the applicable federal income tax law, in either case to
the effect that, and based thereon such opinion of counsel shall confirm that,
subject to customary assumptions and exclusions, the
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Holders of the outstanding Senior Subordinated Notes will not recognize income,
gain or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Legal
Defeasance had not occurred, (c) in the case of Covenant Defeasance, the Issuers
shall have delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that, subject to customary
assumptions and exclusions, the Holders of the outstanding Senior Subordinated
Notes will not recognize income, gain or loss for federal income tax purposes as
a result of such Covenant Defeasance and will be subject to federal income tax
on the same amounts, in the same manner and at the same times as would have been
the case if such Covenant Defeasance had not occurred, (d) no Default or Event
of Default shall have occurred and be continuing on the date of such deposit
(other than a Default or Event of Default resulting from the borrowing of funds
to be applied to such deposit) or, insofar as Events of Default from bankruptcy
or insolvency events are concerned, at any time in the period ending on the
123rd day after the date of deposit, (e) such Legal Defeasance or Covenant
Defeasance will not result in a breach or violation of, or constitute a default
under, any material agreement or instrument (other than the Indenture) to which
the Company or any of its Subsidiaries is a party or by which the Company or any
of its Subsidiaries is bound, (f) the Issuers must have delivered to the Trustee
an opinion of counsel to the effect that, subject to customary assumptions and
exclusions, after the 123rd day following the deposit, the trust funds will not
be subject to the effect of Section 547 of the United States Bankruptcy Code or
any analogous New York State law provision or any other applicable federal or
New York bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally, (g) the Issuers must deliver to the Trustee an
Officers' Certificate stating that the deposit was not made by the Issuers with
the intent of preferring the Holders of Senior Subordinated Notes over the other
creditors of the Issuers with the intent of defeating, hindering, delaying or
defrauding creditors of the Issuers or others, and (h) the Issuers must deliver
to the Trustee an Officers' Certificate and an opinion of counsel (which opinion
may be subject to customary assumptions and exclusions), each stating that all
conditions precedent provided for relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange New Senior Subordinated Notes in
accordance with the Indenture. The Registrar and the Trustee may require a
Holder, among other things, to furnish appropriate endorsements and transfer
documents and the Issuers may require a Holder to pay any taxes and fees
required by law or permitted by the Indenture. The Issuers are not required to
transfer or exchange any New Senior Subordinated Note selected for redemption.
Also, the Issuers are not required to transfer or exchange any Senior
Subordinated Note for a period of 15 days before a selection of New Senior
Subordinated Notes to be redeemed. The registered Holder of a New Senior
Subordinated Note will be treated as the owner of it for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture,
the Note Guarantees and the Senior Subordinated Notes may be amended or
supplemented with the consent of the Holders of at least a majority in principal
amount of the Senior Subordinated Notes then outstanding (including, without
limitation, consents obtained in connection with a purchase of, or tender offer
or exchange offer for, Senior Subordinated Notes), and any existing default or
compliance with any provision of the Indenture, the Note Guarantees or the
Senior Subordinated Notes may be waived with the consent of the Holders of a
majority in principal amount of the then outstanding Senior Subordinated Notes
(including, without limitation, consents obtained in connection with a purchase
of, or tender offer or exchange offer for, Senior Subordinated Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Senior Subordinated Notes held by a non-consenting Holder)
(a) reduce the principal amount of Senior Subordinated Notes whose Holders must
consent to an amendment, supplement or waiver, (b) reduce the principal of or
change the fixed maturity of any Senior Subordinated Note or alter the
provisions with respect to the redemption of the Senior Subordinated Notes
(other than the provisions described under the caption
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"-- Repurchase at the Option of Holders"), (c) reduce the rate of or change the
time for payment of interest on any Senior Subordinated Note, (d) waive a
Default or Event of Default in the payment of principal of or premium, if any,
or interest or Liquidated Damages, if any, on the Senior Subordinated Notes
(except a rescission of acceleration of the Senior Subordinated Notes by the
Holders of at least a majority in aggregate principal amount of the Senior
Subordinated Notes and a waiver of the payment default that resulted from such
acceleration), (e) make any Senior Subordinated Note payable in money other than
that stated in the Senior Subordinated Notes, (f) make any change in the
provisions of the Indenture relating to waivers of past Defaults, (g) waive a
redemption payment with respect to any Senior Subordinated Note (other than the
provisions described under the caption "-- Repurchase at the Option of
Holders"), (h) release any Guarantor from its obligations under its Note
Guarantee or the Indenture, except in accordance with the terms of the
Indenture, or (i) make any change in the foregoing amendment and waiver
provisions. Notwithstanding the foregoing, any (i) amendment to or waiver of the
covenant described under the caption "-- Repurchase at the Option of
Holders -- Change of Control," and (ii) amendment to Article 10 of the Indenture
(which relates to subordination) will require the consent of the Holders of at
least two-thirds in aggregate principal amount of the Senior Subordinated Notes
then outstanding if such amendment would materially adversely affect the rights
of Holders of Senior Subordinated Notes.
Notwithstanding the foregoing, without the consent of any Holder of Senior
Subordinated Notes, the Issuers, the Guarantors and the Trustee may amend or
supplement the Indenture, the Note Guarantees or the Senior Subordinated Notes
to cure any ambiguity, defect or inconsistency, to provide for uncertificated
Senior Subordinated Notes in addition to or in place of certificated Senior
Subordinated Notes, to provide for the assumption of the Issuers' obligations to
Holders of Senior Subordinated Notes in the case of a merger or consolidation or
sale of all or substantially all of the Issuers' assets, to make any change that
would provide any additional rights or benefits to the Holders of Senior
Subordinated Notes or that does not materially adversely affect the legal rights
under the Indenture of any such Holder, or to comply with requirements of the
Commission in order to effect or maintain the qualification of the Indenture
under the Trust Indenture Act or to provide for additional Note Guarantees of
the Senior Subordinated Notes.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of any Issuer, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
The Holders of a majority in principal amount of the then outstanding
Senior Subordinated Notes will have the right to direct the time, method and
place of conducting any proceeding for exercising any remedy available to the
Trustee, subject to certain exceptions. The Indenture provides that in case an
Event of Default shall occur (which shall not be cured), the Trustee will be
required, in the exercise of its power, to use the degree of care of a prudent
man in the conduct of his own affairs. Subject to such provisions, the Trustee
will be under no obligation to exercise any of its rights or powers under the
Indenture at the request of any Holder of Senior Subordinated Notes, unless such
Holder shall have offered to the Trustee security and indemnity satisfactory to
it against any loss, liability or expense.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Accounts Receivable Subsidiary" means an Unrestricted Subsidiary of the
Company to which the Company or any of its Restricted Subsidiaries sells any of
its accounts receivable pursuant to a Receivables Facility.
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"Acquired Indebtedness" means, with respect to any specified Person, (a)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (b) Indebtedness secured by a Lien
encumbering an asset acquired by such specified Person at the time such asset is
acquired by such specified Person.
"Acquisition" means the acquisition of Holdings by the Principals.
"Affiliate" of any specified Person means any other Person which, directly
or indirectly, controls, is controlled by or is under direct or indirect common
control with, such specified Person. For purposes of this definition, "control,"
when used with respect to any Person, means the power to direct the management
and policies of such Person, directly or indirectly, whether through the
ownership of voting securities, by contract or otherwise, and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"Asset Sale" means (a) the sale, lease, conveyance, disposition or other
transfer (a "disposition") of any properties, assets or rights (including,
without limitation, by way of a sale and leaseback) (provided that the sale,
lease, conveyance or other disposition of all or substantially all of the assets
of the Company and its Subsidiaries taken as a whole will be governed by the
provisions of the Indenture described under the caption "-- Change of Control"
and/or the provisions described under the caption "-- Merger, Consolidation or
Sale of Assets" and not by the provisions of the Asset Sale covenant), and (b)
the issuance, sale or transfer by the Company or any of its Restricted
Subsidiaries of Equity Interests of any of the Company's Restricted
Subsidiaries, in the case of either clause (a) or (b), whether in a single
transaction or a series of related transactions (i) that have a fair market
value in excess of $5.0 million or (ii) for net proceeds in excess of $5.0
million. Notwithstanding the foregoing, the following items shall not be deemed
to be Asset Sales: (a) dispositions in the ordinary course of business; (b) a
disposition of assets by the Company to a Restricted Subsidiary or by a
Restricted Subsidiary to the Company or to another Restricted Subsidiary; (c) a
disposition of Equity Interests by a Restricted Subsidiary to the Company or to
another Restricted Subsidiary; (d) the sale and leaseback of any assets within
90 days of the acquisition thereof; (e) foreclosures on assets; (f) any exchange
of like property pursuant to Section 1031 of the Internal Revenue Code of 1986,
as amended, for use in a Permitted Business; (g) any sale of Equity Interests
in, or Indebtedness or other securities of, an Unrestricted Subsidiary; (h) a
Permitted Investment or a Restricted Payment that is permitted by the covenant
described under the caption "-- Restricted Payments"; and (i) sales of accounts
receivable, or participations therein, in connection with any Receivables
Facility.
"Attributable Indebtedness" in respect of a sale and leaseback transaction
means, at the time of determination, the present value (discounted at the rate
of interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
"Capital Expenditure Indebtedness" means Indebtedness incurred by any
Person to finance the purchase or construction or any property or assets
acquired or constructed by such Person which have a useful life or more than one
year so long as (a) the purchase or construction price for such property or
assets is included in "addition to property, plant or equipment" in accordance
with GAAP, (b) the acquisition or construction of such property or assets is not
part of any acquisition of a Person or line of business and (c) such
Indebtedness is incurred within 90 days of the acquisition or completion of
construction of such property or assets.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means (a) in the case of a corporation, corporate stock,
(b) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (c) in the case of a partnership or limited liability company,
partnership or membership
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interests (whether general or limited) and (d) any other interest or
participation that confers on a Person the right to receive a share of the
profits and losses of, or distributions of assets of, the issuing Person.
"Cash Equivalents" means (i) Government Securities, (ii) any certificate of
deposit maturing not more than 365 days after the date of acquisition issued by,
or time deposit of, an Eligible Institution or any lender under the New Credit
Facility, (iii) commercial paper maturing not more than 365 days after the date
of acquisition of an issuer (other than an Affiliate of the Company) with a
rating, at the time as of which any investment therein is made, of "A-3' (or
higher) according to S&P or "P-2" (or higher) according to Moody's or carrying
an equivalent rating by a nationally recognized rating agency if both of the two
named rating agencies cease publishing ratings of investments, (iv) any bankers
acceptances of money market deposit accounts issued by an Eligible Institution
and (v) any fund investing exclusively in investments of the types described in
clauses (i) through (iv) above.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person and its Restricted Subsidiaries for
such period plus, to the extent deducted in computing Consolidated Net Income,
(a) an amount equal to any extraordinary or non-recurring loss plus any net loss
realized in connection with an Asset Sale, (b) provision for taxes based on
income or profits of such Person and its Restricted Subsidiaries for such
period, (c) Fixed Charges of such Person for such period, (d) depreciation,
amortization (including amortization of goodwill and other intangibles) and all
other non-cash charges (excluding any such non-cash charge to the extent that it
represents an accrual of or reserve for cash expenses in any future period or
amortization of a prepaid cash expense that was paid in a prior period) of such
Person and its Restricted Subsidiaries for such period, (e) net periodic
post-retirement benefits, (f) other income or expense net as set forth on the
face of such Person's statement of operations, (g) expenses and charges of the
Company related to the Recapitalization, the New Credit Facility and the
application of the proceeds thereof which are paid, taken or otherwise accounted
for within 90 days of the consummation of the Merger, and (h) any
non-capitalized transaction costs incurred in connection with actual or proposed
financings, acquisition or divestitures (including, but not limited to,
financing and refinancing fees and costs incurred in connection with the
Recapitalization), in each case, on a consolidated basis and determined in
accordance with GAAP. Notwithstanding the foregoing, the provision for taxes
based on the income or profits of, the Fixed Charges of, and the depreciation
and amortization and other non-cash charges of, a Restricted Subsidiary of a
Person shall be added to Consolidated Net Income to compute Consolidated Cash
Flow only to the extent (and in the same proportion) that Net Income of such
Restricted Subsidiary was included in calculating the Consolidated Net Income of
such Person.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum of, without duplication, (a) the interest expense of such Person
and its Restricted Subsidiaries for such period, on a consolidated basis,
determined in accordance with GAAP (including amortization of original issue
discount, non-cash interest payments, the interest component of all payments
associated with Capital Lease Obligations, imputed interest with respect to
Attributable Debt, commissions, discounts and other fees and charges incurred in
respect of letter of credit or bankers' acceptance financings, and net payments,
if any, pursuant to Hedging Obligations; provided that in no event shall any
amortization of deferred financing costs be included in Consolidated Interest
Expense); and (b) the consolidated capitalized interest of such Person and its
Restricted Subsidiaries for such period, whether paid or accrued; provided,
however, that Receivables Fees shall be deemed not to constitute Consolidated
Interest Expense. Notwithstanding the foregoing, the Consolidated Interest
Expense with respect to any Restricted Subsidiary that is not a Wholly Owned
Restricted Subsidiary shall be included only to the extent (and in the same
proportion) that the net income of such Restricted Subsidiary was included in
calculating Consolidated Net Income.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that (a) the Net Income (or loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Restricted Subsidiary
thereof, (b) the Net Income (or loss) of any Restricted Subsidiary shall be
excluded to the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income (or loss) is
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not at the date of determination permitted without any prior governmental
approval (that has not been obtained) or, directly or indirectly, by operation
of the terms of its charter or any agreement, instrument, judgment, decree,
order, statute, rule or governmental regulation applicable to that Restricted
Subsidiary, (c) the Net Income (or loss) of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition shall
be excluded and (d) the cumulative effect of a change in accounting principles
shall be excluded.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Designated Noncash Consideration" means the fair market value of non-cash
consideration received by the Company or one of its Restricted Subsidiaries in
connection with an Asset Sale that is so designated as Designated Noncash
Consideration pursuant to an Officers' Certificate, setting forth the basis of
such valuation, executed by the principal executive officer and the principal
financial officer of the Company, less the amount of cash or Cash Equivalents
received in connection with a sale of such Designated Noncash Consideration.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable), or upon the happening of any event (other than any event solely
within the control of the issuer thereof), matures or is mandatorily redeemable,
pursuant to a sinking fund obligation or otherwise, is exchangeable for
Indebtedness (except to the extent exchangeable at the option of such Person
subject to the terms of any debt instrument to which such Person is a party) or
redeemable at the option of the Holder thereof, in whole or in part, on or prior
to the date on which the Senior Subordinated Notes mature; provided that any
Capital Stock that would constitute Disqualified Stock solely because the
holders thereof have the right to require the Company to repurchase such Capital
Stock upon the occurrence of a Change of Control or an Asset Sale shall not
constitute Disqualified Stock if the terms of such Capital Stock provide that
the Company may not repurchase or redeem any such Capital Stock pursuant to such
provisions unless such repurchase or redemption complies with the covenant
described under the caption " -- Certain Covenants -- Restricted Payments," and
provided further that, if such Capital Stock is issued to any plan for the
benefit of employees of the Company or its Subsidiaries or by any such plan to
such employees, such Capital Stock shall not constitute Disqualified Stock
solely because it may be required to be repurchased by the Company in order to
satisfy applicable statutory or regulatory obligations.
"DLJMB" means DLJ Merchant Banking Partners II, L.P. and its Affiliates.
"Domestic Subsidiary" means a Subsidiary that is organized under the laws
of the United States or any State, district or territory thereof.
"Eligible Institution" means a commercial banking institution that has
combined capital and surplus not less than $100.0 million or its equivalent in
foreign currency, whose short-term debt is rated "A-3" or higher according to
Standard & Poor's Ratings Group ("S&P") or "P-2" or higher according to Moody's
Investor Services, Inc. ("Moody's") or carrying an equivalent rating by a
nationally recognized rating agency if both of the two named rating agencies
cease publishing ratings of investments.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Existing Indebtedness" means Indebtedness of the Company and its
Restricted Subsidiaries (other than Indebtedness under the New Credit Facility)
in existence on the date of the Indenture, until such amounts are repaid.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (a) the Consolidated Interest Expense of such Person for
such period and (b) all dividend payments on any series of preferred stock of
such Person (other than dividends payable solely in Equity Interests that are
not Disqualified Stock), in each case, on a consolidated basis and in accordance
with GAAP.
"Fixed Charge Coverage Ratio" means, with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
(exclusive of amounts attributable to discontinued
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operations, as determined in accordance with GAAP, or operations and businesses
disposed of prior to the Calculation Date (as defined)) to the Fixed Charges of
such Person for such period (exclusive of amounts attributable to discontinued
operations, as determined in accordance with GAAP, or operations and businesses
disposed of prior to the Calculation Date). In the event that the referrent
Person or any of its Subsidiaries incurs, assumes, guarantees or redeems any
Indebtedness (other than revolving credit borrowings) or issues or redeems
preferred stock subsequent to the commencement of the period for which the Fixed
Charge Coverage Ratio is being calculated but prior to the date on which the
event for which the calculation of the Fixed Charge Coverage Ratio is made (the
"Calculation Date"), then the Fixed Charge Coverage Ratio shall be calculated
giving pro forma effect to such incurrence, assumption, guarantee or redemption
of Indebtedness, or such issuance or redemption of preferred stock, as if the
same had occurred at the beginning of the applicable four-quarter reference
period. In addition, for purposes of making the computation referred to above,
acquisitions that have been made by the Company or any of its Subsidiaries,
including all mergers or consolidations and any related financing transactions,
during the four-quarter reference period or subsequent to such reference period
and on or prior to the Calculation Date shall be calculated to include the
Consolidated Cash Flow of the acquired entities on a pro forma basis after
giving effect to cost savings resulting from employee terminations, facilities
consolidations and closings, standardization of employee benefits and
compensation practices, consolidation of property, casualty and other insurance
coverage and policies, standardization of sales and distribution methods,
reductions in taxes other than income taxes and other cost savings reasonably
expected to be realized from such acquisition, as determined in good faith by an
officer of the Company (regardless of whether such cost savings could then be
reflected in pro forma financial statements under GAAP, Regulation S-X
promulgated by the Commission or any other regulation or policy of the
Commission) and without giving effect to clause (c) of the proviso set forth in
the definition of Consolidated Net Income, and shall be deemed to have occurred
on the first day of the four-quarter reference period and Consolidated Cash Flow
for such reference period shall be calculated.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the Indenture.
"guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit or
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Guarantors" means (i) each of the Domestic Subsidiaries of the Company
that is a Restricted Subsidiary on the date of the Indenture and (ii) any other
Subsidiary that executes a Note Guarantee in accordance with the provisions of
the Indenture.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (a) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (b) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
"Holdings" means Thermadyne Holdings Corporation, a Delaware corporation,
the corporate parent of the Company, or its successors.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person in respect of borrowed money or evidenced by bonds, notes, debentures or
similar instruments or letters of credit (or reimbursement agreements in respect
thereof) or banker's acceptances or representing Capital Lease Obligations or
the balance deferred and unpaid of the purchase price of any property or
representing any Hedging Obligations, except any such balance that constitutes
an accrued expense or trade payable, if and to the extent any of the foregoing
Indebtedness (other than letters of credit and Hedging Obligations) would appear
as a liability upon a balance sheet of such Person prepared in accordance with
GAAP, as well as all Indebtedness of others secured by a Lien on any asset of
such Person (whether or not such Indebtedness is assumed by such Person) and, to
the extent not otherwise included, the guarantee by such Person of any
Indebtedness of any other Person, provided that Indebtedness shall not include
the pledge by the Company of
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the Capital Stock of an Unrestricted Subsidiary of the Company to secure
Non-Recourse Debt of such Unrestricted Subsidiary. The amount of any
Indebtedness outstanding as of any date shall be (a) the accreted value thereof
(together with any interest thereon that is more than 30 days past due), in the
case of any Indebtedness that does not require current payments of interest, and
(b) the principal amount thereof, in the case of any other Indebtedness.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees by the referent Person of, and Liens on any
assets of the referent Person securing, Indebtedness or other obligations of
other Persons), advances or capital contributions (excluding commission, travel
and similar advances to officers and employees made in the ordinary course of
business), purchases or other acquisitions for consideration of Indebtedness,
Equity Interests or other securities, together with all items that are or would
be classified as investments on a balance sheet prepared in accordance with
GAAP, provided that an investment by the Company for consideration consisting of
common equity securities of the Company shall not be deemed to be an Investment.
If the Company or any Restricted Subsidiary of the Company sells or otherwise
disposes of any Equity Interests of any direct or indirect Restricted Subsidiary
of the Company such that, after giving effect to any such sale or disposition,
such Person is no longer a Subsidiary of the Company, the Company shall be
deemed to have made an Investment on the date of any such sale or disposition
equal to the fair market value of the Equity Interests of such Restricted
Subsidiary not sold or disposed of in an amount determined as provided in the
final paragraph of the covenant described under the caption "-- Restricted
Payments."
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
"Management Loans" means one or more loans by the Company or Holdings to
officers and/or directors of the Company and any of its Restricted Subsidiaries
to finance the purchase by such officers and directors of common stock of
Holdings; provided, however, that the aggregate principal amount of all such
Management Loans outstanding at any time shall not exceed $5.0 million.
"Merger" means the merger of Mercury Acquisition Corp., a Delaware
corporation, with and into Holdings on or prior to the date of issuance of the
Senior Subordinated Notes.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (a) any gain (or
loss), together with any related provision for taxes on such gain (or loss),
realized in connection with (i) any Asset Sale (including, without limitation,
dispositions pursuant to sale and leaseback transactions) or (ii) the
extinguishment of any Indebtedness of such Person or any of its Restricted
Subsidiaries and (b) any extraordinary or nonrecurring gain (or loss), together
with any related provision for taxes on such extraordinary or nonrecurring gain
(or loss).
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of, without duplication,
(a) the direct costs relating to such Asset Sale (including, without limitation,
legal, accounting and investment banking fees, and sales commissions, recording
fees, title transfer fees and appraiser fees and cost of preparation of assets
for sale) and any relocation expenses incurred as a result thereof, (b) taxes
paid or payable as a result thereof (after taking into account any available tax
credits or deductions and any tax sharing arrangements), (c) amounts required to
be applied to the repayment of Indebtedness (other than revolving credit
Indebtedness incurred pursuant to the New Credit Facility) secured by a Lien on
the asset or assets that were the subject of such Asset Sale and (d) any reserve
established in accordance with GAAP or any amount placed in escrow, in either
case for adjustment in respect of the sale price of such asset or assets until
such time as such reserve is reversed or such escrow arrangement is terminated,
in which case Net
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Proceeds shall include only the amount of the reserve so reversed or the amount
returned to the Company or its Restricted Subsidiaries from such escrow
arrangement, as the case may be.
"New Credit Facility" means that certain Credit Agreement, dated as of May
22, 1998, by and among the Company and certain of its foreign subsidiaries,
Donaldson, Lufkin & Jenrette Securities Corporation, as arranger, DLJ Capital
Funding, Inc., as syndication agent, and ABN AMRO Bank N.V., Chicago Branch, as
administrative agent, including any related notes, guarantees, collateral
documents, instruments and agreements executed in connection therewith, and, in
each case, as amended, modified, renewed, refunded, replaced or refinanced from
time to time, including, without limitation, any agreement (i) extending or
shortening the maturity of any Indebtedness incurred thereunder or contemplated
thereby, (ii) adding or deleting borrowers or guarantors thereunder, (iii)
increasing the amount of Indebtedness incurred thereunder or available to be
borrowed thereunder, provided that on the date such Indebtedness is incurred it
would not be prohibited by clause (i) of Section 4.09 of the Indenture or (iv)
otherwise altering the terms and conditions thereof. Indebtedness under the New
Credit Facility outstanding on the date on which Senior Subordinated Notes are
first issued and authenticated under the Indenture shall be deemed to have been
incurred on such date in reliance on the first paragraph of Section 4.09.
"Non-Recourse Debt" means Indebtedness (i) no default with respect to,
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any of its Restricted Subsidiaries to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its stated maturity; and (ii) as to which the lenders have been notified in
writing that they will not have any recourse to the stock (other than the stock
of an Unrestricted Subsidiary pledged by the Company to secure debt of such
Unrestricted Subsidiary) or assets of the Company or any of its Restricted
Subsidiaries; provided that in no event shall Indebtedness of any Unrestricted
Subsidiary fail to be Non-Recourse Debt solely as a result of any default
provisions contained in a guarantee thereof by the Company or any of its
Restricted Subsidiaries if the Company or such Restricted Subsidiary was
otherwise permitted to incur such guarantee pursuant to the Indenture.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Original Offerings" means the offering of the Senior Subordinated Notes by
the Issuers and the concurrent offering of senior discount debentures by
Holdings.
"Pari Passu Indebtedness" means Indebtedness of the Company that ranks pari
passu in right of payment to the Senior Subordinated Notes.
"Permitted Business" means any business in which the Company and its
Restricted Subsidiaries are engaged on the date of the Indenture or any business
reasonably related, incidental or ancillary thereto.
"Permitted Investments" means (a) any Investment in the Company or in a
Restricted Subsidiary of the Company, (b) any Investment in cash or Cash
Equivalents, (c) any Investment by the Company or any Restricted Subsidiary of
the Company in a Person, if as a result of such Investment (i) such Person
becomes a Restricted Subsidiary of the Company or (ii) such Person is merged,
consolidated or amalgamated with or into, or transfers or conveys substantially
all of its assets to, or is liquidated into, the Company or a Wholly Owned
Restricted Subsidiary of the Company, (d) any Investment made as a result of the
receipt of non-cash consideration from an Asset Sale that was made pursuant to
and in compliance with the covenant described under the caption ' -- Repurchase
at the Option of Holders -- Asset Sales," (e) any Investment acquired solely in
exchange for Equity Interests (other than Disqualified Stock) of the Company,
(f) any Investment in a Person engaged in a Permitted Business (other than an
Investment in an Unrestricted Subsidiary) having an aggregate fair market value,
taken together with all other Investments made pursuant to this clause (f) that
are at that time outstanding, not to exceed 15% of Total Assets at the time of
such Investment (with the fair market value of each Investment being measured at
the time made and without giving effect to subsequent changes in value), (g)
Investments relating to any special purpose Wholly Owned Subsidiary of the
Company organized in connection with a Receivables Facility that, in the good
faith determination of the board of
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directors of the Company, are necessary or advisable to effect such Receivables
Facility and (h) the Management Loans.
"Permitted Liens" means: (i) Liens on property of a Person existing at the
time such Person is merged into or consolidated with the Company or any
Restricted Subsidiary, provided that such Liens were not incurred in
contemplation of such merger or consolidation and do not secure any property or
assets of the Company or any Restricted Subsidiary other than the property or
assets subject to the Liens prior to such merger or consolidation; (ii) Liens
existing on the date of the Indenture; (iii) Liens securing Indebtedness
consisting of Capitalized Lease Obligations, purchase money Indebtedness,
mortgage financings, industrial revenue bonds or other monetary obligations, in
each case incurred solely for the purpose of financing all or any part of the
purchase price or cost of construction or installation of assets used in the
business of the Company or its Restricted Subsidiaries, or repairs, additions or
improvements to such assets, provided that (A) such Liens secure Indebtedness in
an amount not in excess of the original purchase price or the original cost of
any such assets or repair, additional or improvement thereto (plus an amount
equal to the reasonable fees and expenses in connection with the incurrence of
such Indebtedness), (B) such Liens do not extend to any other assets of the
Company or its Restricted Subsidiaries (and, in the case of repair, addition or
improvements to any such assets, such Lien extends only to the assets (and
improvements thereto or thereon) repaired, added to or improved), (C) the
Incurrence of such Indebtedness is permitted by " -- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock" and (D)
such Liens attach within 365 days of such purchase, construction, installation,
repair, addition or improvement; (iv) Liens to secure any refinancings,
renewals, extensions, modification or replacements (collectively, "refinancing")
(or successive refinancings), in whole or in part, of any Indebtedness secured
by Liens referred to in the clauses above so long as such Lien does not extend
to any other property (other than improvements thereto); (v) Liens securing
letters of credit entered into in the ordinary course of business and consistent
with past business practice; (vi) Liens on and pledges of the capital stock of
any Unrestricted Subsidiary securing Non-Recourse Debt of such Unrestricted
Subsidiary; (vii) Liens securing Indebtedness (including all Obligations) under
the New Credit Facility; and (viii) other Liens securing Indebtedness that is
permitted by the terms of the Indenture to be outstanding having an aggregate
principal amount at any one time outstanding not to exceed $50.0 million.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries;
provided that (a) the principal amount (or accreted value, if applicable) of
such Permitted Refinancing Indebtedness does not exceed the principal amount of
(or accreted value, if applicable), plus premium, if any, and accrued interest
on the Indebtedness so extended, refinanced, renewed, replaced, defeased or
refunded (plus the amount of reasonable expenses incurred in connection
therewith), (b) such Permitted Refinancing Indebtedness has a final maturity
date no earlier than the final maturity date of, and has a Weighted Average Life
to Maturity equal to or greater than the Weighted Average Life to Maturity of,
the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded, and (c) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to the Senior
Subordinated Notes, such Permitted Refinancing Indebtedness is subordinated in
right of payment to, the Senior Subordinated Notes on terms at least as
favorable, taken as a whole, to the Holders of Senior Subordinated Notes as
those contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded.
"Principals" means DLJMB.
"Public Equity Offering" means any issuance of membership interests by the
Company (other than to Holdings and other than Disqualified Stock) or common
stock or preferred stock by Holdings (other than Disqualified Stock) that is
registered pursuant to the Securities Act, other than issuances registered on
Form S-8 and issuances registered on Form S-4, excluding issuances of membership
interests or common stock pursuant to employee benefit plans of Holdings or the
Company or otherwise as compensation to employees of the Company or Holdings.
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"Qualified Proceeds" means any of the following or any combination of the
following: (i) cash; (ii) Cash Equivalents; (iii) assets that are used or useful
in a Permitted Business; and (iv) the Capital Stock of any Person engaged in a
Permitted Business if, in connection with the receipt by the Company or any
Restricted Subsidiary of the Company of such Capital Stock, (A) such Person
becomes a Restricted Subsidiary of the Company or any Restricted Subsidiary of
the Company or (B) such Person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its assets to, or is
liquidated into, the Company or any Restricted Subsidiary of the Company.
"Recapitalization" means the Acquisition, the Merger and the Original
Offerings.
"Receivables Facility" means one or more receivables financing facilities,
as amended from time to time, pursuant to which the Company or any of its
Restricted Subsidiaries sells its accounts receivable to an Accounts Receivable
Subsidiary.
"Receivables Fees" means distributions or payments made directly or by
means of discounts with respect to any participation interests issued or sold in
connection with, and other fees paid to a Person that is not a Restricted
Subsidiary in connection with, any Receivables Facility.
"Related Party" means, with respect to any Principal, (i) any controlling
stockholder or partner of such Principal on the date of the Indenture, or (ii)
any trust, corporation, partnership or other entity, the beneficiaries,
stockholders, partners, owners or Persons beneficially holding (directly or
through one or more Subsidiaries) a 51% or more controlling interest of which
consist of the Principals and/or such other Persons referred to in the
immediately preceding clauses (i) or (ii).
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the date
hereof.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any Person, (a) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (b) any partnership or limited liability company (i) the sole
general partner or the managing general partner or managing member of which is
such Person or a Subsidiary of such Person or (ii) the only general partners or
managing members of which are such Person or of one or more Subsidiaries of such
Person (or any combination thereof).
"Tax Sharing Agreement" means any tax sharing agreement or arrangement
between the Company and Holdings, as the same may be amended from time to time;
provided that in no event shall the amount permitted to be paid pursuant to all
such agreements and/or arrangements exceed the amount the Company would be
required to pay for income taxes were it to file a consolidated tax return for
itself and its consolidated Restricted Subsidiaries as if it were a corporation
that was a parent of a consolidated group.
"Total Assets" means the total consolidated assets of the Company and its
Restricted Subsidiaries, as shown on the most recent balance sheet (excluding
the footnotes thereto) of the Company.
"Unrestricted Subsidiary" means any Subsidiary (other than Thermadyne
Capital) that is designated by the board of directors as an Unrestricted
Subsidiary pursuant to a board resolution, but only to the extent that
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such Subsidiary: (a) has no Indebtedness other than Non-Recourse Debt; (b) is
not party to any agreement, contract, arrangement or understanding with the
Company or any Restricted Subsidiary of the Company unless the terms of any such
agreement, contract, arrangement or understanding are no less favorable to the
Company or such Restricted Subsidiary than those that might be obtained at the
time from Persons who are not Affiliates of the Company; (c) is a Person with
respect to which neither the Company nor any of its Restricted Subsidiaries has
any direct or indirect obligation (i) to subscribe for additional Equity
Interests (other than Investments described in clause (g) of the definition of
Permitted Investments) or (ii) to maintain or preserve such Person's financial
condition or to cause such Person to achieve any specified levels, of operating
results; and (d) has not guaranteed or otherwise directly or indirectly provided
credit support for any Indebtedness of the Company or any of its Restricted
Subsidiaries. Any such designation by the board of directors shall be evidenced
to the Trustee by filing with the Trustee a certified copy of the board
resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing conditions and was
permitted by the covenant described under the caption entitled "-- Certain
Covenants -- Restricted Payments." If, at any time, any Unrestricted Subsidiary
would fail to meet the foregoing requirements as a Unrestricted Subsidiary, it
shall thereafter cease to be an Unrestricted Subsidiary for purposes of the
Indenture and any Indebtedness of such Subsidiary shall be deemed to be incurred
by a Restricted Subsidiary of the Company as of such date (and, if such
Indebtedness is not permitted to be incurred as of such date under the covenant
described under the caption entitled "-- Certain Covenants -- Incurrence of
Indebtedness and Issuance of Preferred Stock," the Company shall be in default
of such covenant). The board of directors of the Company may at any time
designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided
that such designation shall be deemed to be an incurrence of Indebtedness by a
Restricted Subsidiary of the Company of any outstanding Indebtedness of such
Unrestricted Subsidiary and such designation shall only be permitted if (i) such
Indebtedness is permitted under the covenant described under the caption
entitled "-- Certain Covenants -- Incurrence of Indebtedness and Issuance
Preferred of Stock" and (ii) no Default or Event of Default would be in
existence following such designation.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the sum of the
products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (b) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all the outstanding Capital Stock or other ownership
interests of which (other than directors' qualifying shares) shall at the time
be owned by such Person or by one or more Wholly Owned Restricted Subsidiaries
of such Person or by such Person and one or more Wholly Owned Restricted
Subsidiaries of such Person.
BOOK-ENTRY; DELIVERY AND FORM
Except as described in the next paragraph, the New Senior Subordinated
Notes initially will be represented by one or more permanent global certificates
in definitive, duly registered form (the "Global Senior Subordinated Notes").
The Global Senior Subordinated Notes will be deposited on the Issue Date with,
or on behalf of, DTC and registered in the name of a nominee of DTC.
The Global Notes. The Issuers expect that pursuant to procedures
established by DTC (i) upon the issuance of the Global Senior Subordinated
Notes, DTC or its custodian will credit, on its internal system, the principal
amount of New Senior Subordinated Notes of the individual beneficial interests
represented by such Global Senior Subordinated Notes to the respective accounts
of persons who have accounts with such depositary and (ii) ownership of
beneficial interests in the Global Senior Subordinated Notes will be shown
93
<PAGE> 95
on, and the transfer of such ownership will be effected only through, records
maintained by DTC or its nominee (with respect to interests of persons who have
accounts with DTC ("participants")) and the records of participants (with
respect to interests of persons other than participants). Qualified
Institutional Buyers ("QIB's") and institutional Accredited Investors who are
not QIB's may hold their interests in the Global Senior Subordinated Notes
directly through DTC if they are participants in such system, or indirectly
through organizations which are participants in such system.
So long as DTC, or its nominee, is the registered owner or holder of the
New Senior Subordinated Notes, DTC or such nominee, as the case may be, will be
considered the sole owner or holder of the New Senior Subordinated Notes
represented by such Global Senior Subordinated Notes for all purposes under the
Indenture. No beneficial owner of an interest in the Global Senior Subordinated
Notes will be able to transfer that interest except in accordance with DTC's
procedures.
Payments of the principal of, premium (if any) and interest on, the Global
Senior Subordinated Notes will be made to DTC or its nominee, as the case may
be, as the registered owner thereof. None of the Issuers, the Guarantors, the
Trustee or any Paying Agent will have any responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interests in the Global Senior Subordinated Notes or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interest.
The Issuers expect that DTC or its nominee, upon receipt of any payment of
principal, premium, if any and interest on the Global Senior Subordinated Notes,
will credit participants' accounts with payments in amount proportionate to
their respective beneficial interests in the principal amount of the Global
Notes as shown on the records of DTC or its nominee. The Issuers also expect
that payments by participants to owners of beneficial interests in the Global
Senior Subordinated Notes held through such participants will be governed by
standing instructions and customary practice, as is now the case with securities
held for the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
through DTC's same-day funds system in accordance with DTC rules and will be
settled in same day funds. If a holder requires physical delivery of a
Certificated Security for any reason, including to sell New Senior Subordinated
Notes to persons in states which require physical delivery of the New Senior
Subordinated Notes, or to pledge such securities, such holder must transfer its
interest in a Global Senior Subordinated Note, in accordance with the normal
procedures of DTC.
DTC has advised the Issuers that it will take any action permitted to be
taken by a holder of New Notes (including the presentation of New Senior
Subordinated Notes for exchange as described below) only at the direction of one
or more participants to whose account the DTC interests in the Global Senior
Subordinated Notes are credited and only in respect of such portion of the
aggregate principal amount of New Senior Subordinated Notes as to which such
participant or participants has or have given such direction.
DTC has advised the Issuers as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Securities Exchange Act of 1934, as amended.
DTC was created to hold securities for its participants and facilitate the
clearance and settlement of securities transactions between participants through
electronic book-entry changes in accounts of its participants, thereby
eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers, banks, trust companies and clearing corporations
and certain other organizations. Indirect access to the DTC system is available
to others such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly ("indirect participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Senior Subordinated Note among participants
of DTC, it is under no obligation to perform such procedures, and such
procedures may be discontinued at any time. None of the Issuers, the Guarantors
nor the
94
<PAGE> 96
Trustee will have any responsibility for the performance by DTC or its
participants or indirect participants of their respective obligations under the
rules and procedures governing their operations.
Certificated Securities. If DTC is at any time unwilling or unable to
continue as a depositary for the Global Senior Subordinated Note and a successor
depositary is not appointed by the Issuer within 90 days, Certificated
Securities will be issued in exchange for the Global Senior Subordinated Notes.
95
<PAGE> 97
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of certain federal income tax
considerations relevant to the exchange of Old Senior Subordinated Notes for New
Senior Subordinated Notes, but does not purport to be a complete analysis of all
potential tax effects. The discussion is based upon the Internal Revenue Code of
1986, as amended, Treasury regulations, Internal Revenue Service rulings and
pronouncements, and judicial decisions now in effect, all of which are subject
to change at any time by legislative, judicial or administrative action. Any
such changes may be applied retroactively in a manner that could adversely
affect a holder of the New Senior Subordinated Notes. The description does not
consider the effect of any applicable foreign, state, local or other tax laws or
estate or gift tax considerations.
EACH HOLDER SHOULD CONSULT HIS OWN TAX ADVISOR AS TO THE PARTICULAR TAX
CONSEQUENCES TO IT OF EXCHANGING OLD SENIOR SUBORDINATED NOTES FOR NEW SENIOR
SUBORDINATED NOTES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL
OR FOREIGN TAX LAWS.
EXCHANGE OF OLD NOTES FOR NEW NOTES
The exchange of Old Senior Subordinated Notes for New Senior Subordinated
Notes pursuant to the Exchange Offer should not constitute a sale or exchange
for federal income tax purposes. Accordingly, such exchange should have no
federal income tax consequences to holders of Old Senior Subordinated Notes.
96
<PAGE> 98
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Senior Subordinated Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Senior Subordinated Notes.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of New Senior Subordinated
Notes received in exchange for Old Senior Subordinated Notes where such Old
Senior Subordinated Notes were acquired as a result of market-making activities
or other trading activities. The Issuers and the Guarantors have agreed that,
for a period of 90 days after the Expiration Date, it will make this Prospectus,
as amended or supplemented, available to any broker-dealer for use in connection
with any such resale. In addition, until December 2, 1998, all dealers effecting
transactions in the New Senior Subordinated Notes may be required to deliver a
Prospectus.
The Issuers and the Guarantors will not receive any proceeds from any sale
of New Senior Subordinated Notes by broker-dealers. New Senior Subordinated
Notes received by broker-dealers for their own account pursuant to the Exchange
Offer may be sold from time to time in one or more transactions in the over-the-
counter market, in negotiated transactions, through the writing of options on
the New Senior Subordinated Notes or a combination of such methods of resale, at
market prices prevailing at the time of resale, at prices related to such
prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such New Senior Subordinated Notes. Any
broker-dealer that resells New Senior Subordinated Notes that were received by
it for its own account pursuant to the Exchange Offer and any broker or dealer
that participates in a distribution of such New Senior Subordinated Notes may be
deemed to be an "underwriter" within the meaning of the Securities Act, and any
profit on any such resale of New Senior Subordinated Notes and any commissions
or concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that by
acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
For a period of 90 days after the Expiration Date, the Issuers and the
Guarantors will promptly send additional copies of this Prospectus and any
amendment or supplement to this Prospectus to any broker-dealer that requests
such documents in the Letter of Transmittal. The Company has agreed to pay all
expenses incident to the Exchange Offer other than commissions or concessions of
any broker-dealers and will indemnify holders of the Old Senior Subordinated
Notes (including any broker-dealers) against certain liabilities, including
certain liabilities under the Securities Act.
LEGAL MATTERS
The validity of the New Senior Subordinated Notes will be passed upon for
the Issuers and the Guarantors by Weil, Gotshal & Manges LLP, Dallas, Texas and
New York, New York.
EXPERTS
The Consolidated Financial Statements of Holdings at December 31, 1997 and
1996 and for each of the three years in the period ended December 31, 1997, and
the related financial statement schedule appearing in this Registration
Statement and related Prospectus have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports thereon appearing elsewhere
herein, and are included in reliance upon such reports of such firm given upon
their authority as experts in accounting and auditing.
97
<PAGE> 99
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA FINANCIAL DATA
The following unaudited condensed consolidated pro forma financial data
(the "Pro Forma Financial Data") of the Company are based on historical
consolidated financial statements of Holdings as adjusted to give effect to
certain transactions described below and to the Merger, including the Merger
Financing and the application of the proceeds thereof. For additional
information regarding the Merger, see "The Merger and Merger Financing." The
unaudited condensed consolidated pro forma statement of operations for the
quarter ended March 31, 1998 gives effect to the Merger and the Merger Financing
and the application of the proceeds thereof as if it had occurred at the
beginning of such period. The unaudited condensed consolidated pro forma
statements of operations for the twelve months ended March 31, 1998 and the year
ended December 31, 1997 give effect to the Arcsys Acquisition and the Woodland
Acquisition and, in the case of the year ended December 31, 1997, the GenSet
Acquisition, and the Merger, including the Merger Financing and the application
of the proceeds thereof, as if they all had occurred at the beginning of the
respective period. The pro forma statement of operations data have been derived
as if the balance sheet of the Company at the beginning of the respective period
was the pro forma balance sheet as of March 31, 1998. For additional information
regarding the GenSet Acquisition, the Arcsys Acquisition and the Woodland
Acquisition, see the discussion under the caption "Recent
Events -- Acquisitions" in Note 2 to Holdings' consolidated financial
statements. The unaudited condensed consolidated pro forma balance sheet gives
effect to the Merger, including the Merger Financing and the application of the
proceeds thereof, as if it had occurred on March 31, 1998. The pro forma
adjustments are based upon available information and upon certain assumptions
that management believes are reasonable under the circumstances. The Pro Forma
Financial Data and accompanying notes should be read in conjunction with the
historical consolidated financial statements of Holdings, including the notes
thereto, and other financial information pertaining to Holdings. The Pro Forma
Financial Data do not purport to represent what the Company's actual results of
operations or actual financial position would have been if the Merger, including
the Merger Financing and the application of the proceeds thereof, and the GenSet
Acquisition, the Arcsys Acquisition and the Woodland Acquisition in fact
occurred on such dates or to project the Company's results of operations or
financial position for any future period or date. The Pro Forma Financial Data
do not give effect to any transactions other than the GenSet Acquisition, the
Arcsys Acquisition, the Woodland Acquisition and the Merger, including the
Merger Financing and the application of the proceeds thereof, discussed in the
notes to the Pro Forma Financial Data included elsewhere herein.
As a result of the Merger, the Company incurred various expenses in
connection with consummating the transaction. See Note 2 to the Unaudited
Consolidated Pro Forma Statement of Operations for a more detailed explanation
of these expenses. While the exact timing, nature and amount of these costs have
not yet been fully determined, the Company anticipates that a significant
one-time pretax charge will be recorded in its second fiscal quarter. As a
result of the foregoing, the Company expects to record a significant net loss in
its second fiscal quarter. Because this loss will result directly from the
one-time charge incurred in connection with the Merger, and this charge will be
funded entirely through the proceeds of the Merger Financing, the Company does
not expect this loss to materially impact its liquidity, ongoing operations or
market position. For a discussion of the consequences of the incurrence of
indebtedness in connection with the Merger Financing, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
The pro forma adjustments were applied to the respective historical
consolidated financial statements of Holdings to reflect and account for the
Merger as a recapitalization; accordingly, the historical basis of the Company's
assets and liabilities has not been impacted thereby.
P-1
<PAGE> 100
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA BALANCE SHEET(1)
<TABLE>
<CAPTION>
MARCH 31, 1998
---------------------------------------
MERGER
HISTORICAL ADJUSTMENTS(1) PRO FORMA
---------- -------------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 0.2 $ -- $ 0.2
Accounts receivable..................................... 82.2 -- 82.2
Inventories............................................. 119.0 -- 119.0
Prepaid expenses and other.............................. 8.3 -- 8.3
------- ------- -------
Total current assets............................ 209.7 -- 209.7
Property, plant and equipment, net........................ 86.0 -- 86.0
Deferred financing costs.................................. 5.6 15.5(2) 15.5
(5.6)(3)
Intangibles, net.......................................... 33.8 -- 33.8
Deferred income taxes..................................... 35.5 16.8(4) 52.3
Other assets.............................................. 1.9 -- 1.9
------- ------- -------
Total assets.................................... $ 372.5 $ 26.7 $ 399.2
======= ======= =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable........................................ $ 49.9 $ -- $ 49.9
Accrued and other liabilities........................... 26.5 -- 26.5
Accrued interest........................................ 13.0 (13.0)(1) --
Income taxes payable.................................... 9.7 -- 9.7
Current maturities of long-term obligations............. 6.3 (6.3)(1) --
------- ------- -------
Total current liabilities....................... 105.4 (19.3) 86.1
New Credit Facility:
Revolving credit facility............................... -- 33.2(1) 33.2
Term loans.............................................. -- 330.0(1) 330.0
Senior Subordinated Notes................................. -- 205.4(1) 205.4
Outstanding Senior Notes.................................. 99.3 (99.3)(1) --
Outstanding Subordinated Notes............................ 179.3 (179.3)(1) --
Other existing long-term debt, less current maturities.... 85.6 (66.8)(1) 18.8
Other long-term liabilities............................... 59.7 -- 59.7
Stockholders' deficit..................................... (156.8) (177.2)(5) (334.0)
------- ------- -------
Total liabilities and stockholders' deficit..... $ 372.5 $ 26.7 $ 399.2
======= ======= =======
</TABLE>
See accompanying notes to Unaudited Condensed Consolidated Pro Forma Balance
Sheet.
P-2
<PAGE> 101
NOTES TO UNAUDITED CONDENSED CONSOLIDATED PRO FORMA BALANCE SHEET
(IN MILLIONS)
(1) The sources of cash at the Company level will include borrowings under the
New Credit Facility and the Senior Subordinated Notes ($568.6 million), of
which an estimated $21.4 million will be used to pay related fees and
expenses and the remaining $547.2 million will be dividended to Holdings.
Sources and uses of cash and cash equivalents in the Merger, including the
Merger Financing and the application of the proceeds thereof as of March 31,
1998, are as follows:
<TABLE>
<S> <C>
TOTAL USES:
Cash to purchase shares..................................... $368.8
Option cash proceeds........................................ 18.1
Management Loans............................................ 3.6
Repayment of Outstanding Subordinated Notes(a).............. 179.3
Repayment of Outstanding Senior Notes(a).................... 99.3
Repayment of outstanding U.S., Australian and Italian bank
facilities................................................ 73.1
Payment of accrued interest................................. 13.0
Estimated transaction fees and expenses..................... 52.9
------
Total cash uses................................... $808.1
======
TOTAL SOURCES:
New Credit Facility
Revolving credit facility(a).............................. $ 33.2
Term loans................................................ 330.0
Senior Subordinated Notes(b)................................ 205.4
Debentures issued by Holdings............................... 94.6
Common stock purchased by management........................ 4.9
Redeemable PIK preferred stock and warrants purchased by
DLJMB..................................................... 50.0
Common stock purchased by DLJMB............................. 90.0
------
Total cash sources................................ $808.1
======
</TABLE>
- ---------------
(a)Assumes that all of the Outstanding Subordinated Notes and Outstanding
Senior Notes are purchased by Holdings. The purchase by Holdings of less
than 100% of each of such notes would result in a reduction in the
amount of borrowings under the New Credit Facility; however, management
does not believe that such changes would have a material effect on the
information presented herein.
(b)Represents the issuance of $207 million aggregate principal amount of
Senior Subordinated Notes at a discount.
(2) Represents the portion of estimated transaction fees and expenses
attributable to the New Credit Facility, the Senior Subordinated Notes and
related interim financing commitments. See Note 6 to the Company's Unaudited
Condensed Consolidated Pro Forma Statement of Operations.
(3) The adjustment reflects the $5.6 million write-off of deferred debt issuance
costs associated with retiring the existing indebtedness. See Notes 2 and 6
to the Company's Unaudited Condensed Consolidated Pro Forma Statement of
Operations for an explanation of the pro forma income statement impact.
P-3
<PAGE> 102
(4) Reflects tax benefit of expense adjustments at a 35.0% rate as shown below:
<TABLE>
<S> <C> <C>
Option cash proceeds........................................ $18.1
Non-capitalized transaction fees and expenses............. 34.2
Less: estimated non-deductible portion.................... (10.0)
-----
Deductible non-capitalized transaction fees and expenses.... 24.2
Write-off of deferred debt issuance costs................... 5.6
-----
Total deductible expenses................................... 47.9
-----
Tax rate.................................................... 35.0%
-----
Tax benefit................................................. $16.8
=====
</TABLE>
(5) Represents the change in the stockholders' deficit as a result of the
Merger, including the Merger Financing and the application of the proceeds
thereof:
<TABLE>
<S> <C>
Cash to purchase shares (a)................................. $(368.8)
Net proceeds from Debentures issued by Holdings............. 91.3
Redeemable preferred stock and warrants purchased by
DLJMB..................................................... 50.0
Common stock purchased by management (b).................... 4.9
Common stock purchased by DLJMB............................. 90.0
Receivable related to Management Loans (c).................. (3.6)
Non-capitalized transaction fees and expenses (d)........... (34.2)
Write-off of deferred debt issuance costs................... (5.6)
Option cash proceeds (e).................................... (18.1)
Tax benefit of expense adjustments.......................... 16.8
-------
Total change in stockholders' deficit............. $(177.2)
=======
</TABLE>
- ---------------
(a) Assumes 10,690,283 shares are purchased for $34.50 per share. See "The
Merger and Merger Financing."
(b) Represents the Management Share Purchase (certain members of senior
management's anticipated purchase of 141,002 shares of the common stock
of the surviving corporation for $34.50 per share). See "Executive
Compensation -- Employment Contracts -- Employment Arrangements
Following the Merger."
(c) Represents loans provided to certain members of senior management by
the company to facilitate the Management Share Purchase.
(d) Represents all non-capitalized transaction fees and expenses and
includes estimated legal, accounting, advisory and consulting fees of
$17.4 million and estimated debt prepayment fees of $16.8 million. The
tax benefit of these expenses is included separately in the table
above.
(e) Represents the purchase of 1,033,668 options at an average purchase
price of $17.47 (the difference between $34.50 and $17.03, the average
exercise price of the Options). See "The Merger and Merger Financing."
P-4
<PAGE> 103
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA
STATEMENT OF OPERATIONS(1)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED MARCH 31, 1998
-------------------------------------------------------------------------
1997 ACQUISITIONS(1)
COMPANY ------------------------------- MERGER
HISTORICAL ARCSYS WOODLAND ADJUSTMENTS ADJUSTMENTS PRO FORMA(2)
---------- ------ -------- ----------- ----------- ------------
(IN MILLIONS, EXCEPT FOR RATIO DATA)
<S> <C> <C> <C> <C> <C> <C>
Net sales..................... $534.5 $11.2 $ 2.5 -- -- $548.2
Operating expenses:
Cost of goods sold.......... 331.6 9.0 1.6 -- -- 342.2
Selling, general and
administrative
expenses................. 111.5 1.7 0.9 -- -- 114.1
Amortization of goodwill.... 1.6 -- -- -- -- 1.6
Amortization of other
intangibles.............. 5.6 0.2 -- -- -- 5.8
Net periodic postretirement
benefits................. 2.8 -- -- -- -- 2.8
------ ----- ----- ----- ------ ------
Income from operations........ 81.4 0.3 -- -- -- 81.7
Other (income) expense:
Interest expense............ 44.6 -- 0.2 0.2(3) 50.0(4) 57.1
(37.9)(5)
Amortization of deferred
financing costs.......... 1.5 -- -- -- 2.0(6) 2.0
(1.5)(6)
Other....................... 3.3 -- -- -- -- 3.3
------ ----- ----- ----- ------ ------
Income (loss) from continuing
operations before taxes..... 32.0 0.3 (0.2) (0.2) (12.6) 19.3
Income tax provision
(benefit)................... 15.1 -- -- (0.1)(3) (4.4)(7) 10.6
------ ----- ----- ----- ------ ------
Income (loss) from continuing
operations available to
common...................... $ 16.9 $ 0.3 $(0.2) $(0.1) $ (8.2) $ 8.7
OTHER DATA:
Adjusted EBITDA(8)............ $104.6 $ 0.8 $ 0.4 $ -- $ -- $105.8
Depreciation.................. 13.1 0.3 0.2 -- -- 13.6
Capital expenditures.......... 17.7 0.1 -- -- -- 17.8
Ratio of earnings to fixed
charges(9).................. 1.6x -- -- -- -- 1.3x
</TABLE>
See accompanying notes to Unaudited Condensed Consolidated Pro Forma Statement
of Operations.
P-5
<PAGE> 104
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
PRO FORMA STATEMENT OF OPERATIONS
(IN MILLIONS)
(1) Represents the financial results for the companies acquired during 1997 for
the periods not included in the Company Historical column as follows: Arcsys
(4/1/97-9/25/97) and Woodland (4/1/97-11/24/97).
(2) The pro forma balance sheet reflects non-recurring charges aggregating $58.1
million (comprised of $18.1 million related to employee stock options and
related plans; $17.4 million of non-capitalizable transaction fees; $16.8
million of debt pre-payment penalties and the write-off of $5.6 million of
related deferred issuance costs) and estimated tax benefits of $16.8
million. The amounts related to debt prepayment penalties and debt issuance
costs will be reflected net of tax benefits as an extraordinary item. These
amounts have not been reflected in the unaudited pro forma consolidated
statements of operations.
(3) Reflects the additional interest expense and associated tax benefit
attributable to the acquisitions, all of which were financed with borrowings
under the Company's revolving credit facility.
<TABLE>
<CAPTION>
ARCSYS WOODLAND TOTAL
------ -------- -----
<S> <C> <C> <C>
Acquisition................................................. $ 7.5 $ 2.6 $10.1
Average interest rate....................................... 7.80% 7.80%
Annual interest............................................. $ 0.6 $ 0.2 $ 0.8
Months to include in pro forma.............................. 6 8
Incremental pro forma interest.............................. $ 0.3 $ 0.1 $ 0.4
Less historical interest included in reported results....... (0.2)
-----
Adjustment.................................................. $ 0.2
=====
TAXES:
Tax benefit on incremental interest at assumed rate of
35.0%..................................................... $ 0.1
=====
</TABLE>
(4) Reflects the additional interest expense attributable to the Merger
Financing, as follows:
<TABLE>
<CAPTION>
RATE AMOUNT INTEREST
---- ------ --------
<S> <C> <C> <C>
New Credit Facility:(a) Revolving Credit
Facility...................................... LIBOR(b) +2.25% $ 33.2 $ 2.7
Term Loans:
Term A........................................ LIBOR(b) +2.25% 100.0 7.9
Term B........................................ LIBOR(b) +2.50% 115.0 9.3
Term C........................................ LIBOR(b) +2.75% 115.0 9.6
------ -----
Total Term Loans...................... 330.0 26.8
Senior Subordinated Notes....................... 9.88% 207.0 20.4
-----
49.9
Amortization of Issuance Discount for Senior
Subordinated Notes............................ 10 yrs 1.6 0.1
-----
$50.0
=====
</TABLE>
- ---------------
(a) A one-eighth of one percent change in interest rates would impact
interest expense for borrowings under the New Credit Facility and the
Senior Subordinated Notes, collectively, in the amount of approximately
$0.7 million.
(b) Calculations based on LIBOR at 5.63%.
The borrowings under the New Credit Facility assume that all of the
Outstanding Subordinated Notes and Outstanding Senior Notes are
purchased by Holdings. The purchase by Holdings of less than 100% of
each of such notes would result in a reduction in the amount of
borrowings under the
P-6
<PAGE> 105
New Credit Facility; however, the management does not believe that such
changes would have a material effect on the information presented
herein.
(5) Reflects the elimination of interest expense attributable to indebtedness to
be paid in connection with the Merger, as follows:
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED
MARCH 31,
1998
-------------
<S> <C>
Outstanding U.S., Australian and Italian bank facilities.... $ 8.4
Outstanding Senior Notes.................................... 10.2
Outstanding Subordinated Notes.............................. 19.3
-----
$37.9
=====
</TABLE>
See Note 8 to Holdings' Consolidated Financial Statements for a description
of interest rates applicable to outstanding indebtedness.
(6) Reflects the net change in amortization of capitalized financing costs, as
follows:
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED
FEES YEARS MARCH 31, 1998
----- ----- --------------
<S> <C> <C> <C>
Elimination of existing amortization of capitalized
financing
costs................................................. $(1.5)
Amortization of capitalized financing costs for new
debt:
Revolving Credit Facility............................. $ 2.3 6 0.4
Term A................................................ 2.3 6 0.4
Term B................................................ 2.6 7 0.4
Term C................................................ 2.6 8 0.3
Senior Subordinated Notes............................. 5.7 10 0.5
----- -----
Total new capitalized financing costs......... $15.5 2.0
===== -----
$ 0.5
=====
</TABLE>
Financing costs are amortized using the effective interest method.
(7) Adjustment reflects the income tax effect of all pro forma entries above at
a rate of 35.0%.
(8) "Adjusted EBITDA" is defined as operating income plus depreciation,
amortization of goodwill, amortization of intangibles and net periodic
postretirement benefits expense and is a key financial measure but should
not be construed as an alternative to operating income or cash flows from
operating activities (as determined in accordance with generally accepted
accounting principles). Adjusted EBITDA is also one of the financial
measures by which the Company's compliance with its covenants is calculated
under its debt agreements. The Company believes that Adjusted EBITDA is a
useful supplement to net income (loss) and other consolidated income
statement data in understanding cash flows generated from operations that
are available for taxes, debt service and capital expenditures. However, the
Company's method of computation may or may not be comparable to other
similarly titled measures of other companies. In addition, Adjusted EBITDA
is not necessarily indicative of amounts that may be available for
discretionary uses and does not reflect any legal or contractual
restrictions on the Company's use of funds.
(9) For purposes of calculating the ratio of earnings to fixed charges, earnings
consist of income before income taxes plus fixed charges. Fixed charges
consist of interest expense, amortization of deferred financing costs and
one-third of the rent expense from operating leases, which management
believes is a reasonable approximation of the interest component of rent
expense.
P-7
<PAGE> 106
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA
STATEMENT OF OPERATIONS(1)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
----------------------------------------------------------------------------------
1997 ACQUISITIONS(1)
COMPANY ---------------------------------------- MERGER
HISTORICAL GENSET ARCSYS WOODLAND ADJUSTMENTS ADJUSTMENTS PRO FORMA(2)
---------- ------ ------ -------- ----------- ----------- ------------
(IN MILLIONS, EXCEPT FOR RATIO DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.................. $520.4 $ 2.4 $17.4 $ 4.0 -- -- $544.2
Operating expenses:
Cost of goods sold....... 320.0 2.1 14.2 2.6 -- -- 338.9
Selling, general and
administrative
expenses.............. 110.7 0.4 2.7 1.2 -- -- 115.0
Amortization of
goodwill.............. 1.6 0.1 -- -- -- -- 1.7
Amortization of other
intangibles........... 6.8 -- 0.2 -- -- -- 7.0
Net periodic
postretirement
benefits.............. 2.8 -- -- -- -- -- 2.8
------ ----- ----- ----- ----- ------ ------
Income from operations..... 78.5 (0.2) 0.3 0.2 -- -- 78.8
Other (income) expense:
Interest expense......... 45.3 0.2 -- 0.3 0.4(3) 50.0(4) 57.0
(39.2)(5)
Amortization of deferred
financing costs....... 1.6 -- -- -- -- 2.0(6) 2.0
(1.6)(6)
Other.................... 3.1 (0.1) -- -- -- -- 3.0
------ ----- ----- ----- ----- ------ ------
Income (loss) from
continuing operations
before taxes............. 28.5 (0.3) 0.3 (0.1) (0.4) (11.2) 16.8
Income tax provision
(benefit)................ 13.4 0.1 -- 0.1 (0.2)(3) (3.9)(7) 9.5
------ ----- ----- ----- ----- ------ ------
Income (loss) from
continuing operations
available to common...... $ 15.1 $(0.4) $ 0.3 $(0.2) $(0.2) $ (7.3) $ 7.3
OTHER DATA:
Adjusted EBITDA(8)......... $102.1 $ -- $ 0.9 $ 0.4 $ -- $ -- $103.4
Depreciation............... 12.5 0.1 0.4 0.2 -- -- 13.2
Capital expenditures....... 16.3 -- 0.2 -- -- -- 16.5
Ratio of earnings to fixed
charges(9)............... 1.6x -- -- -- -- -- 1.3x
</TABLE>
See accompanying notes to Unaudited Condensed Consolidated Pro Forma Statement
of Operations.
P-8
<PAGE> 107
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
---------------------------------------
COMPANY MERGER
HISTORICAL ADJUSTMENTS PRO FORMA(2)
---------- ----------- ------------
(IN MILLIONS, EXCEPT FOR RATIO DATA)
<S> <C> <C> <C>
Net sales................................................. $131.8 -- $131.8
Operating expenses:
Cost of goods sold...................................... 81.8 -- 81.8
Selling, general and administrative expenses............ 27.1 -- 27.1
Amortization of goodwill................................ 0.4 -- 0.4
Amortization of other intangibles....................... 0.5 -- 0.5
Net periodic postretirement benefits.................... 0.6 -- 0.6
------ ----- ------
Income from operations.................................... 21.4 -- 21.4
Other (income) expense:
Interest expense........................................ 10.8 12.6(4) 14.6
(8.8)(5)
Amortization of deferred financing costs................ 0.4 0.5(6) 0.5
(0.4)(6)
Other................................................... (0.2) -- (0.2)
------ ----- ------
Income (loss) from continuing operations before taxes..... 10.4 (3.9) 6.5
Income tax provision (benefit)............................ 4.6 (1.4)(7) 3.2
------ ----- ------
Income (loss) from continuing operations available to
common.................................................. $ 5.8 $(2.5) $ 3.3
OTHER DATA:
Adjusted EBITDA(8)........................................ $ 26.5 $ -- $ 26.5
Depreciation.............................................. 3.6 -- 3.6
Capital expenditures...................................... 3.8 -- 3.8
Ratio of earnings to fixed charges(9)..................... 1.9x -- 1.4x
</TABLE>
See accompanying notes to Unaudited Condensed Consolidated Pro Forma Statement
of Operations.
P-9
<PAGE> 108
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
PRO FORMA STATEMENTS OF OPERATIONS
(IN MILLIONS)
(1) Represents the financial results for the companies acquired during 1997 for
the periods not included in the Company Historical column as follows: GenSet
(1/1/97-1/31/97), Arcsys (1/1/97-9/25/97) and Woodland (1/1/97-11/24/97).
(2) The pro forma balance sheet reflects non-recurring charges aggregating $58.1
million (comprised of $18.1 million related to employee stock options and
related plans; $17.4 million of non-capitalizable transaction fees; $16.8
million of debt pre-payment penalties and the write-off of $5.6 million of
related deferred issuance costs) and estimated tax benefits of $16.8
million. The amounts related to debt prepayment penalties and debt issuance
costs will be reflected net of tax benefits as an extraordinary item. These
amounts have not been reflected in the unaudited pro forma consolidated
statements of operations.
(3) Reflects the additional interest expense and associated tax benefit
attributable to the acquisitions, all of which were financed with borrowings
under the Company's revolving credit facility.
<TABLE>
<CAPTION>
GENSET ARCSYS WOODLAND TOTAL
------ ------ -------- -----
<S> <C> <C> <C> <C>
Acquisition......................................... $27.8 $7.5 $2.6 $37.9
Average interest rate............................... 8.04% 7.80% 7.80%
Annual interest..................................... $ 2.2 $0.6 $0.2 $ 3.0
Months to include in pro forma...................... 1 9 11
Incremental pro forma interest...................... $ 0.2 $0.4 $0.2 $ 0.8
Less historical interest included in reported
results........................................... (0.4)
-----
Adjustment.......................................... $ 0.4
=====
TAXES:
Tax benefit on incremental interest at assumed rate
of 35.0%.......................................... $ 0.2
=====
</TABLE>
(4) Reflects the additional interest expense attributable to the Merger
Financing, as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 1998 DECEMBER 31, 1997
------------------ -----------------
RATE AMOUNT INTEREST INTEREST
---- ------ ------------------ -----------------
<S> <C> <C> <C> <C>
New Credit Facility:(a)
Revolving Credit
Facility.......... LIBOR (b) + 2.25% $ 33.2 $ 0.7 $ 2.7
Term Loans:
Term A............ LIBOR (b) + 2.25% 100.0 2.0 7.9
Term B............ LIBOR (b) + 2.50% 115.0 2.3 9.3
Term C............ LIBOR (b) + 2.75% 115.0 2.4 9.6
------ ----- -----
Total Term
Loans...... 330.0 6.7 26.8
Senior Subordinated
Notes................ 9.88% 207.0 5.1 20.4
----- -----
$12.5 $49.9
Amortization of
Issuance
Discount for Senior
Subordinated
Notes............. 10 yrs 1.6 0.1 0.1
----- -----
$12.6 $50.0
===== =====
</TABLE>
- ---------------
(a) A one-eighth of one percent change in interest rates would impact interest
expense for borrowings under the New Credit Facility and the Senior
Subordinated Notes, collectively, in the amount of approximately $0.2
million and $0.7 million for the three months ended March 31, 1998 and the
year ended December 31, 1997, respectively.
P-10
<PAGE> 109
(b) Calculations based on LIBOR at 5.63%.
The borrowings under the New Credit Facility assume that all of the
Outstanding Subordinated Notes and Outstanding Senior Notes are purchased by
Holdings. The purchase by Holdings of less than 100% of each of such notes
would result in a reduction in the amount of borrowings under the New Credit
Facility; however, the management does not believe that such changes would
have a material effect on the information presented herein.
(5) Reflects the elimination of interest expense attributable to indebtedness to
be paid in connection with the Merger, as follows:
<TABLE>
<CAPTION>
YEAR ENDED
THREE MONTHS ENDED DECEMBER 31,
MARCH 31, 1998 1997
------------------ ----------------
<S> <C> <C>
Outstanding U.S., Australian and Italian bank
facilities...................................... $1.5 $ 9.7
Outstanding Senior Notes.......................... 2.5 10.2
Outstanding Subordinated Notes.................... 4.8 19.3
---- -----
$8.8 $39.2
==== =====
</TABLE>
See Note 8 to Holdings' Consolidated Financial Statements for a description
of interest rates applicable to outstanding indebtedness.
(6) Reflects the net change in amortization of capitalized financing costs, as
follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
FEES YEARS MARCH 31, 1998 DECEMBER 31, 1997
----- ----- -------------- -----------------
<S> <C> <C> <C> <C>
Elimination of existing amortization
of capitalized financing costs..... $(0.4) $(1.6)
Amortization of capitalized financing
costs for new debt:
Revolving Credit Facility.......... $ 2.3 6 0.1 0.4
Term A............................. 2.3 6 0.1 0.4
Term B............................. 2.6 7 0.1 0.4
Term C............................. 2.6 8 0.1 0.3
Senior Subordinated Notes.......... 5.7 10 0.1 0.5
----- ----- -----
Total new capitalized
financing costs.......... $15.5 0.5 $ 2.0
----- -----
$ 0.1 $ 0.4
===== =====
</TABLE>
Financing costs are amortized using the effective interest method.
(7) Adjustment reflects the income tax effect of all pro forma entries above at
a rate of 35.0%.
(8) "Adjusted EBITDA" is defined as operating income plus depreciation,
amortization of goodwill, amortization of intangibles and net periodic
postretirement benefits expense and is a key financial measure but should
not be construed as an alternative to operating income or cash flows from
operating activities (as determined in accordance with generally accepted
accounting principles). Adjusted EBITDA is also one of the financial
measures by which the Company's compliance with its covenants is calculated
under its debt agreements. The Company believes that Adjusted EBITDA is a
useful supplement to net income (loss) and other consolidated income
statement data in understanding cash flows generated from operations that
are available for taxes, debt service and capital expenditures. However, the
Company's method of computation may or may not be comparable to other
similarly titled measures of other companies. In addition, Adjusted EBITDA
is not necessarily indicative of amounts that may be available for
discretionary uses and does not reflect any legal or contractual
restrictions on the Company's use of funds.
(9) For purposes of calculating the ratio of earnings to fixed charges, earnings
consist of income before income taxes plus fixed charges. Fixed charges
consist of interest expense, amortization of deferred financing costs and
one-third of the rent expense from operating leases, which management
believes is a reasonable approximation of the interest component of rent
expense.
P-11
<PAGE> 110
THERMADYNE HOLDINGS CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets at December 31, 1997 and 1996
(audited) and March 31, 1998 (unaudited).................. F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996, and 1995 (audited) and the three
months ended March 31, 1998 and 1997 (unaudited).......... F-4
Consolidated Statements of Shareholders' Equity (Deficit)
for the years ended December 31, 1997, 1996, and 1995
(audited) and the three months ended March 31, 1998
(unaudited)............................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996, and 1995 (audited) and the three
months ended March 31, 1998 and 1997 (unaudited).......... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 111
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Thermadyne Holdings Corporation
We have audited the accompanying consolidated balance sheets of Thermadyne
Holdings Corporation and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our 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 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, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Thermadyne Holdings Corporation and subsidiaries at December 31, 1997 and 1996,
and the consolidated results of its operations and cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Orange County, California
February 5, 1998
F-2
<PAGE> 112
THERMADYNE HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
----------- ------------ ------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 173 $ 1,481 $ 1,420
Accounts receivable, less allowance for doubtful
accounts of $2,278, $2,217 and $1,649,
respectively........................................ 82,171 76,847 54,286
Inventories............................................ 118,966 105,135 79,542
Prepaid expenses and other............................. 8,316 8,534 9,763
Net assets of discontinued operations.................. -- -- 29,455
--------- --------- ---------
Total current assets........................... 209,626 191,997 174,466
Property, plant and equipment, at cost, net.............. 86,025 85,257 75,624
Deferred financing costs, net............................ 5,550 5,754 7,508
Intangibles, at cost, net................................ 33,797 33,970 62,645
Deferred income taxes.................................... 35,551 35,552 23,206
Other assets............................................. 1,893 1,997 9,956
--------- --------- ---------
Total assets................................... $ 372,442 $ 354,527 $ 353,405
========= ========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable....................................... $ 49,906 $ 55,390 $ 28,266
Accrued and other liabilities.......................... 26,478 32,697 29,257
Accrued interest....................................... 12,976 5,680 6,461
Income taxes payable................................... 9,725 4,769 7,948
Deferred income taxes.................................. -- -- 1,324
Current maturities of long-term obligations............ 6,256 4,912 4,205
--------- --------- ---------
Total current liabilities...................... 105,341 103,448 77,461
Long-term obligations, less current maturities........... 364,160 353,175 417,135
Other long-term liabilities.............................. 59,718 60,751 44,078
Shareholders' equity (deficit):
Common stock, $.01 par value, 25,000,000 shares
authorized, 11,217,233, 11,189,675 and 11,020,311
shares issued and outstanding, at March 31, 1998,
December 31, 1997 and 1996, respectively............ 112 112 110
Additional paid-in capital............................. 149,358 149,023 143,237
Accumulated deficit.................................... (293,399) (299,208) (333,465)
Accumulated other comprehensive income................. (12,848) (12,774) 4,849
--------- --------- ---------
Total shareholders' deficit.................... (156,777) (162,847) (185,269)
--------- --------- ---------
Total liabilities and shareholders' deficit.... $ 372,442 $ 354,527 $ 353,405
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 113
THERMADYNE HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1997 1996 1995
------------- ------------- ---------------- ---------------- ----------------
(UNAUDITED) (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net sales....................... $131,829 $117,751 $520,440 $439,744 $ 316,778
Operating expenses:
Cost of goods sold............ 81,784 70,342 320,120 259,835 175,945
Selling, general and
administrative expenses..... 27,064 26,270 110,696 95,907 74,681
Amortization of goodwill...... 382 357 1,591 83,033 92,931
Amortization of other
intangibles................. 518 1,692 6,776 12,377 48,401
Net periodic postretirement
benefits.................... 650 585 2,750 2,731 2,124
-------- -------- -------- -------- ---------
Operating income (loss)......... 21,431 18,505 78,507 (14,139) (77,304)
Other income (expense):
Interest expense.............. (10,834) (11,538) (45,325) (45,655) (41,269)
Amortization of deferred
financing costs............. (370) (460) (1,587) (2,711) (4,860)
Other......................... 166 406 (3,051) (968) 103
-------- -------- -------- -------- ---------
Income (loss) from continuing
operations before income
taxes and extraordinary
item.......................... 10,393 6,913 28,544 (63,473) (123,330)
Income tax provision
(benefit)..................... 4,584 2,981 13,475 (534) 8,518
-------- -------- -------- -------- ---------
Income (loss) from continuing
operations before
extraordinary item............ 5,809 3,932 15,069 (62,939) (131,848)
Discontinued operations:
Gain on sale of discontinued
operations, net of income
taxes of $12,623 and
$14,732, respectively....... -- -- 16,015 8,480 --
Income (loss) from
discontinued operations, net
of income taxes............. -- 1,036 3,173 (5,463) (28,952)
-------- -------- -------- -------- ---------
Income (loss) before
extraordinary item............ 5,809 4,968 34,257 (59,922) (160,800)
Extraordinary item -- loss on
early extinguishment of
long-term debt, net of income
tax benefit of $2,001......... -- -- -- (3,715) --
-------- -------- -------- -------- ---------
Net income (loss)............... $ 5,809 $ 4,968 $ 34,257 $(63,637) $(160,800)
======== ======== ======== ======== =========
Basic earnings per share
amounts:
Income (loss) from continuing
operations.................. $ 0.52 $ 0.36 $ 1.36 $ (5.83) $ (12.97)
Net income (loss)............. $ 0.52 $ 0.45 $ 3.09 $ (5.89) $ (15.81)
Diluted earnings per share
amounts:
Income (loss) from continuing
operations.................. $ 0.50 $ 0.35 $ 1.33 $ (5.83) $ (12.97)
Net income (loss)............. $ 0.50 $ 0.44 $ 3.01 $ (5.89) $ (15.81)
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 114
THERMADYNE HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND THE THREE MONTHS ENDED
MARCH 31, 1998
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN ACCUMULATED COMPREHENSIVE
STOCK CAPITAL DEFICIT INCOME TOTAL
------ ---------- ----------- ------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
January 1, 1995............... $100 $129,900 $(109,028) $ (350) $ 20,622
Comprehensive income:
Net loss............................. -- -- (160,800) -- (160,800)
Other comprehensive income --
Foreign currency translation......... -- -- -- (758) (758)
---------
Comprehensive income................... (161,558)
---------
Exercise of stock options.............. 5 6,261 -- -- 6,266
Stock issued under employee stock
purchase plan........................ 2 2,422 -- -- 2,424
---- -------- --------- -------- ---------
December 31, 1995............. 107 138,583 (269,828) (1,108) (132,246)
Comprehensive income:
Net loss............................. -- -- (63,637) -- (63,637)
Other comprehensive income --
Foreign currency translation......... -- -- -- 5,957 5,957
---------
Comprehensive income................... (57,680)
---------
Exercise of stock options.............. 2 2,424 -- -- 2,426
Stock issued under employee stock
purchase plan........................ 1 2,230 -- -- 2,231
---- -------- --------- -------- ---------
December 31, 1996............. 110 143,237 (333,465) 4,849 (185,269)
Comprehensive income:
Net income........................... -- -- 34,257 -- 34,257
Other comprehensive income --
Foreign currency translation......... -- -- -- (17,623) (17,623)
---------
Comprehensive income................... 16,634
---------
Exercise of stock options.............. 1 1,498 -- -- 1,499
Stock issued under employee stock
purchase plan........................ 1 1,993 -- -- 1,994
Recognition of net operating loss
carryforwards........................ -- 2,295 -- -- 2,295
---- -------- --------- -------- ---------
December 31, 1997............. 112 149,023 (299,208) (12,774) (162,847)
Comprehensive income:
Net income........................... -- -- 5,809 -- 5,809
Other comprehensive income --
Foreign currency translation......... -- -- -- (74) (74)
---------
Comprehensive income................... 5,735
---------
Exercise of stock options.............. -- 335 -- -- 335
---- -------- --------- -------- ---------
March 31, 1998................ $112 $149,358 $(293,399) $(12,848) $(156,777)
==== ======== ========= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 115
THERMADYNE HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash flows provided by (used in) operating
activities:
Net income (loss)................... $ 5,809 $ 4,968 $ 34,257 $(63,637) $(160,800)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Net periodic postretirement benefits....... 650 585 2,750 2,731 2,206
Depreciation............................... 3,556 2,876 12,448 11,651 10,689
Amortization of goodwill................... 382 357 1,591 83,033 102,985
Amortization of other intangibles.......... 518 1,692 6,776 12,377 48,517
Amortization of deferred financing costs... 370 460 1,587 2,711 4,860
Recognition of net operating loss
carryforwards............................ -- 586 2,343 8,534 4,491
Deferred income taxes...................... -- (586) (1,836) (21,882) --
Noncash charges for discontinued
operations............................... -- 565 1,621 13,949 30,328
Gain on sale of discontinued operations.... -- -- (16,015) (8,480) --
Extraordinary item......................... -- -- -- 3,715 --
Changes in operating assets and liabilities:
Accounts receivable........................ (6,179) (2,577) (19,905) (10,166) (5,942)
Inventories................................ (13,502) (4,625) (17,228) (10,107) (7,541)
Prepaid expenses and other................. (52) (334) (1,628) (1,957) (291)
Accounts payable........................... (5,347) 358 20,605 3,498 2,818
Accrued and other liabilities.............. (6,246) (7,762) (5,757) (4,510) 2,963
Accrued interest........................... 7,370 7,249 (258) 643 (658)
Income taxes payable....................... 5,098 (1,513) (3,498) 1,379 (2,363)
Other long-term liabilities................ (1,562) (321) (3,152) (2,124) (2,519)
Discontinued operations.................... -- 903 285 97 1,465
-------- -------- --------- -------- ---------
Total adjustments................... (14,944) (2,087) (19,271) 85,092 192,008
-------- -------- --------- -------- ---------
Net cash provided by operating
activities........................ (9,135) 2,881 14,986 21,455 31,208
-------- -------- --------- -------- ---------
Cash flows provided by (used in) investing
activities:
Capital expenditures, net.................. (3,756) (2,395) (16,339) (11,447) (7,154)
Change in other assets..................... (349) 8,512 4,162 (4,399) (64)
Acquisitions, net of cash.................. (640) (27,755) (37,895) (74,011) (3,370)
Investing activities of discontinued
operations............................... -- (570) (1,680) (3,766) (5,133)
Proceeds from sale of discontinued
operations............................... -- -- 88,543 112,359 --
-------- -------- --------- -------- ---------
Net cash provided by (used in)
investing activities.............. (4,745) (22,208) 36,791 18,736 (15,721)
-------- -------- --------- -------- ---------
Cash flows provided by (used in) financing
activities:
Change in long-term receivables............ 263 17 170 (283) 47
Repayment of long-term obligations......... (10,592) (9,928) (131,486) (150,384) (26,263)
Borrowing of long-term obligations......... 22,370 33,683 72,855 119,854 505
Issuance of common stock................... 335 436 3,069 4,146 7,761
Change in accounts receivable
securitization........................... 376 4,631 5,676 (9,994) 731
Financing fees............................. -- -- -- (3,855) (189)
Financing activities of discontinued
operations............................... -- (1,227) (2,808) (1,732) (11)
Other...................................... (180) (2,168) 808 1,639 (3,516)
-------- -------- --------- -------- ---------
Net cash used in financing
activities........................ 12,572 25,444 (51,716) (40,609) (20,935)
-------- -------- --------- -------- ---------
Net increase (decrease) in cash and cash
equivalents................................ (1,308) 6,117 61 (418) (5,448)
Cash and cash equivalents at beginning of
year....................................... 1,481 1,420 1,420 1,838 7,286
-------- -------- --------- -------- ---------
Cash and cash equivalents at end of year..... $ 173 $ 7,537 $ 1,481 $ 1,420 $ 1,838
======== ======== ========= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 116
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
1. THE COMPANY
Thermadyne Holdings Corporation ("Thermadyne" or "the Company"), a Delaware
corporation, is a global manufacturer of cutting and welding products and
accessories. Thermadyne's year end is December 31.
2. RECENT EVENTS
MERGER WITH MERCURY ACQUISITION CORPORATION
On January 20, 1998, the Company and Mercury Acquisition Corporation
("Mercury"), an affiliate of DLJ Merchant Banking Partners II, L.P. ("DLJ"),
entered into a definitive merger agreement (the "Merger Agreement"). Under the
terms of the Merger Agreement, Mercury will merge with and into the Company,
and, subject to the following sentence, the holders of each share of the
Company's common stock can elect to receive $34.50 in cash for such share or to
retain such share in the merged Company. In any event, holders will be required
to retain 485,010 shares, or 4.3%, of the Company's common stock outstanding
immediately prior to the merger. In addition, DLJ has entered into voting
agreements with Magten Asset Management (on behalf of itself and certain of its
clients) and Fidelity Capital and Income Fund, pursuant to which these current
shareholders, subject to certain conditions, have agreed to vote in favor of the
merger 5,942,708 shares of the Company's common stock owned by them. These
shares represent approximately 53% of the Company's common stock outstanding on
December 31, 1997.
The proposed merger, which will be recorded as a recapitalization for
accounting purposes, is subject to a number of conditions, including regulatory
approvals and approval by Company stockholders. The transaction is estimated to
have an aggregate value of approximately $790 million, including refinancing of
the Company's existing revolving credit facility and senior and subordinated
notes. The Company expects the merger to close by June 30, 1998.
As a result of the proposed merger, the Company and Mercury will incur
various costs, currently estimated to range between $50 million and $60 million,
on a pretax basis, in connection with consummating the transaction. These costs
consist primarily of professional fees, registration costs, compensation costs
and other expenses. Although the exact timing, nature and amount of these merger
transaction costs are subject to change, the Company expects that a one-time
charge for these costs will be recorded in the quarter during which the merger
is consummated.
ACQUISITIONS
On November 25, 1997, the Company acquired substantially all of the assets
of Woodland Cryogenics, Incorporated, a manufacturer of cryogenic pumps, ambient
and electric vaporizers and automatic cylinder filling systems located in
Philadelphia, Pennsylvania. The aggregate consideration paid was approximately
$2,500 and was financed through bank facilities. The transaction was accounted
for as a purchase.
On September 26, 1997, the Company acquired substantially all of the assets
of the welding division of Prestolite Power Corporation, a manufacturer of arc
welders, plasma welders and wire feeders, located in Troy, Ohio. The aggregate
consideration paid was approximately $7,500 and was financed through bank
facilities. The transaction was accounted for as a purchase.
On January 31, 1997, the Company acquired all of the issued and outstanding
capital stock of GenSet S.p.A., a leading manufacturer of engine-driven welders
and generators in Italy. The aggregate consideration paid was approximately
$28,000 and was financed through bank facilities. The transaction was accounted
for as a purchase.
F-7
<PAGE> 117
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
On January 18, 1996, the Company acquired all of the issued and outstanding
capital stock of Duxtech Pty. Ltd., an Australian holding company that operates
Cigweld, the leading manufacturer of welding products in Australia and New
Zealand. The aggregate consideration paid was approximately $74,000 of which
approximately $21,500 was the assumption of existing debt. The remaining balance
was paid in cash which was financed through cash on hand and borrowing under the
Company's existing credit agreement. This transaction was accounted for as a
purchase.
<TABLE>
<S> <C>
Net working capital......................................... $21,220
Excess of cost over fair value of net assets acquired....... 31,002
Property, plant and equipment, at cost, net................. 29,083
Other long-term liabilities, net............................ (7,294)
-------
$74,011
=======
</TABLE>
The operating results of the acquired companies have been included in the
Consolidated Statements of Operations from their respective dates of
acquisition. The pro forma unaudited results of operations for the twelve months
ended December 31, 1997 and 1996, respectively, assuming consummation of the
purchases as of the beginning of each period, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996
---------- ----------
<S> <C> <C>
Net sales................................................... $544,140 $484,005
Income (loss) from from continuing operations............... 14,569 (63,804)
Net income (loss)........................................... 33,857 (64,502)
Basic per share amounts:
Income (loss) from continuing operations.................. 1.32 (5.91)
Net income (loss)......................................... 3.06 (5.97)
Diluted per share amounts:
Income (loss) from continuing operations.................. 1.28 (5.91)
Net income (loss)......................................... 2.97 (5.97)
</TABLE>
Such pro forma amounts are not necessarily indicative of what the actual
consolidated results of operations might have been if the acquisitions had been
effective at the beginning of each period above.
SALE OF DISCONTINUED OPERATIONS
On September 30, 1997, the Company completed the sale of its Wear
Resistance business for $96,000 which consisted of $88,500 in cash and $7,500 in
the assumption of long-term liabilities. The net proceeds were used to reduce
debt. The net assets of the Wear Resistance operations were classified as a
current asset on the Consolidated Balance Sheets at December 31, 1996, and their
financial results were reported separately as discontinued operations in the
Consolidated Statements of Operations. The Company realized a net gain of
$16,015 on this transaction, net of income taxes of $12,623.
F-8
<PAGE> 118
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
The components of net assets of discontinued operations included in the
Consolidated Balance Sheet at December 31, 1996 are as follows:
<TABLE>
<S> <C>
Accounts receivable, net.................................... $17,819
Inventories................................................. 16,660
Prepaid expenses and other.................................. 327
Property, plant and equipment, at cost, net................. 14,323
Other noncurrent assets..................................... 2,732
Accounts payable and accrued liabilities.................... (13,235)
Long-term obligations....................................... (8,518)
Other long-term liabilities................................. (653)
-------
$29,455
=======
</TABLE>
On April 26, 1996, the Company completed the sale of substantially all of
the assets of Coyne Cylinder Company ("Coyne"), and on June 27, 1996, the
Company completed the sale of its Floor Maintenance business. Consideration
received from these two transactions totaled $137,000 and consisted of $112,359
in cash and $24,641 in the assumption or elimination of certain liabilities. The
Company realized a net gain of $8,480 on these two transactions, net of income
taxes of $14,732. The net proceeds were used to reduce debt. The financial
results of the Coyne and Floor Maintenance operations were reported separately
as discontinued operations in the Consolidated Statements of Operations.
Sales from the discontinued businesses totaled $76,163, $183,440 and
$259,772 for the years ended December 31, 1997, 1996 and 1995, respectively.
Certain expenses have been allocated to discontinued operations including
interest expense, which was allocated on a ratio of earnings before interest,
taxes, depreciation and amortization for the years presented. Interest expense
allocated to discontinued operations was $2,048, $7,630 and $11,413 for the
years ended December 31, 1997, 1996 and 1995, respectively. Income (loss) from
discontinued operations included in the accompanying Consolidated Statements of
Operations include immaterial amounts of income taxes (see Note 11).
3. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Thermadyne
and its wholly owned subsidiaries. All material intercompany balances and
transactions have been eliminated in consolidation. Certain amounts from prior
years have been reclassified to conform to current year presentation.
Preparation of financial statements in conformity with generally accepted
accounting principles requires certain estimates and assumptions be made that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Inventories -- Inventories are valued at the lower of cost or market. Cost
is determined using the last-in, first-out ("LIFO") method for domestic
subsidiaries and the first-in, first-out ("FIFO") method for foreign
subsidiaries. Inventories at foreign subsidiaries amounted to approximately
$46,798 and $33,567 at December 31, 1997 and 1996, respectively.
Property, Plant and Equipment -- Property, plant and equipment is carried
at cost and is depreciated using the straight-line method. The average estimated
lives utilized in calculating depreciation are as follows: buildings -25 years;
and machinery and equipment -two to ten years.
F-9
<PAGE> 119
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
Deferred Financing Costs -- The Company capitalizes loan origination fees
and other costs incurred arranging long-term financing. These costs are
amortized over the respective lives of the obligations using the effective
interest method.
Intangibles -- The excess of costs over the net tangible assets of
businesses acquired consists of assembled work forces, customer and distributor
relationships, patented and unpatented technology, and goodwill. In conjunction
with the 1993 financial reorganization of the Company, assets and liabilities
were revalued as of February 1, 1994. The assets were stated at their
reorganization value which is defined as the fair value of the reorganized
company (see Note 7). The portion of the reorganization value not attributable
to specific assets was amortized over a three-year period. Identified intangible
assets are amortized on a straight-line basis over the various estimated useful
lives of such assets, which generally range from three to 25 years. Goodwill
related to acquisitions subsequent to the financial reorganization is amortized
over 40 years.
Income Taxes -- The Company accounts for income taxes using the liability
method required by Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Under the liability method, deferred tax assets
and liabilities are recognized for the estimated future tax consequences
attributable to temporary differences between the carrying value of assets and
liabilities for financial reporting purposes and their tax bases and
carryforward items. The measurement of current and deferred tax assets and
liabilities is based on provisions of the enacted tax law; the effects of future
changes in tax laws or rates are not anticipated. The measurement of deferred
tax assets is reduced, if necessary, by the amount of any tax benefits that,
based on available evidence, are not expected to be realized.
Revenue Recognition -- Revenue from the sale of cutting and welding
products is recognized upon shipment to the customer. Costs and related expenses
to manufacture cutting and welding products are recorded as cost of sales when
the related revenue is recognized.
Earnings Per Share -- In 1997, the Financial Accounting Standards Board
issued Statement No. 128, "Earnings per Share" ("FASB 128"). FASB 128 replaced
the calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented to conform to the Statement 128 requirements.
The effects of options, warrants and convertible securities have not been
considered for the years ended December 31, 1996 and 1995
F-10
<PAGE> 120
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
because the result would be antidilutive. All exchange arrangements contemplated
by the Company's 1994 financial restructuring are assumed to have been
completed.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31,
----------------------------- ---------------------------------------
1998 1997 1997 1996 1995
------------- ------------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
AMOUNTS:
Income (loss) from
continuing operations
before extraordinary
item...................... $ 0.52 $ 0.36 $ 1.36 $ (5.83) $ (12.97)
Discontinued operations..... -- 0.09 1.73 0.28 (2.84)
----------- ----------- ----------- ----------- -----------
Income (loss) before
extraordinary item........ 0.52 0.45 3.09 (5.55) (15.81)
Extraordinary item -- loss
on early extinguishment of
long-term debt............ -- -- -- (0.34) --
----------- ----------- ----------- ----------- -----------
Net income (loss)........... $ 0.52 $ 0.45 $ 3.09 $ (5.89) $ (15.81)
=========== =========== =========== =========== ===========
DILUTED EARNINGS PER SHARE
AMOUNTS:
Income (loss) from
continuing operations
before extraordinary
item...................... $ 0.50 $ 0.35 $ 1.33 $ (5.83) $ (12.97)
Discontinued operations..... -- 0.09 1.68 0.28 (2.84)
----------- ----------- ----------- ----------- -----------
Income (loss) before
extraordinary item........ 0.50 0.44 3.01 (5.55) (15.81)
Extraordinary item -- loss
on early extinguishment of
long-term debt............ -- -- -- (0.34) --
----------- ----------- ----------- ----------- -----------
Net income (loss)........... $ 0.50 $ 0.44 $ 3.01 $ (5.89) $ (15.81)
=========== =========== =========== =========== ===========
Weighted average shares --
basic earnings per
share..................... 11,208,536 11,028,126 11,072,088 10,797,261 10,168,817
EFFECT OF DILUTIVE
SECURITIES:
Employee stock options...... 328,064 287,571 296,109 -- --
----------- ----------- ----------- ----------- -----------
Weighted average shares --
diluted earnings per
share..................... 11,536,600 11,315,697 11,368,197 10,797,261 10,168,817
=========== =========== =========== =========== ===========
</TABLE>
Stock Based Compensation -- The Company grants stock options for a fixed
number of shares to employees with an exercise price equal to the fair value of
the shares at the date of grant, and also through its Employee Stock Purchase
Plan enables substantially all employees to purchase shares of common stock at a
purchase price of 85% of the fair market value at specified dates. The Company
accounts for these stock option grants in accordance with Accounting Principles
Board Opinion No. 25 -- "Accounting for Stock Issued to Employees' ("APB 25"),
and, accordingly, recognizes no compensation expense for the stock option
grants.
F-11
<PAGE> 121
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
Statement of Cash Flows -- For purposes of the statement of cash flows,
Thermadyne considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents. The carrying value of cash and cash
equivalents approximates fair value because of the short maturity of these
investments.
The following table shows the interest and taxes paid during the periods
presented in the accompanying Consolidated Statements of Cash Flows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 1998 MARCH 31, 1997 DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
------------------ ------------------ ----------------- ----------------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest............. $3,538 $4,561 $48,683 $48,581 $46,148
Taxes................ (624) 3,801 12,276 11,409 8,527
</TABLE>
Foreign Currency Translation -- Local currencies have been designated as
the functional currencies for all subsidiaries. Accordingly, assets and
liabilities of foreign subsidiaries are translated at the rates of exchange at
the balance sheet date. Income and expense items of these subsidiaries are
translated at average monthly rates of exchange. The resultant translation gains
or losses are included in the component of shareholders' equity designated
"Foreign currency translation." The Company's foreign operations are discussed
in Note 13.
Recent Accounting Pronouncements -- As of January 1, 1998, the Company
adopted Statement 130, Reporting Comprehensive Income. Statement 130 establishes
new rules for the reporting and display of comprehensive income and its
components; however, the adoption of this Statement had no impact on the
Company's net income or shareholder's equity. Statement 130 requires foreign
currency translation adjustments, which prior to adoption were reported
separately in shareholder's equity, to be included in other comprehensive
income. Prior year financial statements have been reclassified to conform to the
requirements of Statement 130.
In June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("FASB 131"), which requires
publicly-held companies to report financial and descriptive information about
its operating segments in financial statements issued to shareholders for
interim and annual periods. The statement also requires additional disclosures
with respect to products and services, geographical areas of operations, and
major customers. FASB 131 is effective for fiscal years beginning after December
15, 1997 and requires restatement of earlier periods presented.
4. ACCOUNTS RECEIVABLE
The Company has entered into a trade accounts receivable securitization
agreement whereby it will sell on an ongoing basis, through December 28, 1999,
participation interests in up to $50,000 of designated accounts receivable. The
amount of participation interests sold under this financing arrangement is
subject to change based on the level of eligible receivables and restrictions on
concentrations of receivables, and was approximately $28,305 and $22,629 at
December 31, 1997 and 1996, respectively. The sold accounts receivable are
reflected as a reduction of accounts receivable on the Consolidated Balance
Sheets. Interest expense is incurred on participation interests at the rate of
one-month LIBOR plus 50 basis points, per annum (approximately 6.48% at December
31, 1997). The fair value of accounts receivable approximates the carrying
value.
During the year ended December 31, 1997, the Company adopted FASB Statement
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("FASB 125"). FASB 125 is required to be applied
to transfers of assets occurring after January 1, 1997. The effect of adopting
FASB 125 was immaterial.
F-12
<PAGE> 122
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
5. INVENTORIES
The composition of inventories is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ------------------
1998 1997 1996
----------- -------- -------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials........................................ $ 20,612 $ 19,903 $14,128
Work-in-process...................................... 25,874 30,743 21,248
Finished goods....................................... 73,240 56,087 46,519
LIFO reserve......................................... (760) (1,598) (2,353)
-------- -------- -------
$118,966 $105,135 $79,542
======== ======== =======
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT
The composition of property, plant and equipment at December 31 is as
follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Land........................................................ $ 14,071 $ 16,320
Building.................................................... 33,748 22,048
Machinery and equipment..................................... 68,008 59,749
Less: accumulated depreciation.............................. (30,570) (22,493)
-------- --------
$ 85,257 $ 75,624
======== ========
</TABLE>
Assets recorded under capitalized leases were $17,663 ($14,432 net of
accumulated depreciation) and $17,688 ($15,145 net of accumulated depreciation)
at December 31, 1997 and 1996, respectively.
7. INTANGIBLES
The composition of intangibles at December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996
------- --------
<S> <C> <C>
Goodwill.................................................... $39,532 $ 36,322
Patented and unpatented technology.......................... 279 17,311
Customer and distributor relationships...................... -- 18,182
Other....................................................... 2,759 9,958
------- --------
42,570 81,773
Less: accumulated amortization.............................. (8,600) (19,128)
------- --------
$33,970 $ 62,645
======= ========
</TABLE>
Prior to 1995, the Company assessed the recoverability of its identifiable
intangible assets primarily based on its current and anticipated future
undiscounted cash flows, which included disbursements for interest expense. In
the fourth quarter of 1995, the Company early adopted Financial Accounting
Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," ("FASB 121") and
consequently revalued amounts capitalized for customer and distributor
relationships and for patented and unpatented technology given recent
fundamental changes in its core businesses. Based on this revaluation, the
Company determined that assets with a carrying amount of $67,923 were impaired
and wrote them down by $32,972 to their estimated fair value. Fair value was
based on the estimated future cash flows to be generated by these assets,
discounted at a market rate of interest. The writedown is included in the
amortization of other intangibles line item on the Consolidated Statements of
F-13
<PAGE> 123
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
Operations. In the fourth quarter of 1996, the carrying value of intangible
assets recorded in connection with the Company's financial reorganization was
reduced by approximately $2,400 resulting from the initial recognition of the
Company's net deferred tax asset. The carrying value of these intangibles was
further reduced during 1997 by approximately $26,000 upon the recognition of net
operating loss carryforward benefits and the sale of the Wear Resistance
business.
8. LONG-TERM OBLIGATIONS
The composition of long-term obligations at December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Domestic credit agreement................................... $ 41,500 $101,000
Australian credit agreement................................. 18,057 22,666
Senior notes, due May 1, 2002, 10.25% interest payable
semiannually on May 1 and November 1...................... 99,288 99,288
Subordinated notes, due November 1, 2003, 10.75% interest
payable semiannually on May 1 and November 1.............. 179,321 179,321
Capital leases.............................................. 17,630 17,405
Other....................................................... 2,291 1,660
-------- --------
358,087 421,340
Less: Current maturities.................................... (4,912) (4,205)
-------- --------
$353,175 $417,135
======== ========
</TABLE>
At December 31, 1997, the schedule of principal payments on long-term debt,
excluding capital lease obligations, is as follows:
<TABLE>
<S> <C>
1998...................................................... $ 4,708
1999...................................................... 2,705
2000...................................................... 2,685
2001...................................................... 41,544
2002...................................................... 99,300
Thereafter................................................ 189,515
</TABLE>
On June 25, 1996 the Company amended and restated its domestic credit
agreement (the "Domestic Facility") to a $250,000 revolving credit and letters
of credit facility with a consortium of 22 banks. The term is five years and the
banks' commitment reduces by $25,000 at the end of year three and by an
additional $75,000 at the end of year four. At the Company's option, interest
accrues at (i) the prime rate plus an applicable margin in the range of
0.5% - 1.25% or, (ii) LIBOR plus an applicable margin in the range of
1.5% - 2.25%. The applicable margin percentage is dependent upon the Company
meeting certain financial conditions. At December 31, 1997 the prime rate was
8.5%. The facility contains financial covenants which, among other things,
require the Company to maintain certain financial ratios and restrict the
Company's ability to incur indebtedness, make capital expenditures, and pay
dividends. The facility is secured by the capital stock, personal and real
property of the Company and a significant portion of its subsidiaries' capital
stock and personal and real property. At December 31, 1997 the Company had
$10,349 of standby letters of credit outstanding under its Domestic Facility.
Unused borrowing capacity under the Domestic Facility was $198,151.
The Australian credit agreement (the "Australian Facility") is denominated
in Australian dollars ("A$") and expires on December 31, 2000. The Australian
Facility consists of an A$15,000 term
F-14
<PAGE> 124
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
commitment and an A$22,000 revolving credit commitment. The Australian Facility
bears interest at the Bank Bill Rate (as defined) plus a margin of 1.5% for the
term commitment and 0.75% for the revolving credit commitment. At December 31,
1997 the Company's average applicable Bank Bill Rate (as defined) was 4.987%.
Interest payment dates vary depending on the funding period selected by the
Company. Total mandatory principal reductions under the term commitment for the
remainder of its term are as follows: 1998 -- A$3,000; 1999 -- A$4,000; and
2000 -- A$4,000. The facility requires the Company's Australian subsidiary to
comply with various financial covenants. The facility is secured by personal and
real property of the Company's Australian subsidiary. At December 31, 1997 the
Company had A$383 of letters of credit outstanding under the Australian
Facility. Unused borrowing capacity under the Australian Facility was A$1,500.
The indentures governing the senior notes and the subordinated notes
restrict, subject to certain exceptions, the Company and its subsidiaries from
incurring additional debt, paying dividends or making other distributions on or
redeeming or repurchasing capital stock, making investments, loans or advances,
disposing of assets, creating liens on assets and engaging in transactions with
affiliates.
The estimated fair value amounts of the Company's long-term obligations
have been determined by the Company using available market information and
appropriate valuation methodologies. Considerable judgment is required to
develop the estimates of fair value; thus, the estimates provided herein are not
necessarily indicative of the amounts that could be realized in a current market
exchange. The use of different market assumptions or valuation methodologies may
have a material effect on the estimated fair value amounts. The fair value of
the senior notes and the subordinated notes was based on the most recent market
information available, and is estimated to be 104.25% and 107.0% of their
current carrying values at December 31, 1997, or $103,508 and $191,873,
respectively. The fair values of the credit agreement and the Company's other
long-term obligations are estimated at their current carrying values since these
obligations are fully secured and have varying interest charges based on current
market rates.
9. STOCK OPTIONS
The Company has elected to follow APB 25 and related Interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under Financial Accounting
Standards Board Statement No. 123, "Accounting for Stock-Based Compensation"
("FASB 123"), requires use of option valuation models that were not developed
for use in valuing employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by FASB 123, which also requires that the information be determined as
if the Company has accounted for its employee stock options granted subsequent
to December 31, 1994 under the fair value method of that statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1997,
1996 and 1995, respectively: risk-free interest rates of 6.1%, 5.5% and 6.4%; a
dividend yield of 0.0% for each year presented; volatility factors of the
expected market price of the Company's common stock of 0.38, 0.39 and 0.42; and
a weighted-average expected life of the options of six years for each year
presented.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
F-15
<PAGE> 125
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Pro forma net income (loss)..................... $32,239 $(64,574) $(161,588)
Pro forma net income (loss) per share:
Basic......................................... 2.91 (5.98) (15.89)
Diluted....................................... 2.84 (5.98) (15.89)
</TABLE>
Because FASB 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until future
periods.
The Company has three option plans for the grant of options to its
employees and directors. The 1993 Management Option Plan (the "1993 Management
Plan") provides for the grant of options to acquire up to 1,428,570 shares of
common stock to key officers and employees of the Company or its affiliates.
Grants under the 1993 Management Plan are exercisable in installments ranging
from immediately on the date of grant to not later than five years from the date
of grant. The Non-Employee Directors Plan (the "1995 Directors Plan") provides
for the grant of options to acquire up to 50,000 shares of common stock to
non-employee directors of the Company. Grants under the 1995 Directors Plan vest
immediately on the date of grant. The 1996 Employee Stock Option Plan (the "1996
Employee Plan") initially provided for the grant of options to acquire up to
300,000 shares of common stock to employees of the Company. This plan was
amended in 1996 to provide for the grant of options to acquire up to an
additional 500,000 shares of common stock. Grants under the 1996 Employee Plan
vest ratably over five years. All options granted under the three plans
described above are non-qualified stock options granted at 100% of the fair
market value on the grant dates.
Information regarding stock options is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------- --------------------------- ----------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- ---------------- -------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding -- beginning
of year................. 963,055 $14.27 913,000 $12.30 1,275,142 $12.00
Granted................... 217,200 27.00 340,000 17.85 203,000 13.39
Exercised................. (87,255) 12.38 (169,054) 12.01 (452,840) 12.00
Forfeited................. (31,783) 18.32 (120,891) 12.62 (112,302) 12.10
--------- -------- ---------
Outstanding -- end of
year.................... 1,061,217 16.91 963,055 14.27 913,000 12.30
========= ======== =========
Exercisable at end of
year:
1993 Management Plan.... 430,399 359,329 262,666
1995 Directors Plan..... 23,000 24,000 --
1996 Employee Plan...... 39,355 -- --
Reserved for future
grants:
1993 Management Plan.... 15,704 70,621 82,730
1995 Directors Plan..... 22,000 26,000 30,000
1996 Employee Plan...... 470,500 97,000 300,000
Weighted-average fair
value of options granted
during the year......... $ 13.14 $ 8.49 $ 6.88
</TABLE>
F-16
<PAGE> 126
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
10. LEASES
Future minimum lease payments related to continuing operations under leases
with initial or remaining noncancelable lease terms in excess of one year at
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
1998...................................................... $ 3,470 $ 8,855
1999...................................................... 3,644 8,209
2000...................................................... 3,627 7,131
2001...................................................... 3,614 5,955
2002...................................................... 3,608 4,725
Thereafter................................................ 49,735 31,111
--------
Total minimum lease payments................................ 67,698
Less: amount representing interest.......................... (50,068)
--------
Present value of net minimum lease payments, including
current obligations of $204............................... $ 17,630
========
</TABLE>
Rent expense under operating leases from continuing operations amounted to
$9,358, $7,562 and $6,559 for the years ended December 31, 1997, 1996 and 1995,
respectively.
11. INCOME TAXES
Pre-tax income (losses) from continuing operations were taxed under the
following jurisdictions:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Domestic........................................ $31,104 $(69,694) $(123,954)
Foreign......................................... (2,560) 6,221 624
------- -------- ---------
Income (loss) before income taxes..... $28,544 $(63,473) $(123,330)
======= ======== =========
</TABLE>
The provision (benefit) for income taxes charged to continuing operations
is as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Current:
Federal....................................... $11,014 $ 8,091 $6,010
Foreign....................................... 1,064 1,785 1,147
State and local............................... 927 1,050 1,361
------- -------- ------
Total current......................... 13,005 10,926 8,518
------- -------- ------
Deferred........................................ 470 (11,460) --
------- -------- ------
$13,475 $ (534) $8,518
======= ======== ======
</TABLE>
F-17
<PAGE> 127
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
The composition of deferred tax assets and liabilities attributable to
continuing operations at December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Deferred tax assets:
Post-employment benefits.................................. $ 9,214 $ 8,915
Accrued liabilities....................................... 3,316 5,054
Intangibles............................................... 14,408 6,025
Other..................................................... -- 476
Fixed assets.............................................. 6,992 --
Net operating loss carryforwards.......................... 29,761 31,504
-------- --------
Total deferred tax assets......................... 63,691 51,974
Valuation allowance for deferred tax assets............... (22,731) (24,474)
-------- --------
Net deferred tax assets........................... 40,960 27,500
-------- --------
Deferred tax liabilities:
Inventories............................................... 4,562 4,923
Other..................................................... 846 --
Property, plant and equipment............................. -- 695
-------- --------
Total deferred tax liabilities.................... 5,408 5,618
-------- --------
Net deferred tax asset............................ $ 35,552 $ 21,882
======== ========
</TABLE>
The provision (benefit) for income taxes differs from the amount of income
tax determined by applying the applicable U.S. statutory federal income tax rate
to pretax income from continuing operations as a result of the following
differences:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Tax at U.S. statutory rates................... $ 9,991 $(22,216) $(43,166)
Nondeductible goodwill amortization and other
nondeductible expenses...................... 2,048 28,877 37,500
Change in valuation allowance, recognition of
net operating loss carryforward benefits and
other....................................... -- 6,318 12,370
Foreign tax rate differences and recognition
of foreign tax loss benefits................ 833 (393) 929
State income taxes, net of federal tax
benefit..................................... 603 683 885
Initial recognition of net deferred tax
asset....................................... -- (13,803) --
------- -------- --------
$13,475 $ (534) $ 8,518
======= ======== ========
</TABLE>
In the fourth quarter of 1996, the Company re-evaluated the realizability
of the net deferred tax asset. As a result, a net deferred tax asset of
approximately $22,000 was recorded on December 31, 1996. Of the total amount
recorded, approximately $8,000 was reported as an adjustment to the carrying
value of goodwill and other intangible assets. The balance was reported as a
reduction to income tax expense. A portion of the net adjustment for deferred
taxes has been allocated to discontinued operations. The valuation allowance
relates to net operating loss carryforwards existing on February 1, 1994, the
effective date of the Company's financial reorganization.
F-18
<PAGE> 128
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
At December 31, 1997, the Company had net operating loss carryforwards of
approximately $85,000 for U.S. income tax purposes that begin to expire in the
year 2001. The consummation of the financial reorganization resulted in an
ownership change under Section 382 of the Internal Revenue Code. As a result,
the Company's utilization of these losses to offset future U.S. taxable income
is limited to approximately $7,000 per year. Pursuant to the requirements of the
American Institute of Certified Public Accountants Statement of Position No.
90-7, entitled "Financial Entities in Reorganization Under the Bankruptcy Code",
to the extent net operating losses that existed on the effective date of the
Company's financial reorganization are recognized, the resulting tax benefit
will be reported as a direct addition to paid-in capital.
The Company's foreign subsidiaries have undistributed earnings at December
31, 1997. Those earnings are considered to be indefinitely reinvested and,
accordingly, no provision for U.S. federal and state income taxes has been
provided thereon. Upon distribution of those earnings in the form of dividends
or otherwise, the Company would be subject to both U.S. income taxes (subject to
an adjustment for foreign tax credits) and withholding taxes payable to the
various foreign countries. Determination of the amount of unrecognized deferred
U.S. income tax liability is not practicable because of the complexities
associated with its hypothetical calculation.
12. EMPLOYEE BENEFIT PLANS
401(k) Retirement Plan -- The 401(k) Retirement Plan covers the majority of
the Company's domestic employees. The Company, at its discretion, can make a
base contribution of 1% of each employee's compensation and an additional
contribution equal to as much as 4% of the employee's compensation. At the
employee's discretion, an additional 1% to 15% voluntary employee contribution
can be made. The plan requires the Company to make a matching contribution of
50% of the first 6% of the voluntary employee contribution. Total expense for
this plan related to continuing operations was approximately $2,628, $2,585, and
$1,897 for the years ended December 31, 1997, 1996 and 1995, respectively.
Employee Stock Purchase Plan -- The Employee Stock Purchase Plan enables
substantially all employees of the Company to purchase shares of common stock at
a purchase price of 85% of the fair market value at specified dates. For plan
year 1997, the plan was amended to change the plan year to a calendar year
basis. For the plan year ended December 31, 1997, 1,098 employee participants
purchased 82,085 shares at an aggregate purchase price of $1,989. For the plan
year ended October 31, 1996, 1,090 employee participants purchased 145,584
shares at an aggregate purchase price of $2,119. In the initial plan year ended
October 31, 1995, 1,502 employee participants purchased 252,925 shares at an
aggregate purchase price of $2,327. A maximum of 1,000,000 shares is authorized
for purchase under the plan.
Other Postretirement Benefits -- The Company has several retirement plans
covering both salaried and nonsalaried retired employees, which provide
postretirement health care benefits (medical and dental) and life insurance
benefits. The postretirement health care plan is contributory, with retiree
contributions adjusted annually as determined by the Company based on claim
costs. The postretirement life insurance plan is noncontributory. The Company
recognizes the cost of postretirement benefits on the accrual basis as employees
render service to earn the benefit. The Company continues to fund the cost of
health care and life insurance benefits in the year incurred.
F-19
<PAGE> 129
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
The postretirement benefit plans' combined benefit obligations related to
continuing operations at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Accumulated postretirement benefit obligations:
Retirees and surviving beneficiaries...................... $ 3,838 $ 5,156
Active employees eligible to retire....................... 720 1,420
Active employees not yet eligible to retire............... 7,452 9,411
Unrecognized gain......................................... 9,428 6,237
Unrecognized prior service cost........................... 1,927 64
------- -------
Unfunded accumulated postretirement benefit obligation and
accrued postretirement benefit cost.................... $23,365 $22,288
======= =======
</TABLE>
Net periodic postretirement benefit cost from continuing operations
included the following components:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1997 DECEMBER 31, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Service cost-benefits attributed to
service during the period......... $1,255 $1,365 $1,161
Interest cost on accumulated
postretirement benefit
obligation........................ 1,496 1,564 1,094
Loss (gain) from past experience
different from that assumed and
changes in assumptions............ (1) (198) (131)
------ ------ ------
Net periodic postretirement benefit
cost.............................. $2,750 $2,731 $2,124
====== ====== ======
</TABLE>
In addition, for actuarial measurements purposes, the following assumptions
and methods were used: annual discount rate of 7% (7% at January 1, 1997),
medical claim cost trends with annual increases starting at 10.5% in 1996 and
decreasing incrementally to 6% in 2011 and thereafter. The medical cost trend
rate assumption has a significant effect on the amounts reported. To illustrate,
increasing the medical cost trend rate by 1% in each year would increase the
accumulated postretirement benefit obligation as of December 31, 1997 by
approximately $1,900 and the aggregate of the service and interest cost
components of net periodic postretirement benefit cost for the year ended
December 31, 1997, by approximately $307. The Company uses the amortization
method for recording gains or losses resulting from past experience different
from that assumed and changes in assumptions.
Pension Plans -- The Company's subsidiaries have had various
noncontributory defined benefit pension plans which covered substantially all
U.S. employees. The Company froze its three noncontributory defined benefit
pension plans through amendments to such plans effective December 31, 1989. All
former participants of these plans became eligible to participate in the 401(k)
Retirement Plan effective January 1, 1990. The
F-20
<PAGE> 130
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
following table sets forth the funded status of the defined benefit plans and
the amounts recognized in the Company's consolidated financial statements:
Actuarial present value of benefit obligations at December 31:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Vested benefit obligation................................... $13,911 $13,476
Accumulated benefit obligation.............................. 14,356 13,975
Projected benefit obligation................................ 14,356 13,975
Plan assets at fair value................................... 12,126 11,667
------- -------
Projected benefit obligation in excess of plan assets....... (2,230) (2,308)
Unrecognized net loss....................................... (54) 358
Unrecognized prior service cost............................. 122 145
Unrecognized net obligation at transition................... 2 5
Adjustment required to recognize minimum liability.......... -- (508)
------- -------
Accrued pension cost.............................. $(2,160) $(2,308)
======= =======
</TABLE>
Pension cost related to the defined benefit plans included the following
components:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1997 DECEMBER 31, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Service cost-benefits earned during
the period........................ $ -- $ -- $ --
Interest cost on projected benefit
obligation........................ 954 930 930
Actual return on plan assets........ (977) (1,135) (1,025)
Net amortization and deferral....... 93 369 313
----- ------- -------
Net pension expense................. $ 70 $ 164 $ 218
===== ======= =======
</TABLE>
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligations ranged from 7% to 8%. The
assumed rate of increase in future compensation levels used in determining the
actuarial present value of the projected benefit obligations was 0%. The
expected long-term rate of return on assets ranged from 7% to 8%. Plan assets
consist principally of marketable equity securities and restricted and
unrestricted debt securities. The Company's funding policy is to contribute
annually an amount equal to meet the minimum funding standards of the Employee
Retirement Income Security Act of 1974 as determined by the plans' actuary.
F-21
<PAGE> 131
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
13. FOREIGN OPERATIONS
The Company's continuing operations are primarily in the United States,
Australia/Asia, Canada and Europe. Sales among geographic areas have been
eliminated in consolidation. Financial data by geographic area is as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net sales:
United States............................. $333,871 $293,549 $273,106
Australia/Asia............................ 109,984 105,337 4,989
Other foreign operations.................. 76,585 40,858 38,683
-------- -------- --------
$520,440 $439,744 $316,778
======== ======== ========
Sales from United States to foreign
operations................................ $ 35,576 $ 30,932 $ 22,518
======== ======== ========
Export sales from United States............. $ 33,668 $ 25,402 $ 23,782
======== ======== ========
Operating income (loss):
United States............................. $ 71,639 $(22,899) $(80,103)
Australia/Asia............................ 2,304 5,689 143
Other foreign operations.................. 4,564 3,071 2,656
-------- -------- --------
$ 78,507 $(14,139) $(77,304)
======== ======== ========
Identifiable assets:
United States............................. $194,216 $189,153 $280,146
Australia/Asia............................ 102,342 113,588 4,314
Other foreign operations.................. 57,969 21,209 59,077
Discontinued operations................... -- 29,455 72,829
-------- -------- --------
$354,527 $353,405 $416,366
======== ======== ========
</TABLE>
14. CONTINGENCIES
Thermadyne and certain of its wholly owned subsidiaries are defendants in
various legal actions, primarily in the products liability area. While there is
uncertainty relating to any litigation, management is of the opinion that the
outcome of such litigation will not have a material adverse effect on the
Company's financial condition or results of operations.
The Company is party to an agreement with a financial institution to sell
at face value up to a total of $25,000 of its long-term receivables. The product
line that generated these long-term receivables has been divested, and
consequently, no further sales will occur. Under the terms of this agreement,
the Company is liable for a total of 20% of the aggregate receivables sold and
this liability approximates $4,000. The Company has further retained collection
and administrative responsibilities on behalf of the financial institution. The
Company has a secured interest in the inventory sold under these long-term
receivables which has been assigned to the financial institution. At December
31, 1997, approximately $3,666 in contracts subject to this agreement are
outstanding. Management believes the allowance for doubtful accounts at December
31, 1997 will be adequate for all uncollectible receivables.
15. GUARANTOR SUBSIDIARIES
In connection with the proposed merger of the Company and Mercury,
Thermadyne Mfg. LLC and Thermadyne Capital Corp., both wholly-owned subsidiaries
of the Company, expect to raise approximately $205,400 through the issuance of
9 7/8% Senior Subordinated Notes due 2008 (the "Notes"). The Company
F-22
<PAGE> 132
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
will receive all of the net proceeds from the issuance of the Notes and
Thermadyne Mfg. LLC and Thermadyne Capital Corp. will be jointly and severally
liable for all payments under the Notes. Additionally, the Notes are fully and
unconditionally (as well as jointly and severally) guaranteed on an unsecured
senior subordinated basis by certain existing domestic subsidiaries of the
Company (the "Guarantor Subsidiaries"). Each of the Guarantor Subsidiaries is
wholly-owned by the Company.
The following condensed consolidating financial information of the Company
includes the accounts of the Company, the combined accounts of the Guarantor
Subsidiaries and the combined accounts of the non-Guarantor subsidiaries for the
periods indicated. Separate financial statements of each of the Guarantor
Subsidiaries are not presented because management has determined that such
information is not material in assessing the Guarantor Subsidiaries.
CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
TOTAL TOTAL
COMPANY GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
--------- ---------- -------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents...................... $ -- $ (1,555) $ 1,728 $ -- $ 173
Restricted cash................................ -- -- 21,797 (21,797) --
Accounts receivable............................ -- 9,222 98,314 (25,365) 82,171
Inventories.................................... -- 73,245 45,721 -- 118,966
Prepaid expenses and other..................... -- 871 7,790 (345) 8,316
Net assets of discontinued operations.......... -- -- -- -- --
--------- --------- -------- --------- ---------
Total current assets..................... -- 81,783 175,350 (47,507) 209,626
Property, plant and equipment, at cost, net.... -- 47,912 38,113 -- 86,025
Deferred financing costs, net.................. 4,736 151 663 -- 5,550
Intangibles, at cost, net...................... -- 5,249 28,548 -- 33,797
Deferred income tax............................ -- 35,551 -- -- 35,551
Investment in and advances to/from
subsidiaries................................. 192,114 10,707 -- (202,821) --
Other assets................................... -- 89 1,804 -- 1,893
--------- --------- -------- --------- ---------
Total assets............................. $ 196,850 $ 181,442 $244,478 $(250,328) $ 372,442
========= ========= ======== ========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities:
Accounts payable............................... $ -- $ 26,877 $ 23,029 -- $ 49,906
Accrued and other liabilities.................. -- 19,025 7,453 -- 26,478
Accrued interest............................... 12,670 7 299 -- 12,976
Income taxes payable........................... -- 12,532 (2,807) -- 9,725
Deferred income taxes.......................... -- -- -- -- --
Current maturities of long-term obligations...... -- 2 6,254 -- 6,256
--------- --------- -------- --------- ---------
Total current liabilities................ 12,670 58,443 34,228 -- 105,341
Long-term obligations, less current maturities... 328,109 16,382 69,669 (50,000) 364,160
Other long-term liabilities...................... -- 52,870 6,848 -- 59,718
Shareholders' equity (deficit):
Common stock................................... 112 -- -- -- 112
Additional paid-in-capital..................... 149,358 -- -- -- 149,358
Retained earnings (accumulated deficit)........ (293,399) (246,961) (4,636) 251,597 (293,399)
Accumulated other comprehensive income......... -- 1,934 (14,782) -- (12,848)
--------- --------- -------- --------- ---------
Total shareholders' equity (deficit)..... (143,929) (245,027) (19,418) 251,597 (156,777)
Net equity and advances to/from subsidiaries..... -- 298,774 153,151 (451,925) --
--------- --------- -------- --------- ---------
Total liabilities and shareholders'
equity (deficit)....................... $ 196,850 $ 181,442 $244,478 $(250,328) $ 372,442
========= ========= ======== ========= =========
</TABLE>
F-23
<PAGE> 133
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
TOTAL TOTAL
COMPANY GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
-------- ---------- -------------- ------------ --------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............... $ -- $ 308 $ 1,173 $ -- $ 1,481
Restricted cash......................... -- -- 21,634 (21,634) --
Accounts receivable..................... -- 6,595 99,281 (29,029) 76,847
Inventories............................. -- 62,329 42,806 -- 105,135
Prepaid expenses and other.............. -- 4,601 4,152 (219) 8,534
Net assets of discontinued
operations............................ -- -- -- -- --
-------- -------- -------- --------- --------
Total current assets............. -- 73,833 169,046 (50,882) 191,997
Property, plant and equipment, at cost,
net................................... -- 48,367 36,890 -- 85,257
Deferred financing costs, net........... 5,052 1 701 -- 5,754
Intangibles, at cost, net............... -- 5,376 28,594 -- 33,970
Deferred income taxes................... -- 35,552 -- -- 35,552
Investment in and advances to/from
subsidiaries.......................... 170,414 10,783 -- (181,197) --
Other assets............................ -- 130 1,867 -- 1,997
-------- -------- -------- --------- --------
Total assets..................... $175,466 $174,042 $237,098 $(232,079) $354,527
======== ======== ======== ========= ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities:
Accounts payable........................ $ -- $ 30,697 $ 24,693 $ -- $ 55,390
Accrued and other liabilities........... -- 25,079 7,618 -- 32,697
Accrued interest........................ 5,430 10 240 -- 5,680
Income taxes payable.................... -- 8,106 (3,337) -- 4,769
Deferred income taxes................... -- -- -- -- --
Current maturities of long-term
obligations........................... -- 1 4,911 -- 4,912
-------- -------- -------- --------- --------
Total current liabilities........ 5,430 63,893 34,125 -- 103,448
Long-term obligations, less current
maturities.............................. 320,109 16,320 66,746 (50,000) 353,175
Other long-term liabilities............... -- 53,421 7,330 -- 60,751
Shareholders' equity (deficit):
Common stock............................ 112 -- -- -- 112
Additional paid-in-capital.............. 149,023 -- -- -- 149,023
Retained earnings (accumulated
deficit).............................. (299,208) (254,562) (3,668) 258,230 (299,208)
Accumulated other comprehensive
income................................ -- 2,406 (15,180) -- (12,774)
-------- -------- -------- --------- --------
Total shareholders' equity
(deficit)...................... (150,073) (252,156) (18,848) 258,230 (162,847)
Net equity and advances to/from
subsidiaries............................ -- 292,564 147,745 (440,309) --
-------- -------- -------- --------- --------
Total liabilities and
shareholders' equity
(deficit)...................... $175,466 $174,042 $237,098 $(232,079) $354,527
======== ======== ======== ========= ========
</TABLE>
F-24
<PAGE> 134
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
TOTAL TOTAL
COMPANY GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
-------- ---------- -------------- ------------ --------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............... $ -- $ 690 $ 730 $ -- $ 1,420
Restricted cash......................... -- -- 25,461 (25,461) --
Accounts receivable..................... -- 3,498 74,769 (23,981) 54,286
Inventories............................. -- 46,375 33,167 -- 79,542
Prepaid expenses and other.............. -- 7,361 2,858 (456) 9,763
Net assets of discontinued
operations............................ 29,455 -- 3,947 (3,947) 29,455
-------- -------- -------- --------- --------
Total current assets............. 29,455 57,924 140,932 (53,845) 174,466
Property, plant and equipment, at cost,
net................................... -- 42,850 32,774 -- 75,624
Deferred financing costs, net........... 6,395 -- 1,113 -- 7,508
Intangibles, at cost, net............... -- 33,972 28,673 -- 62,645
Deferred income taxes................... -- 23,206 -- -- 23,206
Investment in and advances to/from
subsidiaries.......................... 159,944 11,138 -- (171,082) --
Other assets............................ -- 6,327 3,629 -- 9,956
-------- -------- -------- --------- --------
Total assets..................... $195,794 $175,417 $207,121 $(224,927) $353,405
======== ======== ======== ========= ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities:
Accounts payable........................ $ -- $ 17,953 $ 10,313 $ -- $ 28,266
Accrued and other liabilities........... -- 22,726 6,531 -- 29,257
Accrued interest........................ 6,303 5 153 -- 6,461
Income taxes payable.................... -- 8,264 (316) -- 7,948
Deferred income taxes................... -- 1,324 -- -- 1,324
Current maturities of long-term
obligations........................... -- -- 4,205 -- 4,205
-------- -------- -------- --------- --------
Total current liabilities........ 6,303 50,272 20,886 -- 77,461
Long-term obligations, less current
maturities.............................. 379,609 15,898 71,628 (50,000) 417,135
Other long-term liabilities............... -- 38,349 5,729 -- 44,078
Shareholders' equity (deficit):
Common stock............................ 110 -- -- -- 110
Additional paid-in-capital.............. 143,237 -- -- -- 143,237
Retained earnings (accumulated
deficit).............................. (333,465) (275,048) (891) 275,939 (333,465)
Accumulated other comprehensive
income................................ -- 5,589 (740) -- 4,849
-------- -------- -------- --------- --------
Total shareholders' equity
(deficit)...................... (190,118) (269,459) (1,631) 275,939 (185,269)
Net equity and advances to/from
subsidiaries............................ -- 340,357 110,509 (450,866) --
-------- -------- -------- --------- --------
Total liabilities and
shareholders' equity
(deficit)...................... $195,794 $175,417 $207,121 $(224,927) $353,405
======== ======== ======== ========= ========
</TABLE>
F-25
<PAGE> 135
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
TOTAL TOTAL
COMPANY GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
------- ---------- -------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Net Sales.............................. $ -- $111,511 $47,825 $(27,507)(a) $131,829
Operating Expenses:
Cost of goods sold................... -- 69,710 39,170 (27,096)(a) 81,784
Selling, general and administrative
expenses........................... -- 19,720 7,344 -- 27,064
Amortization of goodwill............. -- 21 361 -- 382
Amortization of other intangibles.... -- 339 179 -- 518
Net periodic postretirement
benefits........................... -- 650 -- -- 650
------ -------- ------- -------- --------
Operating income (loss)................ -- 21,071 771 (411) 21,431
Other income (expense):
Interest expense..................... -- (9,534) (2,376) 1,076 (10,834)
Amortization of deferred financing
costs.............................. -- (316) (54) -- (370)
Equity in net loss of subsidiaries... 5,809 -- -- (5,809) --
Other................................ -- 349 1,306 (1,489) 166
------ -------- ------- -------- --------
Income (loss) from continuing
operations before income tax
provision............................ 5,809 11,570 (353) (6,633) 10,393
Income tax provision................... -- 3,969 615 -- 4,584
------ -------- ------- -------- --------
Net income (loss)...................... $5,809 $ 7,601 $ (968) $ (6,633) $ 5,809
====== ======== ======= ======== ========
</TABLE>
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
TOTAL TOTAL
COMPANY GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
------- ---------- -------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Net Sales............................. $ -- $ 93,332 $44,395 $(19,976)(a) $117,751
Operating Expenses:
Cost of goods sold.................. -- 56,698 33,677 (20,033)(a) 70,342
Selling, general and administrative
expenses.......................... -- 17,998 8,272 -- 26,270
Amortization of goodwill............ -- 22 335 -- 357
Amortization of other intangibles... -- 1,677 15 -- 1,692
Net periodic postretirement
benefits.......................... -- 585 -- -- 585
------ -------- ------- -------- --------
Operating income...................... -- 16,352 2,096 57 18,505
Other income (expense):
Interest expense.................... -- (10,084) (2,706) 1,252 (11,538)
Amortization of deferred financing
costs............................. -- (397) (63) -- (460)
Equity in net loss of
subsidiaries...................... 3,932 -- -- (3,932) --
Other............................... -- 1,216 822 (1,632) 406
------ -------- ------- -------- --------
Income (loss) from continuing
operations before income tax
provision........................... 3,932 7,087 149 (4,255) 6,913
Income tax provision.................. -- 2,424 557 -- 2,981
------ -------- ------- -------- --------
Income (loss) from continuing operations... 3,932 4,663 (408) (4,255) 3,932
Discontinued operations:
Income from discontinued operations,
net of income taxes............... 1,036 -- -- -- 1,036
------ -------- ------- -------- --------
Net income (loss)..................... $4,968 $ 4,663 $ (408) $ (4,255) $ 4,968
====== ======== ======= ======== ========
</TABLE>
- ---------------
(a) Reflects the elimination of intercompany sales among all of the Company's
subsidiaries.
F-26
<PAGE> 136
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
TOTAL TOTAL
COMPANY GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
------- ---------- -------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Net Sales............................. $ -- $405,039 $210,462 $(95,061)(a) $520,440
Operating Expenses:
Cost of goods sold.................. -- 246,794 167,430 (94,104)(a) 320,120
Selling, general and administrative
expenses.......................... -- 76,676 34,020 -- 110,696
Amortization of goodwill............ -- 86 1,505 -- 1,591
Amortization of other intangibles... -- 6,137 639 -- 6,776
Net periodic postretirement
benefits.......................... -- 2,750 -- -- 2,750
------- -------- -------- -------- --------
Operating income (loss)............... -- 72,596 6,868 (957) 78,507
Other income (expense):
Interest expense.................... -- (39,641) (10,823) 5,139 (45,325)
Amortization of deferred financing
costs............................. -- (1,346) (241) -- (1,587)
Equity in net loss of
subsidiaries...................... 15,069 -- -- (15,069) --
Other............................... -- 1,889 1,882 (6,822) (3,051)
------- -------- -------- -------- --------
Income (loss) from continuing
operations before income tax
provision........................... 15,069 33,498 (2,314) (17,709) 28,544
Income tax provision.................. -- 13,012 463 -- 13,475
------- -------- -------- -------- --------
Income (loss) from continuing
operations.......................... 15,069 20,486 (2,777) (17,709) 15,069
Discontinued operations:
Gain on sale of discontinued
operations, net of income taxes of
$12,623........................... 16,015 -- -- -- 16,015
Income from discontinued operations,
net of income taxes............... 3,173 -- -- -- 3,173
------- -------- -------- -------- --------
Net income (loss)..................... $34,257 $ 20,486 $ (2,777) $(17,709) $ 34,257
======= ======== ======== ======== ========
</TABLE>
- ---------------
(a) Reflects the elimination of intercompany sales among all of the Company's
subsidiaries.
F-27
<PAGE> 137
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
TOTAL TOTAL
COMPANY GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
-------- ---------- -------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Net Sales............................ $ -- $352,244 $152,322 $(64,822)(a) $439,744
Operating Expenses:
Cost of goods sold................. -- 210,585 114,066 (64,816)(a) 259,835
Selling, general and administrative
expenses......................... -- 69,989 25,918 -- 95,907
Amortization of goodwill........... -- 82,276 757 -- 83,033
Amortization of other
intangibles...................... -- 9,562 2,815 -- 12,377
Net periodic postretirement
benefits......................... -- 2,731 -- -- 2,731
-------- -------- -------- -------- --------
Operating income (loss).............. -- (22,899) 8,766 (6) (14,139)
Other income (expense):
Interest expense................... -- (40,215) (9,579) 4,139 (45,655)
Amortization of deferred financing
costs............................ -- (2,540) (171) -- (2,711)
Equity in net loss of
subsidiaries..................... (62,939) -- -- 62,939 --
Other.............................. -- (1,872) 7,267 (6,363) (968)
-------- -------- -------- -------- --------
Income (loss) from continuing
operations before income tax
provision and extraordinary item... (62,939) (67,526) 6,283 60,709 (63,473)
Income tax provision (benefit)....... -- (1,751) 1,217 -- (534)
-------- -------- -------- -------- --------
Income (loss) from continuing
operations before extraordinary
item............................... (62,939) (65,775) 5,066 60,709 (62,939)
Discontinued operations:
Gain on sale of discontinued
operations, net of income taxes
of $14,732....................... 8,480 -- -- -- 8,480
Loss from discontinued operations,
net of income taxes.............. (5,463) -- -- -- (5,463)
-------- -------- -------- -------- --------
Income (loss) before extraordinary
item............................... (59,922) (65,775) 5,066 60,709 (59,922)
Extraordinary item -- loss on early
extinguishment of long-term debt,
net of tax benefit of $2,001....... (3,715) -- -- -- (3,715)
-------- -------- -------- -------- --------
Net income (loss).................... $(63,637) $(65,775) $ 5,066 $ 60,709 $(63,637)
======== ======== ======== ======== ========
</TABLE>
- ---------------
(a) Reflects the elimination of intercompany sales among all of the Company's
subsidiaries.
F-28
<PAGE> 138
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
TOTAL TOTAL
COMPANY GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
--------- ---------- -------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Net Sales.......................... $ -- $ 327,543 $46,760 $(57,525)(a) $ 316,778
Operating Expenses:
Cost of goods sold............... -- 198,278 34,375 (56,708)(a) 175,945
Selling, general and
administrative expenses........ -- 65,176 9,505 -- 74,681
Amortization of goodwill......... -- 92,931 -- -- 92,931
Amortization of other
intangibles.................... -- 48,323 78 -- 48,401
Net periodic postretirement
benefits....................... -- 2,124 -- -- 2,124
--------- --------- ------- -------- ---------
Operating income (loss)............ -- (79,289) 2,802 (817) (77,304)
Other income (expense):
Interest expense................. -- (37,084) (5,723) 1,538 (41,269)
Amortization of deferred
financing costs................ -- (4,860) -- -- (4,860)
Equity in net loss of
subsidiaries................... (131,848) -- -- 131,848 --
Other............................ -- 536 3,006 (3,439) 103
--------- --------- ------- -------- ---------
Income (loss) from continuing
operations before income tax
provision........................ (131,848) (120,697) 85 129,130 (123,330)
Income tax provision............... -- 7,506 1,012 -- 8,518
--------- --------- ------- -------- ---------
Income (loss) from continuing
operations....................... (131,848) (128,203) (927) 129,130 (131,848)
Discontinued operations:
Loss from discontinued
operations, net of income
taxes.......................... (28,952) -- -- -- (28,952)
--------- --------- ------- -------- ---------
Net income (loss)................ $(160,800) $(128,203) $ (927) $129,130 $(160,800)
========= ========= ======= ======== =========
</TABLE>
- ---------------
(a) Reflects the elimination of intercompany sales among all of the Company's
subsidiaries.
F-29
<PAGE> 139
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
TOTAL TOTAL
COMPANY GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
-------- ---------- -------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities...................................... $(8,335) $ 219 $ (1,019) $ -- $ (9,135)
Cash flows provided by (used in) investing
activities:
Capital expenditures, net....................... -- (1,689) (2,067) -- (3,756)
Change in other assets.......................... -- (192) (157) -- (349)
Investing activities of discontinued
operations.................................... -- -- -- -- --
Acquisitions, net of cash....................... -- (640) -- -- (640)
Proceeds from sale of discontinued operations... -- -- -- -- --
-------- ------- -------- ---- --------
Net cash provided by (used in) investing
activities...................................... -- (2,521) (2,224) -- (4,745)
Cash flows provided by (used in) financing
activities:
Change in long-term receivables................. -- -- 263 -- 263
Repayment of long-term obligations.............. (26,000) -- 15,408 -- (10,592)
Borrowing of long-term obligations.............. 34,000 63 (11,693) -- 22,370
Change in accounts receivable securitization.... -- 376 -- -- 376
Issuance of common stock........................ 335 -- -- -- 335
Financing fees.................................. -- -- -- -- --
Financing activities of discontinued
operations.................................... -- -- -- -- --
Other........................................... -- -- (180) -- (180)
-------- ------- -------- ---- --------
Net cash provided by (used in) financing
activities...................................... 8,335 439 3,798 -- 12,572
Net increase (decrease) in cash and cash
equivalents..................................... -- (1,863) 555 -- (1,308)
Cash and cash equivalents at beginning of
period.......................................... -- 308 1,173 -- 1,481
-------- ------- -------- ---- --------
Cash and cash equivalents at end of period........ $ -- $(1,555) $ 1,728 $ -- $ 173
======== ======= ======== ==== ========
</TABLE>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
TOTAL TOTAL
COMPANY GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
-------- ---------- -------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities...................................... $(19,007) $(4,430) $ 26,318 $ -- $ 2,881
Cash flows provided by (used in) investing
activities:
Capital expenditures, net....................... -- (1,199) (1,196) -- (2,395)
Change in other assets.......................... -- 5,922 2,590 -- 8,512
Investing activities of discontinued
operations.................................... -- -- (570) -- (570)
Acquisitions, net of cash....................... -- -- (27,755) -- (27,755)
Proceeds from sale of discontinued operations... -- -- -- -- --
-------- ------- -------- ---- --------
Net cash provided by (used in) investing
activities...................................... -- 4,723 (26,931) -- (22,208)
Cash flows provided by (used in) financing
activities:
Change in long-term receivables................. -- 17 -- -- 17
Repayment of long-term obligations.............. (9,928) -- -- -- (9,928)
Borrowing of long-term obligations.............. 29,926 475 3,282 -- 33,683
Change in accounts receivable securitization.... -- 4,631 -- -- 4,631
Issuance of common stock........................ 436 -- -- -- 436
Financing fees.................................. -- -- -- -- --
Financing activities of discontinued
operations.................................... -- -- (1,227) -- (1,227)
Other........................................... (1,427) (444) (297) -- (2,168)
-------- ------- -------- ---- --------
Net cash provided by (used in) financing
activities...................................... 19,007 4,679 1,758 -- 25,444
Net increase (decrease) in cash and cash
equivalents..................................... -- 4,972 1,145 -- 6,117
Cash and cash equivalents at beginning of
period.......................................... -- 690 730 -- 1,420
-------- ------- -------- ---- --------
Cash and cash equivalents at end of period........ $ -- $ 5,662 $ 1,875 $ -- $ 7,537
======== ======= ======== ==== ========
</TABLE>
F-30
<PAGE> 140
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
TOTAL TOTAL
COMPANY GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
--------- ---------- -------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities..................................... $ (32,452) $ 8,215 $ 39,223 $ -- $ 14,986
Cash flows provided by (used in) investing
activities:
Capital expenditures, net...................... -- (9,084) (7,255) -- (16,339)
Change in other assets......................... -- 2,722 1,440 -- 4,162
Investing activities of discontinued
operations................................... -- -- (1,680) -- (1,680)
Acquisitions, net of cash...................... -- (10,140) (27,755) -- (37,895)
Proceeds from sale of discontinued
operations................................... 88,543 -- -- -- 88,543
--------- -------- -------- ---- ---------
Net cash provided by (used in) investing
activities..................................... 88,543 (16,502) (35,250) -- 36,791
Cash flows provided by (used in) financing
activities:
Change in long-term receivables................ -- 170 -- -- 170
Repayment of long-term obligations............. (123,450) -- (8,036) -- (131,486)
Borrowing of long-term obligations............. 63,950 301 8,604 -- 72,855
Change in accounts receivable securitization... -- 5,676 -- -- 5,676
Issuance of common stock....................... 3,069 -- -- -- 3,069
Financing fees................................. -- -- -- -- --
Financing activities of discontinued
operations................................... -- -- (2,808) -- (2,808)
Other.......................................... 340 1,758 (1,290) -- 808
--------- -------- -------- ---- ---------
Net cash provided by (used in) financing
activities..................................... (56,091) 7,905 (3,530) -- (51,716)
Net increase (decrease) in cash and cash
equivalents.................................... -- (382) 443 -- 61
Cash and cash equivalents at beginning of
period......................................... -- 690 730 -- 1,420
--------- -------- -------- ---- ---------
Cash and cash equivalents at end of period....... $ -- $ 308 $ 1,173 $ -- $ 1,481
========= ======== ======== ==== =========
</TABLE>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
TOTAL TOTAL
COMPANY GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
--------- ---------- -------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities..................................... $ (66,632) $ 24,569 $ 63,518 $ -- $ 21,455
Cash flows provided by (used in) investing
activities:
Capital expenditures, net...................... -- (6,554) (4,893) -- (11,447)
Change in other assets......................... -- (2,581) (1,818) -- (4,399)
Investing activities of discontinued
operations................................... -- -- (3,766) -- (3,766)
Acquisitions, net of cash...................... -- -- (74,011) -- (74,011)
Proceeds from sale of discontinued
operations................................... 112,359 -- -- -- 112,359
--------- -------- -------- ---- ---------
Net cash provided by (used in) investing
activities..................................... 112,359 (9,135) (84,488) -- 18,736
Cash flows provided by (used in) financing
activities:
Change in long-term receivables................ -- (283) -- -- (283)
Repayment of long-term obligations............. (150,384) -- -- -- (150,384)
Borrowing of long-term obligations............. 100,000 (188) 20,042 -- 119,854
Change in accounts receivable securitization... -- (9,994) -- -- (9,994)
Issuance of common stock....................... 4,146 -- -- -- 4,146
Financing fees................................. -- (3,855) -- -- (3,855)
Financing activities of discontinued
operations................................... -- -- (1,732) -- (1,732)
Other.......................................... 511 (1,291) 2,419 -- 1,639
--------- -------- -------- ---- ---------
Net cash provided by (used in) financing
activities..................................... (45,727) (15,611) 20,729 -- (40,609)
Net increase (decrease) in cash and cash
equivalents.................................... -- (177) (241) -- (418)
Cash and cash equivalents at beginning of
period......................................... -- 867 971 -- 1,838
--------- -------- -------- ---- ---------
Cash and cash equivalents at end of period....... $ -- $ 690 $ 730 $ -- $ 1,420
========= ======== ======== ==== =========
</TABLE>
F-31
<PAGE> 141
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
TOTAL TOTAL
COMPANY GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
-------- ---------- -------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities...................................... $17,419 $ 3,755 $10,034 $ -- $ 31,208
Cash flows provided by (used in) investing
activities:
Capital expenditures, net....................... -- (7,154) -- -- (7,154)
Change in other assets.......................... -- (944) 907 -- (37)
Investing activities of discontinued
operations.................................... -- -- (5,133) -- (5,133)
Acquisitions, net of cash....................... -- (3,370) -- -- (3,370)
Proceeds from sale of discontinued operations... -- -- -- -- --
-------- -------- ------- ---- --------
Net cash provided by (used in) investing
activities...................................... -- (11,468) (4,226) -- (15,694)
Cash flows provided by (used in) financing
activities:
Change in long-term receivables................. -- 1,090 (1,070) -- 20
Repayment of long-term obligations.............. (26,109) (154) -- -- (26,263)
Borrowing of long-term obligations.............. -- 358 147 -- 505
Change in accounts receivable securitization.... -- 731 -- -- 731
Issuance of common stock........................ 7,761 -- -- -- 7,761
Financing fees.................................. -- (189) -- -- (189)
Financing activities of discontinued
operations.................................... -- -- (11) -- (11)
Other........................................... 929 (1,152) (3,293) -- (3,516)
-------- -------- ------- ---- --------
Net cash provided by (used in) financing
activities...................................... (17,419) 684 (4,227) -- (20,962)
Net increase (decrease) in cash and cash
equivalents..................................... -- (7,029) 1,581 -- (5,448)
Cash and cash equivalents at beginning of
period.......................................... -- 7,896 (610) -- 7,286
-------- -------- ------- ---- --------
Cash and cash equivalents at end of period........ $ -- $ 867 $ 971 $ -- $ 1,838
======== ======== ======= ==== ========
</TABLE>
16. SUPPLEMENTARY UNAUDITED QUARTERLY DATA
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997:
Net sales................................................ $117,751 $135,175 $131,902 $135,612 $520,440
Gross profit............................................. 47,409 52,630 51,007 49,274 200,320
Income from continuing operations........................ 3,932 5,581 4,045 1,511 15,069
Net income (loss)........................................ 4,968 6,783 22,995 (489) 34,257
Basic per share amounts:
Income from continuing operations...................... 0.36 0.50 0.36 0.14 1.36
Net income (loss)...................................... 0.45 0.61 2.07 (0.04) 3.09
Diluted per share amounts:
Income from continuing operations...................... 0.35 0.49 0.35 0.13 1.33
Net income (loss)...................................... 0.44 0.60 2.02 (0.04) 3.01
Year ended December 31, 1996:
Net sales................................................ $102,233 $116,120 $110,820 $110,571 $439,744
Gross profit............................................. 42,604 47,236 45,478 44,591 179,909
Loss from continuing operations.......................... (20,667) (20,657) (17,152) (4,463) (62,939)
Net loss................................................. (21,867) (16,386) (19,616) (5,768)(1) (63,637)
Basic per share amounts:
Loss from continuing operations........................ (1.93) (1.92) (1.59) (0.41) (5.83)
Net loss............................................... (2.04) (1.53) (1.82) (0.53) (5.89)
Diluted per share amounts:
Loss from continuing operations........................ (1.93) (1.92) (1.59) (0.41) (5.83)
Net loss............................................... (2.04) (1.53) (1.82) (0.53) (5.89)
</TABLE>
- ---------------
(1) Reflects recognition of net deferred tax assets (see Note 11).
F-32
<PAGE> 142
- ------------------------------------------------------------
- ------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN
THE SECURITIES TO WHICH IT RELATES OR ANY OFFER TO SELL OR THE SOLICITATION OF
AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER
OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
---------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Available Information...................... 2
Summary.................................... 3
Risk Factors............................... 15
Use of Proceeds............................ 21
Capitalization............................. 22
Selected Financial Data.................... 23
Management's Discussion and Analysis of
Financial Condition and Results
of Operations............................ 25
Business................................... 32
The Merger and Merger Financing............ 42
Management................................. 44
Executive Compensation..................... 47
Security Ownership of Certain Beneficial
Owners and Management of Holdings........ 51
Certain Relationships and Related
Transactions............................. 53
Limited Liability Company Agreement........ 55
The Exchange Offer......................... 56
Description of the New Credit Facility..... 63
Description of New Senior Subordinated
Notes.................................... 65
Certain United States Federal Income Tax
Considerations........................... 96
Plan of Distribution....................... 97
Legal Matters.............................. 97
Experts.................................... 97
Unaudited Condensed Consolidated Pro Forma
Financial Data........................... P-1
Index to Financial Statements.............. F-1
</TABLE>
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
OFFER TO EXCHANGE
ALL OUTSTANDING
9 7/8% SENIOR SUBORDINATED NOTES
DUE 2008 FOR
9 7/8% SENIOR SUBORDINATED NOTES
DUE 2008
THERMADYNE MFG. LLC
THERMADYNE CAPITAL CORP.
--------------------
PROSPECTUS
--------------------
AUGUST 4, 1998
- ------------------------------------------------------------
- ------------------------------------------------------------
<PAGE> 143
THERMADYNE MFG LLC
MARKET MAKING PROSPECTUS
<PAGE> 144
PROSPECTUS
THERMADYNE MFG. LLC
AND
THERMADYNE CAPITAL CORP.
9 7/8% SENIOR SUBORDINATED NOTES DUE 2008
The 9 7/8% Senior Subordinated Notes due 2008 (the "New Senior Subordinated
Notes") were issued by Thermadyne Mfg. LLC (the "Company") and Thermadyne
Capital Corp. ("Capital Corp.," and, together with the Company, the "Issuers")
in exchange for the 9 7/8% Senior Subordinated Notes due 2008 (the "Old Senior
Subordinated Notes") issued by the Issuers. The form and terms of the New Senior
Subordinated Notes are identical to the form and terms of the Old Senior
Subordinated Notes except that the New Senior Subordinated Notes have been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
and do not bear any legends restricting their transfer. The New Senior
Subordinated Notes evidence the same debt as the Old Senior Subordinated Notes
and were issued pursuant to, and entitled to the benefits of, the Indenture (as
defined) governing the Old Senior Subordinated Notes. See "Description of New
Senior Subordinated Notes." The New Senior Subordinated Notes and the Old Senior
Subordinated Notes are sometimes collectively referred to herein as the "Senior
Subordinated Notes."
The New Senior Subordinated Notes mature on June 1, 2008. Interest on the New
Senior Subordinated Notes will be payable semi-annually on June 1 and December 1
of each year, commencing on December 1, 1998. The New Senior Subordinated Notes
are subject to redemption at any time on or after June 1, 2003 at the option of
the Issuers, in whole or in part, in cash at the redemption prices set forth
herein, plus accrued and unpaid interest and Liquidated Damages (as defined
herein), if any, thereon to the applicable redemption date. Notwithstanding the
foregoing, on or prior to June 1, 2001, the Issuers may redeem up to 35% of the
aggregate principal amount of Senior Subordinated Notes ever issued under the
Indenture in cash at a redemption price of 109.875% of the principal amount
thereof, plus accrued and unpaid interest and Liquidated Damages, if any,
thereon to the redemption date, with the net cash proceeds of one or more Public
Equity Offerings (as defined herein); provided that at least 65% of the
aggregate principal amount of Senior Subordinated Notes ever issued under the
Indenture remains outstanding immediately after the occurrence of any such
redemption. In addition, at any time prior to June 1, 2003, the Issuers may, at
their option upon the occurrence of a Change of Control (as defined herein),
redeem the New Senior Subordinated Notes, in whole but not in part, in cash at a
redemption price equal to (i) the present value of the sum of all the remaining
interest (excluding accrued and unpaid interest, if any), premium and principal
payments that would become due on the New Senior Subordinated Notes as if the
New Senior Subordinated Notes were to remain outstanding and be redeemed on June
1, 2003, computed using a discount rate equal to the Treasury Rate (as defined
herein) plus 50 basis points, plus (ii) accrued and unpaid interest and
Liquidated Damages, if any, to the date of redemption. Upon the occurrence of a
Change of Control, each Holder of New Senior Subordinated Notes will have the
right to require the Issuers to repurchase all or any part of such Holder's New
Senior Subordinated Notes at an offer price in cash equal to 101% of the
aggregate principal amount thereof, plus accrued and unpaid interest and
Liquidated Damages, if any, thereon to the date of repurchase. See "Description
of New Senior Subordinated Notes."
The New Senior Subordinated Notes are general unsecured obligations of the
Issuers and are subordinated in right of payment to all existing and future
Senior Indebtedness (as defined herein) of the Issuers, including indebtedness
pursuant to the New Credit Facility (as defined herein). The New Senior
Subordinated Notes rank pari passu with any future senior subordinated
indebtedness of the Issuers and rank senior to all subordinated Indebtedness (as
defined herein) of the Issuers. The New Senior Subordinated Notes are
effectively subordinated to all liabilities of the Issuers' subsidiaries that
are not Guarantors (as defined herein). The New Senior Subordinated Notes are
unconditionally guaranteed on a senior subordinated basis by certain of the
Company's existing domestic subsidiaries (the "Guarantors"). The Note Guarantees
(as defined herein) are general unsecured obligations of the Guarantors, are
subordinated in right of payment to all existing and future Senior Indebtedness
of the Guarantors, including indebtedness under the New Credit Facility, and
rank senior in right of payment to any future subordinated indebtedness of the
Guarantors. On a pro forma basis after giving effect to the Merger (as defined
herein), including the Merger Financing (as defined herein) and the application
of the proceeds thereof, as of March 31, 1998, the Company and the Guarantors
would have had outstanding approximately $379.5 million of Senior Indebtedness,
and the Company's non-Guarantor subsidiaries would have had approximately $87.0
million of outstanding liabilities, including trade payables.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NEW SENIOR
SUBORDINATED NOTES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
This Prospectus is to be used by Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJSC") in connection with offers and sales in market-making
transactions at negotiated prices related to prevailing market prices at the
time of sale. The Issuers do not intend to list the New Senior Subordinated
Notes on any securities exchange or to seek admission thereof to trading in the
National Association of Securities Dealers Automated Quotation System. DLJSC has
advised the Issuers that it intends to make a market in the New Senior
Subordinated Notes; however, it is not obligated to do so and any market-making
may be discontinued at any time. The Issuers will receive no portion of the
proceeds of the sale of the New Senior Subordinated Notes and will bear expenses
incident to the registration thereof.
DONALDSON, LUFKIN & JENRETTE
------------------------
THE DATE OF THIS PROSPECTUS IS AUGUST 4, 1998.
<PAGE> 145
AVAILABLE INFORMATION
As a result of the filing under the Securities Act of the Registration
Statement on Form S-1 with respect to the New Senior Subordinated Notes (the
"Registration Statement"), of which this Prospectus is a part, the Issuers will
become subject to the informational requirements of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and in accordance therewith will file
reports and other information with the Securities and Exchange Commission (the
"Commission"). Additionally, the Company's parent corporation, Thermadyne
Holdings Corporation, is currently subject to the informational requirements of
the Exchange Act and in accordance therewith files reports and other information
with the Commission. Such reports and other information may be inspected and
copied at the public reference facilities of the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices at 500 West Madison Street, Suite 1400, Chicago, Illinois 60611, and 7
World Trade Center, 13th Floor, New York, New York 10048. Copies of such
material can also be obtained at prescribed rates by writing to the Public
Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549.
This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits and schedules thereto. Statements made
in this Prospectus as to the contents of any contract, agreement or other
document are not necessarily complete. With respect to each such contract,
agreement or other document filed as an exhibit to the Registration Statement,
reference is hereby made to such exhibit for a more complete description of the
matter involved, and each such statement shall be deemed qualified in its
entirety by such reference. Copies of the Registration Statement and the
exhibits thereto are on file with the Commission and may be examined without
charge at the public reference facilities of the Commission described above.
Copies of such materials can also be obtained at prescribed rates by writing to
the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549. The reports, proxy statements and other
information filed by the Issuers with the Commission may also be obtained from
the web site that the Commission maintains at http://www.sec.gov.
The Issuers are required by the Indenture to furnish the holders of the New
Senior Subordinated Notes with copies of the annual reports and of the
information, documents and other reports specified in Sections 13 and 15(d) of
the Exchange Act, so long as any New Senior Subordinated Notes are outstanding.
2
<PAGE> 146
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Investors are urged to read this Prospectus in its
entirety. As used in this Prospectus, the term "Holdings" means Thermadyne
Holdings Corporation, including its predecessors and subsidiaries; the term
"Issuers" means Thermadyne Mfg. LLC, a wholly owned subsidiary of Holdings
("Thermadyne LLC"), and Thermadyne Capital Corp. ("Thermadyne Capital"), a
wholly owned subsidiary of Thermadyne LLC; and the terms "Company" and
"Thermadyne" mean Thermadyne LLC and its predecessors and subsidiaries.
THE COMPANY
OVERVIEW
Thermadyne is a leading global manufacturer of cutting and welding products
and accessories. The Company manufactures a broad range of gas (oxy-fuel) and
electric arc cutting and welding products that are ultimately sold to end-user
customers principally engaged in the aerospace, automotive, construction, metal
fabrication, mining, mill and foundry, petroleum and shipbuilding industries.
Thermadyne sells its products through a long-established domestic network of
approximately 1,100 independent distributors who market Thermadyne products to
over 10,000 end-user customers. For the twelve months ended March 31, 1998, the
Company's net sales and Adjusted EBITDA (as defined herein), on a pro forma
basis, were $548.2 million and $115.5 million, respectively.
The Company's core products enjoy leading brand recognition, a reputation
for quality and strong market positions. In 1994, following the Company's
Restructuring (as defined herein), current management initiated a series of
transactions to focus the Company's business exclusively on the cutting and
welding industry. As part of this strategy, the Company divested three non-core
businesses and acquired six cutting and welding businesses, which collectively
generated approximately $169 million in annual revenues at the respective times
of acquisition. As a result of this repositioning strategy, along with ongoing
new product introductions, an extensive distribution network and market leading
brands, the Company has achieved a compound annual growth in net sales and
EBITDA of 20.3% and 12.5%, respectively, from 1993 to 1997.
According to the United States Department of Commerce, domestic welding
industry revenues totaled over $3.6 billion in 1997. The domestic industry has
grown at an annual rate of 5.9% since 1989 and is expected to grow 4.2% in 1998.
Global welding industry revenues are estimated to total over $10.0 billion, and
management believes that growth in the international market has been faster than
the domestic market, driven, in large part, by infrastructure spending in
developing markets. International markets, including Australia and Italy,
represented approximately 42% of the Company's net sales in 1997, up from
approximately 20% of net sales in 1994. Although the industry has begun to
experience global consolidation, it continues to be very fragmented.
COMPETITIVE STRENGTHS
Thermadyne possesses a number of competitive strengths that have allowed it
to develop and maintain a strong position within the cutting and welding
industry, including the following:
Market Leading Brands. Management believes that the strength and longevity
of the numerous Thermadyne brand names create a significant competitive
advantage and position Thermadyne as one of the leaders in the cutting and
welding industry. Each of the Company's major divisions maintains
industry-leading brand names with significant market shares. Management believes
that VICTOR(R), founded in 1913, is the leading brand name in domestic
gas-operated cutting and welding torches and equipment; TWECO(R), founded in
1936, is the leading domestic manufacturer of metal inert gas ("MIG") and manual
welding torches; ARCAIR(R) is the leading domestic brand name of tungsten inert
gas ("TIG") torch and accessory products; THERMAL DYNAMICS(R), founded in 1957,
is a leading domestic manufacturer of manual plasma cutting products; and
CIGWELD(R), founded in 1922, is the leading brand name in the Australia/New
Zealand cutting and welding
3
<PAGE> 147
products market. Each of the manufacturing operations associated with these
brands is ISO-9000 series certified.
Diverse and Stable Customer Base. The Company's customer base includes
cutting and welding product distributors as well as end-user customers
principally engaged in the aerospace, automotive, construction, metal
fabrication, mining, mill and foundry, petroleum and ship building industries.
No one customer accounted for more than 9% of the Company's 1997 net sales.
Further, the Company's top 20 customers have been associated with the Company
for an average of over 10 years.
Established, Effective Distribution Channels. The Company believes that its
strong, established and long-standing relationships with over 1,100 independent
cutting and welding products distributors in the United States provide a
significant competitive advantage and support the Company's strong market
position. Thermadyne's domestic distributor relationships are maintained by 11
area business managers who oversee the Company's relationships with large
distributors and by separate product-specific sales forces for each of
Thermadyne's business units. Management believes that this unique structure,
which combines relationship managers with technically trained product
specialists, will enable the Company to more effectively maintain and utilize
its distributor networks. Management also believes that this established
distribution network enables the Company to achieve market penetration when
introducing newly developed or acquired products.
Proven and Committed Senior Management Team. Thermadyne's management team
has strategically repositioned the Company over the past four years to focus
exclusively in its core cutting and welding markets. This repositioning was
accomplished through divestitures of three non-core assets and acquisitions of
six strategic businesses or product lines. In addition, management has initiated
the development and introduction of significant new products and product lines.
As a result of management's efforts, the Company achieved a 20.3% growth rate in
net sales from 1993 to 1997. In connection with the Merger each member of the
senior management team signed an employment contract with the Company.
Additionally, the Company adopted an incentive plan to tie each member of senior
management's compensation to the Company's financial performance. See "Executive
Compensation."
BUSINESS STRATEGY
Thermadyne has developed a business strategy designed to enhance its strong
market positions and continue to improve its growth and profitability. The
primary elements of the Company's business strategy are as follows:
Continue New Product Development and Enhancement. The foundation for
Thermadyne's strong market positions and leading brand names is the development
and introduction of new products and enhancements of existing products. The
Company believes it is at the forefront of cutting and welding technology with a
proven track-record of continual new product introductions and existing product
enhancements that have resulted in 262 issued or pending United States and
foreign patents. New products and product enhancements are designed to add value
for customers, including enhanced safety features, improved productivity and
ergonomics and an improved welding environment. Examples of recent new product
introductions include robotic welding systems and accessories, high-purity
instrumentation, automated plasma cutting and safety products as well as
underwater cutting electrodes. During 1997, the Company introduced over 135 new
products or product enhancements, and the Company expects to continue this
effort in the future.
Expand Strategic Acquisitions. The Company has completed six acquisitions
since 1993, which collectively generated approximately $169 million in annual
revenues at the respective times of acquisition, including over $135 million of
revenues for Australia and Italy. The Company believes that numerous acquisition
candidates exist globally, and the Company intends to continue to seek new
acquisition opportunities in its cutting and welding business. Thermadyne
intends to continue its focused acquisition strategy that includes the following
principal elements: (i) entering and expanding in geographic areas where the
Company does not currently have a significant presence through acquisitions of
local cutting and welding businesses and (ii) expanding in geographic areas
where the Company currently maintains a strong presence through the acquisition
of complementary product lines.
4
<PAGE> 148
Leverage Existing Distribution Network. The Company intends to leverage its
existing distribution network through the acquisition or introduction of new
products and product enhancements. Management believes that when the Company
acquires a local presence in a new geographic area, it can utilize the acquired
distribution network to sell existing Thermadyne brands into that local market.
In addition, the Company believes that significant opportunities exist to
purchase complementary product lines and expand its business by selling the new
product lines through Thermadyne's extensive distribution network. For example,
through recent acquisitions the Company has expanded its offering of filler
metals, conventional arc welding power supplies, safety equipment and
engine-driven welding power sources and began marketing such products through
its established distribution network. The Company intends to continue this
strategy of penetrating new welding product markets by leveraging its extensive
distribution network in conjunction with its new product development and focused
acquisition strategies.
Broaden International Presence. Thermadyne has maintained an international
presence for over 30 years and continues to broaden its presence throughout the
world. International sales accounted for approximately 42% of net sales in 1997
as compared to approximately 20% in 1994. The Company has established a
dedicated international market presence and maintains the leading position in
Australia/New Zealand and significant and growing positions in Europe, Asia and
Latin America. Management intends to continue the expansion of its strong
domestic brand names into the international market and to continue to penetrate
the growing Asian and Latin American cutting and welding markets.
Continue Cost Reduction Efforts. Thermadyne strives to continually improve
manufacturing efficiencies and reduce unit costs. In December 1997, the Company
implemented a cost reduction program that includes the following principal
elements: (i) vendor rationalization and consolidation; (ii) manufacturing
process and productivity improvements and product design changes; (iii)
personnel rationalization and expense reductions; (iv) advertising and trade
show expense reductions; (v) aircraft, charter and other travel expense
reductions; and (vi) elimination of the annual sales meeting. These cost
reduction initiatives are expected to generate approximately $10 million in
savings on an annualized basis. In addition, the Company has initiated the
implementation of a new global information system that is designed to allow the
Company to further integrate administrative functions and improve information
flow across business unit lines.
Continue Dedicated Customer Service. The Company believes that effective
and proactive customer service has enabled the Company to build and maintain its
leading market positions and strong distributor relationships. Management plans
to continue this strategy of enhancing distributor and end-user relationships
through continuous customer service improvements. Each of Thermadyne's divisions
maintains a dedicated, well trained, technically oriented and product-specific
sales and customer service team. Management believes that the dedicated product
teams provide Thermadyne with a significant competitive advantage. In addition,
to further improve customer service, the Company has implemented a national
accounts team of 11 area business managers to support the dedicated product
sales and service teams and further support sales to the Company's key
distributors.
5
<PAGE> 149
THE MERGER AND MERGER FINANCING
On May 22, 1998, Holdings consummated the merger of Mercury Acquisition
Corporation ("Mercury"), a corporation organized by DLJ Merchant Banking
Partners II, L.P. ("DLJMB") and affiliated funds and entities (the "DLJMB
Funds") with and into Holdings, with Holdings continuing as the surviving
corporation (the "Merger").
In order to fund the payment of the cash portion of the Merger
Consideration (as defined herein), the Option Cash Proceeds (as defined herein)
and the ESPP Cash Proceeds (as defined herein), to refinance and/or retire
outstanding indebtedness of the Company, and to pay expenses incurred in
connection with the Merger, the Issuers issued the Senior Subordinated Notes and
the Company entered into a syndicated senior secured loan facility providing for
term loan borrowings in the aggregate principal amount of approximately $330
million and revolving loan borrowings of $100 million (the "New Credit
Facility"). In connection with the Merger, the Company borrowed all term loans
available under the New Credit Facility plus approximately $25 million of
revolving loans. The remaining revolving loans will be available to fund the
working capital requirements of the Company. The proceeds of such financings
were distributed to Holdings in the form of a dividend. See "Description of New
Credit Facility," "The Merger and Merger Financing" and "Certain Relationships
and Related Transactions."
Mercury issued approximately $94.6 million aggregate gross proceeds of its
12 1/2% Senior Discount Debentures due 2008 (the "Debentures"). In connection
with the Merger, Holdings succeeded to the obligations of Mercury with respect
to the Debentures. The DLJMB Funds also purchased 2,608,696 shares of common
stock of Mercury ("Mercury Common Stock"), 2,000,000 shares of senior
exchangeable preferred stock of Mercury ("Mercury Preferred Stock") and warrants
to purchase 353,428 shares of Mercury Common Stock at an exercise price of $0.01
per share (the "DLJMB Warrants") for approximately $140 million (the "DLJMB
Equity Investment"). As a result of the Merger, the proceeds of such purchases
became an asset of Holdings, each share of Mercury Common Stock became a share
of common stock of Holdings ("Holdings Common Stock"), each share of Mercury
Preferred Stock became a share of senior exchangeable preferred stock of
Holdings ("Holdings Preferred Stock") and each DLJMB Warrant to acquire Mercury
Common Stock became exercisable for an equal number of shares of Holdings Common
Stock. In addition, in connection with the Merger, certain members of senior
management purchased 143,192 shares of Holdings Common Stock for approximately
$4.9 million (the "Management Share Purchase"), of which approximately $3.6
million was provided through non-recourse loans from Holdings (the "Management
Loans").
The equity and debt financings referred to above are collectively referred
to herein as the "Merger Financing."
6
<PAGE> 150
THE NEW SENIOR SUBORDINATED NOTES
Securities Offered......... $207.0 million aggregate principal amount at
maturity of 9 7/8% Senior Subordinated Notes due
2008.
Issuers.................... The New Senior Subordinated Notes will be joint and
several obligations of the Company and Thermadyne
Capital. Thermadyne Capital is a Delaware
corporation and wholly-owned subsidiary of the
Company formed in connection with the Original
Offering. Thermadyne Capital has no assets, no
liabilities (other than the Senior Subordinated
Notes), no substantial operations, and will be
prohibited from engaging in any business
activities.
Maturity Date.............. June 1, 2008.
Interest Payment Dates..... June 1 and December 1, commencing December 1, 1998.
Optional Redemption........ The New Senior Subordinated Notes will be subject
to redemption at any time on or after June 1, 2003
at the option of the Issuers, in whole or in part,
in cash at the redemption prices set forth herein,
plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the applicable
redemption date. Notwithstanding the foregoing, on
or prior to June 1, 2001, the Issuers may redeem up
to 35% of the aggregate principal amount of Senior
Subordinated Notes ever issued under the Indenture
in cash at a redemption price of 109.875% of the
principal amount thereof, plus accrued and unpaid
interest and Liquidated Damages, if any, thereon to
the redemption date, with the net cash proceeds of
one or more Public Equity Offerings; provided that
at least 65% of the aggregate principal amount of
Senior Subordinated Notes ever issued under the
Indenture remains outstanding immediately after the
occurrence of any such redemption. In addition, at
any time prior to June 1, 2003, the Issuers may, at
their option upon the occurrence of a Change of
Control, redeem the New Senior Subordinated Notes,
in whole but not in part, in cash at a redemption
price equal to (i) the present value of the sum of
all the remaining interest (excluding accrued and
unpaid interest, if any), premium and principal
payments that would become due on the New Senior
Subordinated Notes as if the New Senior
Subordinated Notes were to remain outstanding and
be redeemed on June 1, 2003, computed using a
discount rate equal to the Treasury Rate plus 50
basis points, plus (ii) accrued and unpaid interest
and Liquidated Damages, if any, to the date of
redemption. See "Description of New Senior
Subordinated Notes -- Optional Redemption."
Change of Control.......... Upon the occurrence of a Change of Control, each
Holder of New Senior Subordinated Notes will have
the right to require the Issuers to repurchase all
or any part of such Holder's New Senior
Subordinated Notes at an offer price in cash equal
to 101% of the aggregate principal amount thereof,
plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the date of repurchase.
No assurance can be given that the Issuers will
have sufficient resources to satisfy their
repurchase obligation with respect to the New
Senior Subordinated Notes following a Change of
Control. See "Risk Factors -- Possible Inability to
Repurchase New Senior Subordinated Notes upon
Change of Control" and "Description of New Senior
Subordinated Notes -- Repurchase at the Option of
Holders -- Change of Control."
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<PAGE> 151
Ranking.................... The New Senior Subordinated Notes will be general
unsecured obligations of the Issuers and will be
subordinated in right of payment to all existing
and future Senior Indebtedness of the Issuers,
including indebtedness pursuant to the New Credit
Facility. The New Senior Subordinated Notes will
rank pari passu with any future senior subordinated
indebtedness of the Issuers and will rank senior to
all Subordinated Indebtedness of the Issuers. The
New Senior Subordinated Notes will be effectively
subordinated to all liabilities of the Issuers'
subsidiaries that are not Guarantors. On a pro
forma basis after giving effect to the Merger,
including the Merger Financing and the application
of proceeds thereof, as of March 31, 1998, the
Company and the Guarantors would have had
outstanding approximately $379.5 million of Senior
Indebtedness and the Company's non-Guarantor
subsidiaries would have had approximately $87.0
million of outstanding liabilities, including trade
payables.
Note Guarantees............ The New Senior Subordinated Notes will be
unconditionally guaranteed on a senior subordinated
basis by the Guarantors. The Note Guarantees will
be general unsecured obligations of the Guarantors,
will be subordinated in right of payment to all
existing and future Senior Indebtedness of the
Guarantors, including indebtedness under the New
Credit Facility, and will rank senior in right of
payment to any future subordinated indebtedness of
the Guarantors. See "Description of New Senior
Subordinated Notes -- Note Guarantees."
Certain Covenants.......... The Indenture pursuant to which the New Senior
Subordinated Notes will be issued (the "Indenture")
contains certain covenants that, among other
things, limit the ability of the Issuers and their
Restricted Subsidiaries (as defined herein) to:
incur indebtedness and issue preferred stock,
repurchase Capital Stock (as defined herein) and
Indebtedness subordinated to the New Senior
Subordinated Notes, engage in transactions with
affiliates, engage in sale and leaseback
transactions, incur or suffer to exist certain
liens, pay dividends or other distributions, make
investments, sell assets and engage in certain
mergers and consolidations.
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered in connection with an investment in the New Senior Subordinated
Notes.
8
<PAGE> 152
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION
The summary historical consolidated financial data for and as of the end of
each of the years in the five-year period ended December 31, 1997 set forth
below have been derived from the audited consolidated financial statements of
the Company and its predecessor. The pro forma financial data for the
three-month period ended March 31, 1998 and the historical financial data for
the three-month period ended March 31, 1997 are derived from unaudited financial
statements. The unaudited financial statements include all adjustments,
consisting only of normal recurring adjustments, which the Company considers
necessary for a fair presentation of the financial position and the results of
operations for these periods. Operating results for the pro forma three-month
period ended March 31, 1998 are not necessarily indicative of the results that
may be expected for the entire year ending December 31, 1998. The data should be
read in conjunction with the historical consolidated financial statements of the
Company and its predecessor, and the related notes thereto, set forth elsewhere
herein.
The unaudited summary consolidated pro forma financial data of the Company
set forth below are based on historical consolidated financial statements of
Holdings as adjusted to give effect to certain transactions described below and
the Merger, including the Merger Financing and the application of the proceeds
thereof. The pro forma balance sheet data give effect to the Merger, including
the Merger Financing and the application of the proceeds thereof, as if it had
occurred on March 31, 1998. The pro forma statement of operations data for the
three-month period ended March 31, 1998 gives effect to the Merger and the
Merger Financing and the application of the proceeds thereof as if it had
occurred at the beginning of such period. The pro forma statement of operations
data for the twelve months ended March 31, 1998 give effect to the acquisition
of the welding division of Prestolite Power Corporation ("Arcsys"), which
occurred on September 26, 1997 (the "Arcsys Acquisition"), the acquisition of
certain assets of Woodland Cryogenics, Inc. ("Woodland"), which occurred on
November 25, 1997 (the "Woodland Acquisition"), and the Merger, including the
Merger Financing and the application of the proceeds thereof, as if they all had
occurred on April 1, 1997. The pro forma statement of operations data for the
twelve months ended March 31, 1998 and the three-month period ended March 31,
1998 have been derived as if the balance sheet of the Company at the beginning
of such period was the pro forma balance sheet as of March 31, 1998. The pro
forma adjustments are based upon available information and upon certain
assumptions that management believes are reasonable under the circumstances. The
pro forma financial data do not purport to represent what the Company's actual
results of operations or actual financial position would have been if the Arcsys
Acquisition, the Woodland Acquisition and the Merger, including the Merger
Financing and the application of the proceeds thereof, had occurred on such
dates or to project the Company's results of operations or financial position
for any future period or date.
In 1996, Holdings announced plans to sell, and in 1997 consummated the sale
of, its wear resistance business; in late 1995, Holdings announced its plans to
sell, and in 1996 consummated the sale of, its gas containment and floor
maintenance businesses. These businesses are accounted for as discontinued
operations in Holdings' Consolidated Financial Statements. The following data
should be read in conjunction with "Unaudited Condensed Consolidated Pro Forma
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Holdings' Consolidated Financial Statements and
Notes thereto, in each case included elsewhere herein.
9
<PAGE> 153
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
--------------------------------------------------------------------------------- ------------
TWELVE MONTHS
ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31, FISCAL YEARS ENDED DECEMBER 31, FISCAL YEAR
------------- ------------------------- ------------------------------------- ENDED
PRO FORMA PRO FORMA DECEMBER 31,
1998 1998 1997 1997 1996 1995 1994(1) 1993
------------- ----------- ----------- ------- ------- ------- ------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS DATA(2):
Net sales.................... $ 548.2 $ 131.8 $ 117.8 $ 520.4 $ 439.7 $ 316.8 $258.1 $ 248.3
Cost of goods sold........... 342.2 81.8 70.3 320.0 259.8 176.0 141.1 132.2
Selling, general and
administrative expenses.... 114.1 27.1 26.3 110.7 95.9 74.7 60.0 57.8
Amortization of
goodwill(3)................ 1.6 0.4 0.4 1.6 83.0 92.9 83.9 4.5
Amortization of
intangibles(4)............. 5.8 0.5 1.7 6.8 12.4 48.4 10.7 8.7
Net periodic postretirement
benefits................... 2.8 0.6 0.6 2.8 2.7 2.1 2.1 3.6
------- ------- ------- ------- ------- ------- ------ -------
Operating income (loss)...... 81.7 21.4 18.5 78.5 (14.1) (77.3) (39.7) 41.5
Interest expense............. 57.1 14.6 11.5 45.3 45.7 41.3 39.1 66.9
Other expense, net(5)........ 5.3 0.3 0.1 4.7 3.7 4.8 2.0 27.4
Income (loss) from continuing
operations available to
common..................... 8.7 3.3 3.9 15.1 (62.9) (313.8) (85.1) (53.4)
CONSOLIDATED BALANCE SHEET DATA
(AT PERIOD END):
Cash and cash equivalents.... $ 0.2 $ 0.2 $ 7.5 $ 1.5 $ 1.4 $ 1.8 $ 7.3 $ 15.0
Working capital(6)........... 123.6 123.6 121.4 88.5 67.6 52.3 81.5 65.8
Total assets................. 399.2 399.2 386.6 354.5 353.4 416.4 627.8 517.5
Total debt(7)................ 587.4 587.4 444.1 358.1 421.3 456.5 497.7 693.3
Total stockholders' equity
(deficit).................. (334.0) (334.0) (184.5) (162.8) (185.3) (132.2) 20.6 (307.9)
OTHER DATA:
Adjusted EBITDA(8)........... $ 105.8 $ 26.5 $ 24.0 $ 102.1 $ 95.7 $ 74.6 $ 62.7 $ 63.8
Adjusted EBITDA with cost
savings(9)................. 115.5 -- -- -- -- -- --
Depreciation................. 13.6 3.6 2.9 12.5 11.7 8.5 5.7 5.6
Capital expenditures......... 17.8 3.8 2.4 16.3 11.4 7.2 8.0 5.0
CREDIT RATIOS:
Adjusted EBITDA/interest
expense.................... 2.0x -- -- -- -- -- -- --
Total debt/Adjusted
EBITDA(10)................. 5.1 -- -- -- -- -- -- --
</TABLE>
- ---------------
(1) Represents the eleven-month period from February 1, 1994, the effective
date of the Company's comprehensive financial restructuring under Chapter
11 of the United States Bankruptcy Code (the "Restructuring"), through
December 31, 1994.
(2) See "Business -- Business Strategy" and the discussion under the caption
"Recent Events -- Acquisitions" in Note 2 to Holdings' Consolidated
Financial Statements for information concerning the Company's business
combinations occurring during the periods presented.
(3) In conjunction with the Restructuring, Holdings' assets and liabilities
were revalued at the effective date thereof. The assets and liabilities
were stated at their reorganization value. The portion of the
reorganization value not attributable to specific assets was amortized over
a three year period.
(4) Includes $33.0 million in 1995 related to the writedown of intangible
assets in accordance with Financial Accounting Standards Board Statement
No. 121.
(5) During 1993, nonrecurring charges of $18.9 million were recorded resulting
from writing off unamortized debt discount and deferred financing costs and
other costs related to the Restructuring.
(6) Excludes net assets of discontinued operations for 1995 and 1996.
(7) For 1993, includes liabilities subject to compromise of $466.2 million.
10
<PAGE> 154
(8) "Adjusted EBITDA" is defined as operating income plus depreciation,
amortization of goodwill, amortization of intangibles and net periodic
postretirement benefits expense and is a key financial measure but should
not be construed as an alternative to operating income or cash flows from
operating activities (as determined in accordance with generally accepted
accounting principles). Adjusted EBITDA is also one of the financial
measures by which the Company's compliance with its covenants is calculated
under its debt agreements. The Company believes that Adjusted EBITDA is a
useful supplement to net income (loss) and other consolidated income
statement data in understanding cash flows generated from operations that
are available for taxes, debt service and capital expenditures. However,
the Company's method of computation may or may not be comparable to other
similarly titled measures of other companies. In addition, Adjusted EBITDA
is not necessarily indicative of amounts that may be available for
discretionary uses and does not reflect any legal or contractual
restrictions on the Company's use of funds.
(9) "Adjusted EBITDA with cost savings" represents the pro forma 1997 Adjusted
EBITDA plus $10.2 million of anticipated cost savings and operational
enhancements. The components of these cost savings and operational
enhancements are set forth below.
<TABLE>
<CAPTION>
COST SAVINGS CATEGORY (IN MILLIONS)
--------------------- -------------
<S> <C>
Vendor rationalization and consolidation.................. $ 3.0
Manufacturing process and productivity improvements and
product design changes.................................. 1.8
Personnel rationalization and expense reductions.......... 1.6
Advertising and trade show expense reductions............. 0.5
Aircraft, charter and other travel expense reductions..... 2.0
Elimination of the annual sales meeting................... 1.3
-----
$10.2
=====
</TABLE>
(10) "Total debt" equals total long-term debt, including current maturities.
11
<PAGE> 155
RISK FACTORS
In addition to the other information set forth herein, prospective
investors should carefully consider the following information in evaluating the
Company and its business before making an investment in the New Senior
Subordinated Notes.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
The information herein contains forward-looking statements that involve a
number of risks and uncertainties. A number of factors could cause actual
results, performance, achievements of the Company, or industry results to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. These factors include,
but are not limited to: the competitive environment in the cutting and welding
industry in general and in the Company's specific market areas; changes in
prevailing interest rates and the availability of and terms of financing to fund
the anticipated growth of the Company's business; inflation; changes in costs of
goods and services; economic conditions in general and in the Company's specific
market areas; changes in or failure to comply with federal, state and/or local
government regulations; liability and other claims asserted against the Company;
changes in operating strategy or development plans; the ability to attract and
retain qualified personnel; the significant indebtedness of the Company; labor
disturbances; changes in the Company's acquisition and capital expenditure
plans; and other factors referenced herein. In addition, such forward-looking
statements are necessarily dependent upon assumptions, estimates and dates that
may be incorrect or imprecise and involve known and unknown risks uncertainties
and other factors. Accordingly, any forward-looking statements included herein
do not purport to be predictions of future events or circumstances and may not
be realized. Forward-looking statements can be identified by, among other
things, the use of forward-looking terminology such as "believes," "expects,"
"may," "will," "should," "seeks," "pro forma" or "anticipates," "intends" or the
negative of any thereof, or other variations thereon or comparable terminology,
or by discussions of strategy or intentions. Given these uncertainties,
prospective investors are cautioned not to place undue reliance on such
forward-looking statements. The Company disclaims any obligations to update any
such factors or to publicly announce the results of any revisions to any of the
forward-looking statements contained herein to reflect future events or
developments.
SUBSTANTIAL LEVERAGE; LIQUIDITY; STOCKHOLDER'S DEFICIT
In connection with the Merger and the Merger Financing, including the
application of the proceeds therefrom, the Company incurred a significant amount
of indebtedness. As of March 31, 1998, after giving pro forma effect to the
Merger, including the Merger Financing and the application of the proceeds
thereof, the Company would have had (i) total consolidated indebtedness of
approximately $587.4 million, (ii) $66.8 million of additional borrowings
available under the New Credit Facility and (iii) a stockholder's deficit of
$334.0 million. In addition, subject to the restrictions in the New Credit
Facility and the Indenture, the Company may incur significant additional
indebtedness, which may be secured, from time to time.
The level of the Company's indebtedness could have important consequences
to the Company, including: (i) limiting cash flow available for general
corporate purposes, including acquisitions, because a substantial portion of the
Company's cash flow from operations must be dedicated to debt service; (ii)
limiting the Company's ability to obtain additional debt financing in the future
for working capital, capital expenditures or acquisitions; (iii) limiting the
Company's flexibility in reacting to competitive and other changes in the
industry and economic conditions generally; and (iv) exposing the Company to
risks inherent in interest rate fluctuations because certain of the Company's
borrowings may be at variable rates of interest, which could result in higher
interest expense in the event of increases in interest rates.
The Company's ability to make scheduled payments of principal of, to pay
interest on or to refinance its indebtedness and to satisfy its other debt
obligations will depend upon its future operating performance, which will be
affected by general economic, financial, competitive, legislative, regulatory,
business and other factors beyond its control. The Company anticipates that its
operating cash flow, together with borrowings under the New Credit Facility,
will be sufficient to meet its anticipated future operating expenses, capital
expenditures
12
<PAGE> 156
and to service its debt requirements as they become due. However, if the
Company's future operating cash flows are less than currently anticipated it may
be forced, in order to meet its debt service obligations, to reduce or delay
acquisitions or capital expenditures, sell assets or reduce operating expenses,
including, but not limited to, investment spending such as selling and marketing
expenses, expenditures on management information systems and expenditures on new
products. If the Company were unable to meet its debt service obligations, it
could attempt to restructure or refinance its indebtedness or to seek additional
equity capital. There can be no assurance that the Company will be able to
effect any of the foregoing on satisfactory terms, if at all. In addition,
subject to the restrictions and limitations contained in the agreements relating
to the Merger Financing, the Company may incur significant additional
indebtedness to finance future acquisitions, which could adversely affect the
Company's operating cash flows and its ability to service its indebtedness. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS
The Indenture restricts, among other things, the Company's ability to incur
additional indebtedness, incur liens, pay dividends or make certain other
restricted payments, enter into certain transactions with affiliates, impose
restrictions on the ability of a Restricted Subsidiary to pay dividends or make
certain payments to the Company, merge or consolidate with any other person or
sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of the assets of the Company. In addition, the New Credit
Facility contains other and more restrictive covenants and prohibits the Company
from prepaying its other indebtedness (including the Senior Subordinated Notes).
See "Description of New Credit Facility" and "Description of New Senior
Subordinated Notes -- Repurchase at the Option of Holders." The New Credit
Facility requires the Company to maintain specified financial ratios and satisfy
certain other financial condition tests. The Company's ability to meet those
financial ratios and tests can be affected by events beyond its control, and
there can be no assurance that the Company will meet those tests. A breach of
any of these covenants could result in a default under the New Credit Facility
and/or the New Senior Subordinated Notes. Upon the occurrence of an event of
default under the New Credit Facility, the lenders could elect to declare all
amounts outstanding under the New Credit Facility to be immediately due and
payable. If the Company were unable to repay those amounts, the lenders could
proceed against the collateral granted to them to secure that indebtedness. If
the lenders under the New Credit Facility accelerate, there can be no assurance
that the assets of the Company would be sufficient to repay in full such
indebtedness and the other indebtedness of the Company, including the New Senior
Subordinated Notes. Substantially all of the Company's domestic assets are
pledged as security under the New Credit Facility. See "Description of New
Credit Facility."
SUBORDINATION; ASSET ENCUMBRANCES
The New Senior Subordinated Notes will be general unsecured obligations of
the Issuers and will be subordinated in right of payment to all existing and
future Senior Indebtedness of the Issuers, including all indebtedness under the
New Credit Facility. In addition, the Note Guarantee of each Guarantor will be
subordinated to the prior payment in full of all Senior Indebtedness of such
Guarantor (including such Guarantor's guarantee of the New Credit Facility) to
the same extent that the Senior Subordinated Notes are subordinated to Senior
Indebtedness of the Company. As of March 31, 1998, on a pro forma basis after
giving effect to the Merger, including the Merger Financing and the application
of the proceeds thereof, the Company and the Guarantors would have had
outstanding approximately $379.5 million of Senior Indebtedness, all of which
would have been secured borrowings, and approximately $66.8 million of
additional revolving borrowings available under the New Credit Facility. By
reason of such subordination, in the event of the insolvency, liquidation,
reorganization, dissolution or other winding-up of the Issuers or the Guarantors
or upon a default in payment with respect to, or the acceleration of, any Senior
Indebtedness, the holders of such Senior Indebtedness and any other creditors
who are holders of Senior Indebtedness and creditors of subsidiaries, if any,
must be paid in full before the Holders of the New Senior Subordinated Notes may
be paid. If the Issuers or the Guarantors incur any additional pari passu debt,
the holders of such debt would be entitled to share ratably with the Holders of
the New Senior Subordinated Notes in any proceeds distributed in connection with
any insolvency, liquidation, reorganization, dissolution or other winding-up of
the Issuers or
13
<PAGE> 157
the Guarantors. This may have the effect of reducing the amount of proceeds paid
to Holders of the New Senior Subordinated Notes. In addition, no cash payments
may be made with respect to the New Senior Subordinated Notes during the
continuance of a payment default with respect to Senior Indebtedness and, under
certain circumstances, for a period of up to 179 days if a non-payment default
exists with respect to Senior Indebtedness. In addition, holders of indebtedness
and other liabilities of the Company's subsidiaries that are not Guarantors will
have claims that are effectively senior to the New Senior Subordinated Notes. On
a pro forma basis after giving effect to the Merger, including the Merger
Financing and the application of the proceeds thereof, as of March 31, 1998, the
Company's non-Guarantor subsidiaries would have had approximately $87.0 million
of outstanding liabilities, including trade payables. See "Description of New
Senior Subordinated Notes -- Subordination."
HOLDING COMPANY STRUCTURE
The Company currently conducts substantially all of its business through
subsidiaries. The Company is dependent on the cash flow of its subsidiaries and
distributions thereof from its subsidiaries to the Company in order to meet its
debt service obligations. Subject to the provisions of the Indenture, future
borrowings by the Company's subsidiaries may contain restrictions or
prohibitions on the payment of dividends by such subsidiaries to the Company.
See "Description of New Senior Subordinated Notes -- Certain Covenants." In
addition, under applicable state law, subsidiaries of the Company may be limited
in the amount that they are permitted to pay as dividends on their capital
stock.
POSSIBLE INABILITY TO REPURCHASE NEW SENIOR SUBORDINATED NOTES UPON CHANGE OF
CONTROL
Upon the occurrence of a Change of Control, each Holder of New Senior
Subordinated Notes will have the right to require the Issuers to repurchase all
or any part of such Holder's New Senior Subordinated Notes at an offer price in
cash equal to 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any, thereon to the date of
repurchase. No assurance can be given that the Issuers will have sufficient
resources to satisfy their repurchase obligation with respect to the New Senior
Subordinated Notes following a Change of Control. See "Description of New Senior
Subordinated Notes -- Repurchase at the Option of Holders -- Change of Control."
The New Credit Facility prohibits the Issuers from purchasing the Senior
Subordinated Notes (except in certain limited amounts) and will also provide
that certain change of control events with respect to the Issuers will
constitute a default thereunder. Any future credit agreements or other
agreements relating to Senior Indebtedness to which the Issuers become a party
may contain similar restrictions and provisions. In the event a Change of
Control occurs at a time when the Issuers are prohibited from purchasing the New
Senior Subordinated Notes, the Issuers could seek the consent of its lenders to
the purchase of the New Senior Subordinated Notes or could attempt to refinance
the borrowings that contain such prohibition. If the Issuers do not obtain such
consent or repay such borrowings, the Issuers will remain prohibited from
purchasing the New Senior Subordinated Notes by the relevant Senior
Indebtedness. In such case, the Issuers' failure to purchase the tendered New
Senior Subordinated Notes would constitute an event of default under the
Indenture which would, in turn, constitute a default under the New Credit
Facility and could constitute a default under other Senior Indebtedness. In such
circumstances, the subordination provisions in the Indenture would likely
restrict payments to the Holders of the New Senior Subordinated Notes. See
"Description of New Senior Subordinated Notes -- Subordination."
CONTROL BY THE DLJMB FUNDS
Approximately 80.6% of the outstanding shares of Holdings Common Stock are
held by the DLJMB Funds. As a result of their stock ownership, the DLJMB Funds
control Holdings (and through Holdings, the Issuers) and have the power to elect
a majority of its directors, appoint new management and approve any action
requiring the approval of the holders of Holdings Common Stock, including
adopting certain amendments to Holdings' certificate of incorporation and
approving mergers or sales of all or substantially all of Holdings' assets. The
directors elected by the DLJMB Funds will have the authority to effect decisions
affecting the capital structure of Holdings, including the issuance of
additional capital stock, the implementa-
14
<PAGE> 158
tion of stock repurchase programs and the declaration of dividends. The
interests of the DLJMB Funds may differ from the interests of the holders of the
New Notes.
The general partners of each of the DLJMB Funds are affiliates or employees
of Donaldson, Lufkin & Jenrette, Inc. ("DLJ, Inc."). DLJ Capital Funding, which
acted as syndication agent for the New Credit Facility in connection with the
Merger, is also an affiliate of DLJ, Inc. DLJSC, which placed the Senior
Subordinated Notes and the Debentures, is also an affiliate of DLJ, Inc.
The existence of a controlling stockholder of Holdings is likely to have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from seeking to acquire, a majority of the
outstanding Holdings Common Stock. A third party would be required to negotiate
any such transaction with the DLJMB Funds and the interests of the DLJMB Funds
may be different from the interests of the holders of the New Senior
Subordinated Notes.
ACQUISITION GROWTH STRATEGY; MANAGEMENT AND FUNDING OF GROWTH
The Company has historically pursued an aggressive acquisition strategy,
completing six acquisitions from September 13, 1994 to December 31, 1997, and
expects to continue to pursue such a strategy to promote its growth. There are
various risks associated with pursuing a growth strategy of this nature. Any
future growth of the Company will require the Company to manage its expanding
domestic and international operations, integrate new businesses and adapt its
operational and financial systems to respond to changes in its business
environment, while maintaining a competitive cost structure. The acquisition
strategy of the Company will continue to place significant demands on the
Company and its management to improve the Company's operational, financial and
management information systems, to develop further the management skills of the
Company's managers and supervisors, and to continue to retain, train, motivate
and effectively manage the Company's employees. The failure of the Company to
manage its prior or any future growth effectively could have a material adverse
effect on the Company. There also can be no assurance that suitable acquisition
candidates will be available or that acquisitions can be completed on reasonable
terms.
Additionally, the Company's ability to maintain and increase its revenue
base and to respond to shifts in customer demand and changes in industry trends
will be partially dependent on its ability to generate sufficient cash flow or
obtain sufficient capital for the purpose of, among other things, financing
acquisitions, satisfying customer contractual requirements and financing
infrastructure growth. There can be no assurance that the Company will be able
to generate sufficient cash flow or that financing will be available on
acceptable terms (or permitted to be incurred under the terms of the Merger
Financing and any future indebtedness) to fund the Company's future growth.
CYCLICALITY AND MATURITY OF THE CUTTING AND WELDING INDUSTRY
The cutting and welding industry in the United States is a mature industry
that is cyclical in nature. The substitution of plastic, concrete and other
materials impacts the use of fabricated metal parts in many products and
structures. Increased offshore manufacturing by United States companies has
contributed to slow growth rates in the domestic manufacturing industry and in
turn has led to slower growth in the United States cutting and welding industry.
During periods of economic expansion the cutting and welding industry has grown
at double digit rates but has experienced contraction during periods of slowing
industrial activity. There can be no assurance that during future periods of
economic expansion the cutting and welding industry will experience the same
growth rates as it has in the past. Although the Company believes that its
exposure to cyclical downturns is moderated by its broad customer base and the
diversity of the industries it serves, cyclical downturns could have an adverse
effect on period-to-period results.
INTERNATIONAL MARKETS
The Company's growth strategy includes increasing the marketing of existing
products into Europe, Asia, Latin America and other developing economies.
However, there can be no assurance that the Company will be successful in its
expansion efforts.
15
<PAGE> 159
Approximately 42% of the Company's net sales in 1997 (including its United
States third party export sales) were made to purchasers located in foreign
countries. Because of its foreign operations, the Company's business is subject
to the currency risks of doing business abroad, including exchange rate
fluctuations and limits on repatriation of funds.
Additionally, as a result of the current downturn in the Asian economy,
there may be a decrease in infrastructure development in the Asian region or an
overall worldwide contraction of industrial development. The impact of decreased
development could have a material adverse effect on the Company's business,
financial condition or results of operations.
Further, many developing economies have a significant degree of political
and economic uncertainty. Social unrest, the absence of trained labor pools and
the uncertainty of entering into joint ventures or other partnership
arrangements with local organizations have slowed business activities in some
large developing economies. The political and economic uncertainties present in
these promising growth markets may adversely impact the Company's ability to
implement and achieve its foreign growth objectives.
COMPETITION
The cutting and welding industry is highly competitive. While the Company
believes it is one of only a few worldwide broad line manufacturers of both
cutting and welding equipment and consumable products, the Company competes in
each of its businesses with other broad line manufacturers and numerous smaller
competitors specializing in particular products.
While the Company has historically experienced little direct foreign
competition in the United States market, fluctuations in the value of the United
States dollar against other currencies could make the United States market more
attractive to foreign exporters.
The Company currently experiences substantial competition in the foreign
markets in which it competes.
DEPENDENCE ON KEY PERSONNEL
The Company's continued success depends, to a large extent, upon the
efforts and abilities of key managerial employees, particularly Holdings'
executive officers. See "Management." Although Holdings has employment
agreements with all of its executive officers, there can be no assurance that
such persons will remain in the employ of the Company. Competition for qualified
management personnel in the industry is intense. The loss of the services of
certain of these key employees or the failure to retain qualified employees when
needed could have a material adverse effect on the Company's business, financial
condition or results of operations. See "Executive Compensation -- Employment
Arrangements -- Employment Contracts." The Company does not currently maintain
key man life insurance.
ENVIRONMENTAL MATTERS
The Company's operations are subject to federal, state, local and foreign
laws and regulations relating to the storage, handling, generation, treatment,
emission, release, discharge and disposal of certain substances and wastes. As a
result, the Company is involved from time to time in administrative or legal
proceedings relating to environmental matters and has in the past and will
continue to incur capital costs and other expenditures relating to environmental
matters. Liability under environmental laws may be imposed on current and prior
owners and operators of property or businesses without regard to fault or to
knowledge about the condition or action causing the liability. The Company may
be required to incur costs relating to the remediation of properties, including
properties at which the Company disposes of waste, and environmental conditions
could lead to claims for personal injury, property damage or damages to natural
resources. The Company is aware of environmental conditions at certain
properties which it now or previously owned or leased which are undergoing
remediation and the Company has in the past and may in the future be named a
potentially responsible party ("PRP") at off-site disposal sites to which it has
sent waste.
The Company believes, based on current information, that any costs it may
incur relating to environmental matters will not have a material adverse effect
on its business, financial condition or its result of operations.
16
<PAGE> 160
There can be no assurance, however, that the Company will not incur significant
fines, penalties or other liabilities associated with noncompliance or clean-up
liabilities or that future events, such as changes in laws or the interpretation
thereof, the development of new facts or the failure of other PRPs to pay their
share will not cause the Company to incur additional costs that could have a
material adverse effect on its business, financial condition or results of
operations. See "Business -- Legal Proceedings and Environmental Matters."
TRADING MARKET FOR THE NEW SENIOR SUBORDINATED NOTES
There is no existing trading market for the New Senior Subordinated Notes,
and there can be no assurance regarding the future development of a market for
the New Senior Subordinated Notes or the ability of the Holders of the New
Senior Subordinated Notes to sell their New Senior Subordinated Notes or the
price at which such Holders may be able to sell their New Senior Subordinated
Notes. If such market were to develop, the New Senior Subordinated Notes could
trade at prices that may be higher or lower than their initial offering price
depending on many factors, including prevailing interest rates, the Company's
operating results and the market for similar securities. Although it is not
obligated to do so, DLJSC intends to make a market in the New Senior
Subordinated Notes. Any such market-making activity may be discontinued at any
time, for any reason, without notice at the sole discretion of DLJSC. No
assurance can be given as to the liquidity of or the trading market for the New
Senior Subordinated Notes.
DLJSC may be deemed to be an affiliate of the Issuers and, as such, may be
required to deliver a prospectus in connection with its market-making activities
in the New Senior Subordinated Notes. Pursuant to the Registration Rights
Agreement, the Issuers and the Guarantors agreed to use their respective best
efforts to file and maintain a registration statement that would allow DLJSC to
engage in market-making transactions in the New Senior Subordinated Notes for up
to 90 days from the date on which the exchange of New Senior Subordinated Notes
for Old Senior Subordinated Notes is consummated. The Issuers have agreed to
bear substantially all the costs and expenses related to such registration
statement.
YEAR 2000
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. The Company believes that its
internal systems are Year 2000 compliant or will be upgraded or replaced in
connection with previously planned changes to information systems prior to the
need to comply with Year 2000 requirements. However, the Company is uncertain as
to the extent its customers and vendors may be affected by Year 2000 issues that
require commitment of significant resources and may cause disruptions in the
customers' and vendors' businesses.
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<PAGE> 161
USE OF PROCEEDS
This Prospectus is delivered in connection with the sale of the New Senior
Subordinated Notes by DLJSC in market-making transactions. The Issuers will not
receive any of the proceeds from such transactions.
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<PAGE> 162
CAPITALIZATION
The following table sets forth the historical consolidated capitalization
of the Company as of March 31, 1998, and on a pro forma basis to give effect to
the Merger, including the Merger Financing and the application of the proceeds
thereof, as if they had occurred on March 31, 1998. The information set forth
below should be read in conjunction with the Company's Unaudited Condensed
Consolidated Pro Forma Financial Data, the Company's Consolidated Financial
Statements and the related notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
----------------------------
HISTORICAL PRO FORMA(1)
---------- ------------
(IN MILLIONS)
<S> <C> <C>
Cash and cash equivalents.................................. $ 0.2 $ 0.2
======= =======
Total debt (including current portion):
New Credit Facility:
Revolving credit facility........................ -- $ 33.2
Term loan facility............................... -- 330.0
Capitalized lease obligations and other debt.......... $ 18.8 18.8
Outstanding subordinated notes........................ 179.3 --
Outstanding senior notes.............................. 99.3 --
Other existing debt................................... 73.1 --
Senior Subordinated Notes............................. -- 205.4
------- -------
Total debt....................................... 370.4 587.4
Shareholders' deficit...................................... (156.8) (334.0)
------- -------
Total capitalization....................................... $ 213.6 $ 253.4
======= =======
</TABLE>
- ---------------
(1) For a description of the pro forma adjustments, see the Notes to Unaudited
Condensed Consolidated Pro Forma Balance Sheet Data.
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<PAGE> 163
SELECTED FINANCIAL DATA
The selected financial data for and as of each of the years in the
five-year period ended December 31, 1997 set forth below have been derived from
the audited Consolidated Financial Statements of the Company's predecessor,
Holdings. The historical financial data for the three-month periods ended March
31, 1998 and 1997 are derived from unaudited financial statements. The unaudited
financial statements include all adjustments, consisting only of normal
recurring adjustments, which the Company considers necessary for a fair
presentation of the financial position and the results of operations for these
periods. Operating results for the three-month period ended March 31, 1998 are
not necessarily indicative of the results that may be expected for the entire
year ending December 31, 1998. The data should be read in conjunction with the
historical consolidated financial statements of the Company and its predecessor,
and the related notes thereafter, set forth elsewhere herein. In 1996, Holdings
announced plans to sell, and in 1997 consummated the sale of, its wear
resistance business; in late 1995, Holdings announced its plans to sell, and in
1996 consummated the sale of, its gas containment and floor maintenance
businesses. These businesses are accounted for as discontinued operations in
Holdings' Consolidated Financial Statements. The selected financial data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Holdings' Consolidated Financial
Statements and Notes thereto, in each case included elsewhere herein.
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
----------------------------------------------------------------- ------------
THREE MONTHS ENDED FISCAL YEAR
MARCH 31, FISCAL YEARS ENDED DECEMBER 31, ENDED
------------------------- ------------------------------------- DECEMBER 31,
1998 1997 1997 1996 1995 1994(1) 1993
----------- ----------- ------- ------- ------- ------- ------------
(UNAUDITED) (UNAUDITED) (IN MILLIONS, EXCEPT FOR RATIO DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS DATA(2):
Net sales..................... $ 131.8 $117.8 $ 520.4 $ 439.7 $ 316.8 $ 258.1 $ 248.3
Cost of goods sold............ 81.8 70.3 320.0 259.8 176.0 141.1 132.2
Selling, general and
administrative expenses..... 27.1 26.3 110.7 95.9 74.7 60.0 57.8
Amortization of goodwill(3)... 0.4 0.4 1.6 83.0 92.9 83.9 4.5
Amortization of
intangibles(4).............. 0.5 1.7 6.8 12.4 48.4 10.7 8.7
Net periodic postretirement
benefits.................... 0.6 0.6 2.8 2.7 2.1 2.1 3.6
------- ------ ------- ------- ------- ------- -------
Operating income (loss)....... 21.4 18.5 78.5 (14.1) (77.3) (39.7) 41.5
Interest expense.............. 10.8 11.5 45.3 45.7 41.3 39.1 66.9
Other expense, net(5)......... 0.2 0.1 4.7 3.7 4.8 2.0 27.4
Income (loss) from continuing
operations available to
common...................... 5.8 3.9 15.1 (62.9) (131.8) (85.1) (53.4)
CONSOLIDATED BALANCE SHEET DATA
(AT PERIOD END):
Cash and cash equivalents..... $ 0.2 $ 7.5 $ 1.5 $ 1.4 $ 1.8 $ 7.3 $ 15.0
Working capital(6)............ 104.3 121.4 88.5 67.6 52.3 81.5 65.8
Total assets.................. 372.5 386.6 354.5 353.4 416.4 627.8 517.5
Total debt(7)................. 370.4 444.1 358.1 421.3 456.5 497.7 693.3
Total stockholders' equity
(deficit)................... (156.8) (184.5) (162.8) (185.3) (132.2) 20.6 (307.9)
OTHER DATA:
Adjusted EBITDA(8)............ $ 26.5 $ 24.0 $ 102.1 $ 95.7 $ 74.6 $ 62.7 $ 63.8
Depreciation.................. 3.6 2.9 12.5 11.7 8.5 5.7 5.6
Capital expenditures.......... 3.8 2.4 16.3 11.4 7.2 8.0 5.0
Ratio of earnings to fixed
charges(9).................. 1.9x 1.5x 1.6x -- -- -- --
</TABLE>
- ---------------
(1) Represents the eleven-month period from February 1, 1994, the effective date
of the Restructuring, through December 31, 1994.
(2) See "Business -- Business Strategy" and the discussion under the caption
"Recent Events -- Acquisitions" in Note 2 to Holdings' Consolidated
Financial Statements for information concerning the Company's business
combinations occurring during the periods presented.
20
<PAGE> 164
(3) In conjunction with the Restructuring, Holdings' assets and liabilities were
revalued at the effective date thereof. The assets and liabilities were
stated at their reorganization value. The portion of the reorganization
value not attributable to specific assets was amortized over a three year
period.
(4) Includes $33.0 million in 1995 related to the writedown of intangible assets
in accordance with Financial Accounting Standards Board Statement No. 121.
(5) During 1993, nonrecurring charges of $18.9 million were recorded resulting
from writing off unamortized debt discount and deferred financing costs and
other costs related to the Restructuring.
(6) Excludes net assets of discontinued operations for 1995 and 1996.
(7) For 1993, includes liabilities subject to compromise of $466.2 million.
(8) "Adjusted EBITDA" is defined as operating income plus depreciation,
amortization of goodwill, amortization of intangibles and net periodic
postretirement benefits expense and is a key financial measure but should
not be construed as an alternative to operating income or cash flows from
operating activities (as determined in accordance with generally accepted
accounting principles). Adjusted EBITDA is also one of the financial
measures by which the Company's compliance with its covenants is calculated
under its debt agreements. The Company believes that Adjusted EBITDA is a
useful supplement to net income (loss) and other consolidated income
statement data in understanding cash flows generated from operations that
are available for taxes, debt service and capital expenditures. However, the
Company's method of computation may or may not be comparable to other
similarly titled measures of other companies. In addition, Adjusted EBITDA
is not necessarily indicative of amounts that may be available for
discretionary uses and does not reflect any legal or contractual
restrictions on the Company's use of funds.
(9) For purposes of calculating the ratio of earnings to fixed charges, earnings
consist of income before income taxes plus fixed charges. Fixed charges
consist of interest expense, amortization of deferred financing costs and
one-third of the rent expense from operating leases, which management
believes is a reasonable approximation of the interest component of rent
expense. Earnings were not sufficient to cover fixed charges by $52.8
million, $80.8 million, $123.3 million and $63.5 million for the fiscal
years ended December 31, 1993, 1994, 1995 and 1996, respectively.
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<PAGE> 165
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Holdings'
Consolidated Financial Statements including the notes thereto.
This discussion contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors."
OVERVIEW
Thermadyne, through its subsidiaries, is engaged in the design, manufacture
and distribution of cutting and welding products and accessories. Since 1993,
the Company has embarked on a strategy designed to focus its business
exclusively on the cutting and welding industry and enhance the Company's market
position within that industry.
The Company divested three non-core businesses: the Coyne Cylinder Company
(1996), the Clarke floor maintenance business (1996) and the Deloro Stellite
wear resistance business (1997). In addition, since 1993, the Company acquired
six cutting and welding businesses, which businesses collectively generated
approximately $169 million in annual revenue at the respective times of
acquisition, in order to broaden the Company's product offerings and expand the
Company's worldwide geographic coverage. The acquisitions of Modern Engineering
Company (1994), C&G Systems Inc. (1995), Arcsys (1997), and Woodland (1997) all
added additional or complementary product lines to the Company's product
offering. The acquisition of Cigweld (1996), an Australian based manufacturer of
welding products, provided the Company with new product offerings as well as a
significant market position in Australia and New Zealand and positioned the
Company to effectively compete in the growing Asian market. The acquisition of
GenSet (1997), an Italian manufacturer of engine-driven welders, extended the
Company's product line globally and increased the Company's European presence.
Thermadyne plans to continue its focused acquisition strategy to acquire
businesses that augment its product offering and/or geographic coverage.
The Company's revenue is now generated entirely by the sale of cutting and
welding equipment, accessories and consumables. Consumables include tips,
electrodes, parts and other products that are required to be periodically
replaced. Consumable sales accounted for over 40% of total revenue in 1997 and
are expected to continue generating a significant percentage of revenue in the
future.
As a result of the Merger, the Company and Mercury incurred various costs
in connection with consummating the transaction. See Note 2 to the Unaudited
Condensed Consolidated Pro Forma Statement of Operations for a more detailed
explanation of these expenses. While the exact timing, nature and amount of
these costs have not yet been fully determined, the Company anticipates that a
significant one-time pretax charge will be recorded in its second fiscal
quarter. As a result of the foregoing, the Company expects to record a
significant net loss in its second fiscal quarter. Because this loss will result
directly from the one-time charge incurred in connection with the Merger, and
this charge will be funded entirely through the proceeds of the Merger
Financing, the Company does not expect this loss to materially impact its
liquidity, ongoing operations or market position.
COST REDUCTION INITIATIVES
Thermadyne strives to continually improve manufacturing efficiencies and
reduce unit costs. In December 1997, the Company implemented a cost reduction
program that includes the following principal elements: (i) vendor
rationalization and consolidation; (ii) manufacturing process and productivity
improvements and product design changes; (iii) personnel rationalization and
expense reductions; (iv) advertising and trade show expense reductions; (v)
aircraft, charter and other travel expense reductions; and (vi) elimination of
the annual sales meeting. These cost reduction initiatives are expected to
generate approximately $10 million in savings on an annualized basis. In
addition, the Company has initiated the implementation of a new global
22
<PAGE> 166
information system that is designed to allow the Company to further integrate
administrative functions and improve information flow across business unit
lines.
RESULTS OF OPERATIONS
The following discussion of results of operations is presented for the
fiscal years ended December 31, 1997, 1996 and 1995 and the three months ended
March 31, 1998 and 1997. The results of operations of the Company include the
operations of C&G, Cigweld, GenSet, Arcsys and Woodland from their respective
dates of acquisition.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31,
1997
Net Sales
Net sales were $131.8 million for the three months ended March 31, 1998
compared to $117.8 million for the three months ended March 31, 1997, an
increase of 12.0%. Domestic sales for the first three months of 1998 were up
20.3% (10.5% excluding acquisitions) over the first three months of 1997.
International sales increased approximately 1.0% overall despite the continuing
economic turmoil in Asia. Europe, Latin America and the Middle East regions all
recorded significant increases over the prior year.
Costs and Expenses
Cost of goods sold as a percentage of sales for the quarter ended March 31,
1998 was 62.0% compared to 59.7% for the quarter ended March 31, 1997. This
increase is the result of (i) recent acquisitions, which generally carry a
somewhat lower average gross margin than the Company's existing businesses, and
(ii) sales mix, as the Company expanded its product offering including items in
more price-competitive markets.
Selling, general and administrative expenses were $27.1 million for the
first three months of 1998, an increase of $0.8 million, or 3.0% over the first
three months of 1997. As a percentage of sales, selling, general and
administrative expenses were 20.5% for the three months ended March 31, 1998 and
22.3% for the three months ended March 31, 1997. This improvement is due in part
to the Company's growth in sales, as well as the realization of savings from a
cost reduction program the Company initiated in December 1997.
Interest expense decreased from $11.5 million in the first quarter of 1997
to $10.8 million in the first quarter of 1998, a decrease of $0.7 million or
6.1%. This decrease is largely the result of lower debt levels in 1998 compared
to 1997.
Income tax provision was $4.6 million on pre-tax income of $10.4 million
for the three months ended March 31, 1998, compared to an income tax provision
of $3.0 million on pre-tax income of $6.9 million for the three months ended
March 31, 1997.
Adjusted EBITDA
Adjusted EBITDA was $26.5 million for the quarter ended March 31, 1998,
compared to $24.0 million for the quarter ended March 31, 1997, an increase of
$2.5 million or 10.5%.
FISCAL 1997 COMPARED TO FISCAL 1996
Net Sales
Net sales from continuing operations for the year ended December 31, 1997
were $520.4 million, compared to net sales of $439.7 million for the year ended
December 31, 1996, an increase of $80.7 million, or 18.4%. Domestic and
international sales increased 12.0% and 28.3%, respectively in 1997. Included in
net sales for the year ended December 31, 1997 are sales of $32.9 million
related to GenSet, which was acquired effective February 1, 1997, $5.6 million
related to Arcsys, which was acquired on September 26, 1997 and $0.2 million
related to Woodland, which was acquired on November 25, 1997. Excluding sales
from these acquired companies, net sales from continuing operations increased
$42.0 million, or 9.6%. New product
23
<PAGE> 167
introductions and the addition of products through acquisition have been the
most significant growth factors in domestic sales. Success with new marketing
programs and with sales through alternate channels have also contributed to this
increase. Sales in international markets have increased as a result of strategic
initiatives in Asia and Latin America, and the addition of sales personnel.
Costs and Expenses
Cost of goods sold from continuing operations as a percentage of sales for
the year ended December 31, 1997 was 61.5% compared to 59.1% for the year ended
December 31, 1996. This change is largely due to the 1997 acquisitions as these
new product lines have lower average gross margins than the blended margin in
the Company's existing businesses. Excluding the effect of the 1997
acquisitions, cost of goods sold as a percentage of sales would have been 59.9%.
Selling, general and administrative expenses from continuing operations
increased 15.4% to $110.7 million for the year ended December 31, 1997 from
$95.9 million for the year ended December 31, 1996. The 1997 acquisitions added
$4.6 million of this $14.8 million increase. The remainder of this increase is
mostly the result of spending in Asia and Latin America related to internal
infrastructure and business development as the Company pursues increased market
share in these regions. As a percentage of sales, selling, general and
administrative expenses from continuing operations decreased to 21.3% for the
year ended December 31, 1997 from 21.8% for the year ended December 31, 1996.
Amortization of goodwill decreased $81.4 million to $1.6 million for the
year ended December 31, 1997 from $83.0 million for the year ended December 31,
1996. Goodwill amortization in 1997 relates to acquisitions since the Company's
1994 financial reorganization. In 1996, goodwill recorded in connection with the
reorganization was reduced, in part, by the initial recognition of certain
deferred tax assets existing on the effective date of the Company's
comprehensive financial restructuring and the remaining amount associated with
the reorganization became fully amortized. Amortization of other intangibles
decreased from $12.4 million to $6.8 million for the years ended December 31,
1996 and 1997, respectively. This $5.6 million, or 45.3%, decrease results from
the initial recognition of the net deferred tax asset as well as adjustments
during 1997 resulting from the recognition of net operating loss carryforward
benefits and the sale of the wear resistance business.
Interest expense was essentially the same for 1997 as in 1996, even though
the Company's overall debt level decreased $63.3 million over the course of the
year. This is due to the acquisition of GenSet in February 1997 which resulted
in a higher overall debt balance the first nine months of the year. Cash
proceeds from the sale of discontinued operations were used to reduce debt at
the end of the third quarter of 1997.
Income tax expense was $13.5 million for the year ended December 31, 1997
compared to an income tax benefit of $0.5 million for the year ended December
31, 1996. The income tax benefit recorded in the fourth quarter of 1996 includes
a $13.8 million income tax benefit resulting from the initial recognition of the
Company's net deferred tax asset. The Company's decision to record the net
deferred tax asset was based on an analysis of actual taxable income in the
available carryback period and taxable income expected to be generated in the
succeeding three years. Based on this analysis, the Company believes that it is
more likely than not that the recorded net deferred tax asset will be realized.
Adjusted EBITDA
Adjusted EBITDA from continuing operations was $102.1 million and $95.7
million for the years ended December 31, 1997 and 1996, respectively. As a
percentage of sales, Adjusted EBITDA was 19.6% for the year ended December 31,
1997 compared to 21.8% for the year ended December 31, 1996. For a description
of the term "Adjusted EBITDA," see Note 9 to "Summary -- Summary Historical and
Unaudited Pro Forma Condensed Consolidated Financial Information."
24
<PAGE> 168
Recent Accounting Pronouncements
As of January 1, 1998, the Company adopted FASB Statement 130, "Reporting
Comprehensive Income" ("Statement 130"). Statement 130 establishes new rules for
the reporting and display of comprehensive income and its components; however,
the adoption of this Statement had no impact on the Company's net income or
shareholder's equity. Statement 130 requires foreign currency translation
adjustments, which prior to adoption were reported separately in shareholder's
equity, to be included in other comprehensive income. Prior year financial
statements have been reclassified to conform to the requirements of Statement
130.
In June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("FASB 131"), which requires
publicly-held companies to report financial and descriptive information about
its operating segments in financial statements issued to shareholders for
interim and annual periods. The statement also requires additional disclosures
with respect to products and services, geographical areas of operations, and
major customers. FASB 131 is effective for fiscal years beginning after December
15, 1997 and requires restatement of earlier periods presented. The Company is
evaluating the impact of adopting this standard.
FISCAL 1996 COMPARED TO FISCAL 1995
Net Sales
Net sales from continuing operations were $439.7 million for the year ended
December 31, 1996, representing an increase of $123.0 million, or 38.8%, over
comparable net sales for the year ended December 31, 1995. This increase
includes $100.2 million related to Cigweld, which was acquired effective
February 1, 1996. Excluding the effects of Cigweld, net sales from continuing
operations increased $22.8 million, or 7.2%, over 1995. This growth was realized
over all of the Company's key product lines and was the result of emphasis on
new product development, sales force expansion and increasing the Company's
international presence. The Company's overall sales increase came from domestic
growth of 7.5% and an increase in international business of 154.4% including the
effects of Cigweld. Sales have increased in all the Company's major
international markets, particularly Asia and Latin America which are two of the
key geographic areas the Company has targeted for growth.
Costs and Expenses
Cost of goods sold from continuing operations for the year ended December
31, 1996 was 59.1% of sales, which compares to 55.5% of sales for the year ended
December 31, 1995. This increase in percent of sales was expected upon
completion of the acquisition of Cigweld as the average gross margin on Cigweld
products is lower than the Company's existing businesses' blended margin.
Excluding the effect of Cigweld, cost of goods sold would have been 54.6% of
sales with the improvement over 1995 due primarily to a more favorable sales
mix.
Selling, general and administrative expenses from continuing operations
increased $21.2 million, or 28.4%, to $95.9 million for the year ended December
31, 1996. The acquisition of Cigweld accounts for $17.2 million of this
increase. As a percentage of sales, selling, general and administrative expenses
were 21.8% for the 12 months ended December 31, 1996 compared to 23.6% for the
twelve months ended December 31, 1995.
Amortization of other intangibles has decreased from 1995 due to the early
adoption of Financial Accounting Standards Board Statement No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," during the fourth quarter of 1995, which resulted in a writedown of those
assets of approximately $33.0 million.
Interest expense increased $4.4 million to $45.7 million for the year ended
December 31, 1996 from $41.3 million for the year ended December 31, 1995. This
increase results primarily from debt incurred in the acquisition of Cigweld.
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<PAGE> 169
A tax benefit of $0.5 million was reported for the year ended December 31,
1996 compared to tax expense of $8.5 million reported for the year ended
December 31, 1995. In the fourth quarter of 1996, the Company reevaluated the
realizability of its net deferred tax asset, and consequently, recorded a $13.8
million reduction in income tax expense. The Company's decision to record the
net deferred tax asset was based on an analysis of actual taxable income in the
available carryback period and taxable income expected to be generated in the
succeeding three years. Based on this analysis, the Company believes that it is
more likely than not that the recorded net deferred tax asset will be realized.
Adjusted EBITDA
Adjusted EBITDA from continuing operations was $95.7 million for the twelve
months ended December 31, 1996 compared to $74.6 million for the twelve months
ended December 31, 1995. As a percentage of sales, Adjusted EBITDA was 21.8% for
the year ended December 31, 1996, compared to 23.6% for 1995. Excluding Cigweld
the Adjusted EBITDA percentage for 1996 would have been 24.8%.
Discontinued Operations
Excluding the effects of accounting for the wear resistance business as
discontinued operations, net sales and Adjusted EBITDA for the twelve months
ended December 31, 1996, were $546.1 million and $110.5 million, respectively,
increases of 31.9% and 24.4%, respectively, over the twelve months ended
December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital and Cash Flows. Cash used in operating activities was $9.1
million for the first quarter of 1998, a decrease of $12.0 million from the
first quarter of 1997, in which cash flow from operations provided $2.9 million.
This use of cash by operating activities is the result of a net increase in
operating assets and liabilities of $12.9 million. Net cash used in investing
activities decreased from $22.2 million in the first quarter of 1997 to $4.7
million in the first quarter of 1998. Cash used for acquisitions decreased $27.1
million and was offset by an increase in capital expenditures of $1.4 million
and a decrease in cash provided by other assets of $8.9 million. Cash provided
by financing activities decreased $12.9 million to $12.6 million for the quarter
ended March 31, 1998 from $25.4 million for the quarter ended March 31, 1997.
Net borrowings of long-term debt decreased $12.0 million in a comparison of
these same periods. In addition, the accounts receivable securitization program
provided $4.3 million less in the first three months of 1998 compared to 1997,
while financing activities of discontinued operations and other financing
activities used $1.2 million and $2.0 million less in the first quarter of 1998,
respectively.
Cash provided by operating activities was $15.0 million for the year ended
December 31, 1997 compared to $21.5 million for the year ended December 31,
1996. This decrease in cash provided by operating activities is the result of a
net increase in operating assets and liabilities in 1997 compared to 1996 of
$7.3 million, partially offset by an increase in earnings (adjusted for noncash
expenses) of $0.8 million in 1997 over 1996. Net cash provided by investing
activities was $36.8 million in 1997 compared to $18.7 million in 1996. Cash
used for acquisitions decreased $36.1 million and cash proceeds from the sale of
discontinued operations decreased $23.8 million in 1997 compared to 1996. In
addition, cash used for capital expenditures increased $4.9 million and other
assets provided $8.6 million more in 1997. Net cash used in financing activities
was $51.7 million for the year ended December 31, 1997, an increase of $11.1
million over the use of $40.6 million for the year ended December 31, 1996. The
net repayment of long-term obligations was $28.1 million higher in 1997 than in
1996. This was partially offset by an increase in cash provided by the accounts
receivable securitization of $15.6 million and a decrease in cash used by
financing fees of $3.9 million in the year ended December 31, 1997 compared to
the same period of 1996.
Capital Expenditures. The Company had $16.3 million of capital expenditures
related to continuing operations in 1997. The New Credit Facility contains
restrictions on the Company's ability to make capital expenditures. Based on
present estimates, management believes that the amount of capital expenditures
26
<PAGE> 170
permitted to be made under the New Credit Facility will be adequate to maintain
the properties and businesses of the Company's continuing operations.
Liquidity. The Company's principal sources of liquidity are cash flow from
operations and borrowings under the New Credit Facility. The Company's principal
uses of cash will be debt service requirements, capital expenditures,
acquisitions and working capital. The Company expects that ongoing requirements
for debt service, capital expenditures and working capital will be funded from
operating cash flow and borrowings under the New Credit Facility. In connection
with future acquisitions, the Company may require additional funding which may
be provided in the form of additional debt, equity financing or a combination
thereof. There can be no assurance that any such additional financing will be
available to the Company on acceptable terms.
The Company incurred substantial indebtedness in connection with the Merger
and the Merger Financing. On a pro forma basis, after giving effect to the
Merger, the Merger Financing and the application of the proceeds thereof, the
Company would have had approximately $587.4 million of indebtedness outstanding
as of March 31, 1998 as compared to $370.4 million of indebtedness outstanding
as of March 31, 1998 on a historical basis. In addition, on the same pro forma
basis, the Company would have a stockholders' deficit of $334.0 million at March
31, 1998 as compared to a stockholders' deficit of $156.8 million as of March
31, 1998 on a historical basis. The Company's significant debt service
obligations following the Merger could, under certain circumstances, have
material consequences to security holders of the Company. See "Risk Factors."
In connection with the Merger, Mercury raised approximately $140 million
through the issuance of approximately 2,608,696 shares of Mercury Common Stock,
2,000,000 shares of Mercury Preferred Stock and the DLJMB Warrants to purchase
353,428 shares of Mercury Common Stock at an exercise price of $0.01 per share,
and approximately $94.6 million aggregate gross proceeds of the Debentures. As a
result of the Merger, the proceeds from the sale of such securities became an
asset of Holdings, each share of Mercury Common Stock became a share of Holdings
Common Stock, each share of Mercury Preferred Stock became a share of Holdings
Preferred Stock, each DLJMB Warrant by its terms became exercisable for an equal
number of shares of Holdings Common Stock and Holdings succeeded to the
obligations of Mercury with respect to the Debentures. In addition, the Company
raised approximately $205.4 million through the issuance of the Senior
Subordinated Notes and $430 million through the New Credit Facility. In
addition, in connection with the Merger, certain members of senior management
purchased 143,192 shares of Holdings Common Stock for approximately $4.9 million
through the Management Share Purchase, of which approximately $3.6 million was
provided through the Management Loans.
The term loan facility under the New Credit Facility consists of (i) a $100
million Term A loan, (ii) a $115 million Term B loan and (iii) a $115 million
Term C loan. The Term A loan will mature six years after the closing date, the
Term B Loan will mature seven years after the closing date and the Term C loan
will mature eight years after the closing date. The New Credit Facility also
includes a $100 million revolving credit facility, which is subject to increase
by up to $25 million upon request by the Company and that will terminate six
years after the closing date.
Borrowings under the New Credit Facility generally will bear interest based
on a margin over, at the Company's option, the base rate or LIBOR. The
applicable margin will vary based on the Company's ratio of consolidated
indebtedness to adjusted EBITDA. The Company's obligations under the New Credit
Facility will be secured by substantially all of the assets of the Company,
including a pledge of the capital stock of all of its subsidiaries, subject to
certain limitations with respect to foreign subsidiaries. In addition, Holdings
has guaranteed the obligations of the Company under the New Credit Facility.
Such guarantee is only recourse to Holdings' pledge of all of the outstanding
capital stock of the Company to secure the Company's obligations under the New
Credit Facility. The New Credit Facility contains customary covenants and events
of default including substantial restrictions on the Company's ability to make
dividends or other distributions to Holdings.
The Debentures were issued by Mercury, became obligations of Holdings
following the Merger and are not guaranteed by the Company or any of its
consolidated subsidiaries. The Debentures will mature in 2008
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and will not require cash interest payments until 2003. The Debentures contain
customary covenants and events of default, including covenants that limit the
ability of the Company and its subsidiaries to incur debt, pay dividends and
make certain investments.
The Senior Subordinated Notes were issued by the Issuers and are guaranteed
by certain of the Company's domestic subsidiaries. The Senior Subordinated Notes
will mature in 2008. Interest on the Senior Subordinated Notes will be payable
semiannually in cash. The Senior Subordinated Notes contain customary covenants
and events of default, including covenants that limit the ability of the Company
and its subsidiaries to incur debt, pay dividends and make certain investments.
The Company anticipates that its operating cash flow, together with
borrowings under the New Credit Facility, will be sufficient to meet its
anticipated future operating expenses, capital expenditures and to service its
debt requirements as they become due. However, the Company's ability to make
scheduled payments of principal of, to pay interest on or to refinance its
indebtedness and to satisfy its other debt obligations will depend upon its
future operating performance, which will be affected by general economic,
financial, competitive, legislative, regulatory, business and other factors
beyond its control. See "Risk Factors."
EFFECT OF INFLATION; SEASONALITY
Inflation has not been a material factor affecting the Company's business.
In recent years, the cost of electronic components has remained relatively
stable due to competitive pressures within the industry, which has enabled the
Company to contain its service costs. The Company's general operating expenses,
such as salaries, employee benefits, and facilities costs, are subject to normal
inflationary pressures.
The operations of the Company are generally not subject to seasonal
fluctuations.
YEAR 2000 COMPLIANCE
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. The Company believes that its
internal systems are Year 2000 compliant or will be upgraded or replaced in
connection with previously planned changes to information systems prior to the
need to comply with Year 2000 requirements. However, the Company is uncertain as
to the extent its customers and vendors may be affected by Year 2000 issues that
require commitment of significant resources and may cause disruptions in the
customers' and vendors' businesses.
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BUSINESS
OVERVIEW
Thermadyne is a leading global manufacturer of cutting and welding products
and accessories. The Company manufactures a broad range of gas (oxy-fuel) and
electric arc cutting and welding products that are ultimately sold to end-user
customers principally engaged in the aerospace, automotive, construction, metal
fabrication, mining, mill and foundry, petroleum and shipbuilding industries.
Thermadyne sells its products through a long-established domestic network of
approximately 1,100 independent distributors who market Thermadyne products to
over 10,000 end-user customers. For the twelve months ended March 31, 1998, the
Company's net sales and Adjusted EBITDA, on a pro forma basis, were $548.2
million and $115.5 million, respectively.
The Company's core products enjoy leading brand recognition, a reputation
for quality and strong market positions. In 1994, following the Company's
comprehensive financial restructuring under chapter 11 of the United States
Bankruptcy Code (the "Restructuring"), current management initiated a series of
transactions to focus the Company's business exclusively on the cutting and
welding industry. As part of this strategy, the Company divested three non-core
businesses: the Clarke floor maintenance business (1996); the Coyne Cylinder
Company (1996); and the Deloro Stellite wear resistance business (1997). In
addition, the Company initiated an acquisition strategy, purchasing six cutting
and welding products businesses since the Restructuring, which businesses
collectively generated approximately $169 million in annual revenues at the
respective times of acquisition. The acquisitions of cutting and welding
businesses provided, and will continue to provide, an opportunity for Thermadyne
to expand distribution of existing product lines into new geographic regions and
to sell acquired product lines through Thermadyne's existing distribution
network. As a result of this repositioning strategy, along with ongoing new
product introductions, an extensive distribution network and market leading
brands, the Company has achieved a compound annual growth in net sales and
Adjusted EBITDA of 20.3% and 12.5%, respectively, from 1993 to 1997.
According to the United States Department of Commerce, domestic welding
industry revenues totaled over $3.6 billion in 1997. The domestic industry has
grown at an annual rate of 5.9% since 1989 and is expected to grow 4.2% in 1998.
Global welding industry revenues are estimated to total over $10.0 billion and
management believes that growth in the international market has been faster than
the domestic market, driven, in large part, by infrastructure spending in
developing markets. International markets, including Australia and Italy,
represented approximately 42% of the Company's net sales in 1997, up from
approximately 20% of net sales in 1994. Although the industry has begun to
experience global consolidation, it continues to be very fragmented.
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RECENT ACQUISITIONS
The following table sets forth certain information with respect to the
Company's recent acquisitions:
<TABLE>
<CAPTION>
YEAR ANNUAL
TARGET ACQUIRED PRINCIPAL PRODUCTS REVENUE(1)
------ -------- ------------------ -------------
(IN MILLIONS)
<S> <C> <C> <C>
Modern Engineering Company,
Inc............................ 1994 Oxy-fuel gas apparatus $ 3.0
C&G Systems, Inc................. 1995 Cutting tables 2.5
Duxtech Pty. Limited (Cigweld)... 1996 Electric arc products, oxy-fuel 100.1
products, filler metals, gas
control products and safety
products
GenSet S.p.A..................... 1997 Engine-driven welders and 38.1
generators
Prestolite Power Corporation
Welding Division (Arcsys)...... 1997 Arc welders, plasma welders and 20.3
wire feeders
Woodland Cryogenics, Inc......... 1997 Cryogenic pumps, ambient and 4.6
electric vaporizers and automatic
cylinder filling systems
------
Total......................................................................... $168.6
======
</TABLE>
- ---------------
(1) Estimated annual revenue at the respective times of acquisition.
COMPETITIVE STRENGTHS
Thermadyne possesses a number of competitive strengths that have allowed it
to develop and maintain a strong position within the cutting and welding
industry, including the following:
Market Leading Brands. Management believes that the strength and longevity
of the numerous Thermadyne brand names create a significant competitive
advantage and position Thermadyne as one of the leaders in the cutting and
welding industry. Each of the Company's major divisions maintains
industry-leading brand names with significant market shares. Management believes
that VICTOR(R), founded in 1913, is the leading brand name in domestic
gas-operated cutting and welding torches and equipment; TWECO(R), founded in
1936, is the leading domestic manufacturer of MIG and manual welding torches;
ARCAIR(R) is the leading domestic brand name of TIG torch and accessory
products; THERMAL DYNAMICS(R), founded in 1957, is a leading domestic
manufacturer of manual plasma cutting products; and CIGWELD(R), founded in 1922,
is the leading brand name in the Australia/New Zealand cutting and welding
products market. Each of the manufacturing operations associated with these
brands is ISO-9000 series certified.
Diverse and Stable Customer Base. The Company's customer base includes
cutting and welding product distributors as well as end-user customers
principally engaged in the aerospace, automotive, construction, metal
fabrication, mining, mill and foundry, petroleum and ship building industries.
No one customer accounted for more than 9% of the Company's 1997 net sales.
Further, the Company's top 20 customers have been associated with the Company
for an average of over 10 years.
Established, Effective Distribution Channels. The Company believes that its
strong, established and long-standing relationships with over 1,100 independent
cutting and welding products distributors in the United States provide a
significant competitive advantage and support the Company's strong market
position. Thermadyne's domestic distributor relationships are maintained by 11
area business managers who oversee the Company's relationships with large
distributors and by separate product-specific sales forces for each of
Thermadyne's business units. Management believes that this unique structure,
which combines relationship managers with technically trained product
specialists, will enable the Company to more effectively maintain and utilize
its distributor networks. Management also believes that this established
distribution network enables the Company to achieve market penetration when
introducing newly developed or acquired products.
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Proven and Committed Senior Management Team. Thermadyne's management team
has repositioned the Company over the past four years to focus exclusively in
its core cutting and welding markets. This repositioning was accomplished
through divestitures of non-core assets and acquisitions of strategic businesses
or product lines. In addition, through aggressive new product development and
acquisition strategies, the management team has positioned the Company to
realize a 20.3% compound annual growth rate in net sales from 1993 to 1997. In
connection with the Merger each member of the senior management team signed an
employment contract with the Company. Additionally, the Company adopted an
incentive plan to tie each member of senior management's compensation to the
Company's financial performance. See "Executive Compensation."
BUSINESS STRATEGY
Thermadyne has developed a business strategy designed to enhance its strong
market positions and continue to improve its growth and profitability. The
primary elements of the Company's business strategy are as follows:
Continue New Product Development and Enhancement. The foundation for
Thermadyne's strong market positions and leading brand names is the development
and introduction of new products and enhancements of existing products. The
Company believes it is at the forefront of cutting and welding technology with a
proven track-record of continual new product introductions and existing product
enhancements that have resulted in more than 262 issued or pending United States
and foreign patents. New products and product enhancements are designed to add
value for customers, including enhanced safety features, improved productivity
and ergonomics and an improved welding environment. Examples of recent new
product introductions include robotic welding systems and accessories,
high-purity instrumentation, automated plasma cutting and safety products as
well as underwater cutting electrodes. During 1997, the Company introduced over
135 new products or product enhancements, and the Company expects to continue
this effort in the future.
Expand Strategic Acquisitions. The Company has completed six acquisitions
since 1993, which collectively generated approximately $169 million in annual
revenues at the respective times of acquisition, including over $135 million of
revenues for Australia and Italy. The Company believes that numerous acquisition
candidates exist globally, and the Company intends to continue to seek new
acquisition opportunities in its cutting and welding business. Thermadyne
intends to continue its focused acquisition strategy that includes the following
principal elements: (i) entering and expanding in geographic areas where the
Company does not currently have a significant presence through acquisitions of
local cutting and welding businesses and (ii) expanding in geographic areas
where the Company currently maintains a strong presence through the acquisition
of complementary product lines.
Leverage Existing Distribution Network. The Company intends to leverage its
existing distribution network through the acquisition or introduction of new
products and product enhancements. Management believes that when the Company
acquires a local presence in a new geographic area, it can utilize the acquired
distribution network to sell existing Thermadyne brands into that local market.
In addition, the Company believes that significant opportunities exist to
purchase complementary product lines and expand its business by selling the new
product lines through Thermadyne's extensive distribution network. For example,
through recent acquisitions the Company has expanded its offering of filler
metals, conventional arc welding power supplies, safety equipment and
engine-driven welding power sources and began marketing such products through
its established distribution network. The Company intends to continue this
strategy of penetrating new welding product markets by leveraging its extensive
distribution network in conjunction with its new product development and focused
acquisition strategies.
Broaden International Presence. Thermadyne has maintained an international
presence for over 30 years and continues to broaden its presence throughout the
world. International sales accounted for approximately 42% of net sales in 1997
as compared to approximately 20% in 1994. The Company has established a
dedicated international market presence and maintains the leading position in
Australia/New Zealand and significant and growing positions in Europe, Asia and
Latin America. Management intends to continue the
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expansion of its strong domestic brand names into the international market and
to continue to penetrate the growing Asian and Latin American cutting and
welding markets.
Continue Cost Reduction Efforts. Thermadyne strives to continually improve
manufacturing efficiencies and reduce unit costs. In December 1997, the Company
implemented a cost reduction program that includes the following principal
elements: (i) vendor rationalization and consolidation; (ii) manufacturing
process and productivity improvements and product design changes; (iii)
personnel rationalization and expense reductions; (iv) advertising and trade
show expense reductions; (v) aircraft, charter and other travel expense
reductions; and (vi) elimination of the annual sales meeting. In addition, the
Company has initiated the implementation of a new global information system that
is designed to allow the Company to further integrate administrative functions
and improve information flow across business unit lines.
Continue Dedicated Customer Service. The Company believes that effective
and proactive customer service has enabled the Company to build and maintain its
leading market positions and strong distributor relationships. Management plans
to continue this strategy of enhancing distributor and end-user relationships
through continuous customer service improvements. Each of Thermadyne's divisions
maintains a dedicated, well trained, technically oriented and product-specific
sales and customer service team. Management believes that the dedicated product
teams provide Thermadyne with a significant competitive advantage. In addition,
to further improve customer service, the Company has implemented a national
accounts team of 11 area business managers to support the dedicated product
sales and service teams and further support sales to the Company's key
distributors.
PRINCIPAL PRODUCTS
The Company manufactures a broad range of both gas (oxy-fuel) and arc
cutting and welding equipment (including a line of advanced plasma arc cutting
systems and oxy-fuel apparatus), accessories and consumables, including repair
parts. Over 40% of the Company's 1997 net sales were derived from the sale of
consumables and repair parts. Gas cutting and welding torches burn a mixture of
oxygen and fuel gas, typically acetylene. Arc cutting and welding systems are
powered by electricity. The major arc cutting and welding systems are plasma,
stick, MIG and TIG. Arc technology is more sophisticated than gas technology and
can be used on more types of metals. In addition, arc equipment produces less
distortion in the surrounding metal and it cuts and welds faster, reducing labor
costs. However, gas technology is more portable and generally less expensive
than arc technology and therefore remains important in many industries.
The Company conducts its operations through the following subsidiaries:
Thermal Dynamics -- Plasma Arc Cutting Products. Thermal Dynamics
Corporation ("Thermal Dynamics"), located in West Lebanon, New Hampshire and
founded in 1957, developed many of the early plasma cutting systems and
maintains its position as a leading manufacturer of plasma cutting systems and
replacement parts. Thermal Dynamics' product line ranges from a portable 20 amp
unit to large 1000 amp units. Thermal Dynamics' end-users are engaged primarily
in fabrication and repair of sheet metal and plate products found in fabricated
structural steel and non-ferrous metals, automotive products, appliances, sheet
metal, HVAC, general fabrication, shipbuilding and general maintenance.
Advantages of the plasma cutting process over other methods include faster
cutting speeds, the ability to cut ferrous and non-ferrous alloys and minimum
heat distortion on the material being cut. Plasma cutting also permits metal
cutting using only compressed air and electricity.
Tweco -- Electric Arc Products and Arc Gouging Systems. Tweco Products,
Inc. ("Tweco"), located in Wichita, Kansas and founded in 1936, manufactures a
line of arc welding replacement parts and accessories, including electrode
holders, ground clamps, cable connectors, terminal connectors and lugs and cable
splicers, and a variety of automatic and semi-automatic welding guns and cable
assemblies utilized in the arc welding process. Tweco also manufactures manual
stick electrode holders, ground clamps and accessories. Manual stick welding is
one of the oldest forms of welding and is used primarily by smaller welding
shops which perform general repair, maintenance and fabrication work. Tweco's
end-users are primarily engaged in the manufacture or repair and maintenance of
transportation equipment, including automobiles, trucks, aircraft,
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trains and ships; the manufacture of a broad range of machinery; and the
production of fabricated metal products, including structural metal, hand tools
and general hardware.
Tweco is a leading domestic manufacturer of MIG welding guns. The MIG
process is an arc welding process utilized in the fabrication of steel,
aluminum, stainless steel and other metal products and structures. In the MIG
process, a small diameter consumable electrode wire is continuously fed into the
arc. The welding arc area is protected from the atmosphere by a "shielding' gas.
The welding guns and cable assemblies manufactured by Tweco carry the continuous
wire electrode, welding current and shielding gas to the welding arc. Tweco
manufactures a related line of robotic welding accessory products. This new
accessory line includes, but is not limited to, a robotic torch with patented
consumables, a robotic deflection mount, a robotic cleaning station, robotic
arms and an anti-splatter misting system.
Through its Arcair product line, Tweco manufactures equipment and related
consumable materials for "gouging," a technique that liquefies metal in a narrow
groove and then removes it using compressed air. Gouging products are often used
in joint preparation prior to a welding process. Numerous other applications
exist for these gouging systems, such as removal of defective welds, removal of
trim in foundries and repair of track, switches and freight cars in the railroad
industry. Arcair also manufactures a line of underwater welding and gouging
equipment.
In addition to gouging products, Arcair produces a patented exothermic
cutting system, SLICE(R). This system generates temperatures in excess of 7000
degreesF and can quickly cut through steel, concrete and other materials.
SLICE(R) has many applications, including opening clogged steel furnaces and
providing rapid entry in fire and rescue operations. Arcair has developed an
underwater version of the SLICE(R)cutting system for use in the marine repair
and salvage industry.
Arcair also manufactures TIG torches and accessories. The TIG process can
be used to fuse metals of almost all alloys and in thicknesses down to foil
size. TIG welding is used for pressure vessels, such as tanks, valves and pipes
and is relied on heavily in welding nuclear components. Fabrications involving
aluminum, magnesium and other specialty metals for use in aircraft, ships and
weapon systems also utilize the TIG process.
Arcair provides a complete line of chemicals used in the welding industry.
Chemicals are used for weld cleaning and as agents to reduce splatter adherence
on the metal being welded. Chemicals are also used to reduce splatter adherence
in welding nozzles in MIG applications.
Victor -- Oxy-Fuel Gas Products. Victor Equipment Company ("Victor") has
plants in Abilene and Denton, Texas and Gallman, Mississippi and was founded in
1913. Victor is a leading domestic manufacturer of gas operated cutting and
welding torches and gas and flow pressure regulation equipment. Victor's torches
are used to cut ferrous metals and to weld, heat, solder and braze a variety of
metals, and its regulation equipment is used to control pressure and flow of
most industrial and specialty gases. In addition, Victor manufactures a variety
of replacement parts, including welding nozzles and cutting tips of various
types and sizes and a line of specialty gas regulators purchased by end-users in
the process control, electronics and other industries. Victor also manufactures
a wide range of medical regulation equipment serving the oxygen therapy market,
including home health care and hospitals.
The torches produced by Victor are commonly referred to as oxy-fuel
torches. These torches combine a mixture of oxygen and a fuel gas, typically
acetylene, to produce a high temperature flame. These torches are designed for
maximum durability, repair ability and performance utilizing patented built-in
reverse flow check valves and flash arresters in several models. Victor also
manufactures lighter-duty hand-held heating, soldering and brazing torches.
Pressure regulators, which are basically diaphragm valves, serve a broad range
of industrial and specialty gas process control operations.
The principal uses of the Victor torch are cutting steel in metal
fabricating applications such as shipbuilding, construction of oil refineries,
power plants and manufacturing facilities, and welding, heating, brazing and
cutting in connection with maintenance of machinery, equipment and facilities.
Victor sells its lighter-duty products to end-user customers principally engaged
in the plumbing, refrigeration and heating,
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ventilation and air conditioning industries. The relative low cost, mobility and
ease of use of Victor torches makes them suitable for a wide variety of uses.
Cigweld -- Electric Arc Products, Oxy-Fuel Products, Filler Metals, Gas
Control Products and Safety Products. The business now known as Cigweld, located
in Melbourne, Australia and founded in 1922, is the leading Australian
manufacturer of gas equipment and welding products.
Cigweld manufactures arc equipment welding products for both the automatic
arc and manual arc welding markets. The Cigweld range of automatic welding
equipment includes packages specifically designed for particular market
segments. End users of this product range include the rural market and the
vehicle repair, metal fabrication, ship building, general maintenance and heavy
industries. Manual arc equipment products range from small welders designed for
the home handyman to units designed for heavy industry.
Cigweld manufactures a range of consumable products (filler metals) for
manual and automatic arc and gas welding. The range of manual arc electrodes
includes over 50 individual electrodes for different applications. Cigweld
markets its manual arc electrodes under such brand names as Satincraft,
Weldcraft, Ferrocraft(R), Alloycraft(R), Satincrome, Cobalarc(R), Castcraft and
Weldall(R).
For automatic and semi-automatic welding applications, Cigweld manufactures
a significant range of solid and flux-cored wires, principally under the
Autocraft(R), Verti-Cor, Satin-Cor, Metal-Cor and Cobalarc(R) brand names. For
gas and TIG welding, Cigweld manufactures and supplies approximately 40
individual types of wires and solders for use in different applications.
Cigweld's filler metals are manufactured to standards appropriate for their
intended use, with the majority of products approved by agencies, such as
Lloyd's Register of Shipping, American Bureau of Shipping, De Norske Veritas and
U.S. Naval Ships.
Cigweld manufactures a comprehensive range of equipment for gas welding and
cutting and ancillary products such as gas manifolds, gas regulators and
flowmeters. Gas welding and cutting equipment is sold in kit form or as
individual products. Kits are manufactured for various customer groups and their
components include combinations of oxygen and acetylene regulators, blowpipes,
cutting attachments, mixers, welding and heating tips, cutting nozzles, roller
guides, twin welding hoses, goggles, flint lighters and tip cleaners,
combination spanners and cylinder keys. In addition to its kits, Cigweld
manufactures and/or distributes a complete range of gas equipment, including a
range of blowpipes and attachments, regulators (for oxygen, acetylene, argon and
carbon dioxide), flashback arrestors, cutting nozzles, welding and heating tips,
hoses and fittings, gas manifolds and accessories.
Cigweld also manufactures a range of gas control equipment including
specialty regulators (for use with different gases, including oxygen, acetylene,
liquified petroleum gas, argon, carbon dioxide, nitrogen, air, helium, hydrogen,
carbon monoxide, ethylene, ethane and nitrous oxide), manifold systems, cylinder
valves and spares and natural gas regulators. Cigweld's gas control items are
primarily sold to gas companies.
Cigweld manufactures and/or distributes a range of safety products for use
in welding and complementary industries. The product range includes welding
helmets and accessories, respirators and masks, breathing apparatus, earmuffs
and earplugs, safety spectacles, safety goggles and gas welding goggles, safety
helmets, faceshields, flashields (see-through welding curtains and screens) and
welding apparel.
Medical products are also manufactured by Cigweld in its manufacturing
plant in Melbourne, Australia. These products are distributed through a sole
distributor in the Australian market and exported through third party
distributors and related entities. The product range includes regulators,
flowmeters, suction units, oxygen therapy, resuscitation and outlet valves for
medical gas systems.
C&G Systems -- Cutting Tables. C&G Systems Inc. ("C&G"), located in Itasca,
Illinois and founded in 1968, manufactures a line of mechanized cutting tables
for fabricating sheet metal and metal plate. The machines utilize either
oxy-fuel or plasma cutting torches produced by other divisions of the Company.
C&G has a wide range of cutting tables from the relatively inexpensive
cantilever type used in general fabrication and job shops to the large precision
gantry type found in steel service centers and specialty cutting applications.
These metal cutting tables can be used in virtually any metal fabrication plant.
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Stoody -- Hardfacing Products. Stoody Company ("Stoody"), located in
Bowling Green, Kentucky and with operations founded in 1921, is a recognized
world leader in the development and manufacture of hardfacing welding wires,
electrodes and rods. While Stoody's primary product line is iron-based welding
wires, Stoody also participates in the markets for cobalt-based and nickel-based
electrodes, rods and wires, which are essentially protective overlays, deposited
on softer base materials by various welding processes. This procedure, referred
to as "hardfacing" or "surface treatment," adds a more resistant surface,
thereby increasing the component's useful life. Lower initial costs, the ability
to treat large parts, and ease and speed of repairs in the field are some of the
advantages of hardfacing over solid wear resistant components. A variety of
products have been developed for hardfacing applications in industries utilizing
earth moving equipment, agricultural tools, crushing components, and steel mill
rolls, and in virtually all applications where metal is exposed to external wear
factors.
Thermal Arc -- Arc Welders, Plasma Welders and Wire Feeders. In 1997, the
inverter and plasma arc welder business of Thermal Dynamics and Arcsys were
combined to form Thermal Arc, Inc. ("Thermal Arc"). The combined operation is
located in Troy, Ohio and produces a full line of inverter and transformer-
based electric arc welders, plasma welders, engine driven welders and wire
feeders. Thermal Arc products compete in the marketplace for construction,
industrial and automated applications, and serve a large and diverse user base.
The inverter arc welding power machines use high frequency power
transistors to provide welding machines that are extremely portable and power
efficient when compared to conventional welding power sources. Plasma welding
dramatically improves productivity for the end-user. Additionally, conventional
transformer-based machines provide a cost-effective alternative for markets
where low cost and simplicity of maintenance are a high priority.
GenSet -- Engine-Driven Welders and Generators. GenSet, located in Pavia,
Italy, commenced operations in 1976 with the production of small generating
sets. In 1976, it developed its first engine-driven welder and, in 1977,
obtained its first patent for the synchronous alternator designed for welding
purposes. It now offers a full range of technologically advanced generators and
engine-driven welders that are sold throughout the world. These products are
used both where main power is not available and for stand-by power where
continuous power supply is a key requirement.
Woodland Cryogenics -- Cryogenic Pumps, Ambient and Electric Vaporizers and
Automatic Cylinder Filling Systems. Woodland, with manufacturing facilities in
Philadelphia, Pennsylvania and founded in 1986, is a leading manufacturer,
distributor and installer of cryogenic and high pressure gas fill plants,
vaporizers and pumps. Woodland's products are used to control, mix and package
both cryogenic and high pressure gases into containment vessels such as gas
cylinders.
The principal uses of Woodland products are for the filling of cryogenic
and high pressure gases for applications in industrial, medical and specialty
gas markets served by gas distributors and producers. Woodland has developed
computerized filling equipment to maximize productivity while also offering
conventional or manual filling equipment.
INTERNATIONAL BUSINESS
The Company had aggregate international sales from continuing operations of
approximately $220.2 million, $171.6 million and $67.5 million for the fiscal
years ended December 31, 1997, 1996 and 1995, respectively, or approximately
42%, 39% and 21%, respectively, of net sales in each such period. The Company's
international sales are influenced by fluctuations in exchange rates of foreign
currencies, foreign economic conditions and other risks associated with foreign
trade. The Company's international sales consist of: (a) export sales of
Thermadyne products manufactured at domestic manufacturing facilities and, to a
limited extent, products manufactured by third parties, sold through overseas
field representatives of Thermadyne International Corporation ("Thermadyne
International"), a subsidiary of Thermadyne; and (b) sales of Thermadyne
products manufactured at international manufacturing facilities, sold by
Thermadyne's foreign subsidiaries. For further information concerning the
international operations of the Company, see the notes to the Consolidated
Financial Statements of the Company included elsewhere herein.
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Thermadyne International was formed in 1980 to coordinate Thermadyne's
efforts to increase international sales and sells cutting and welding products
through independent distributors in more than 80 countries. In support of this
effort, the Company operates distribution centers in Canada, Australia, Italy,
Mexico, Japan, Singapore, Brazil, the Philippines, Indonesia and the United
Kingdom and employs sales people located in 23 additional countries.
DISTRIBUTION
The Company's cutting and welding products are distributed through a
domestic network of approximately 1,100 independent welding products
distributors with over 2,800 locations who carry one or more of its product
lines. Relationships with the distributors are maintained by a separate sales
force for each of the Company's principal product lines. In addition, a team of
11 area business managers exists to support the sale of all of the Company's
product lines to its key distributors. The Company's products are distributed
internationally through a direct sales force and independent distributors.
RESEARCH AND DEVELOPMENT
The Company has research and development groups for each of its product
lines that primarily conduct process and product development to meet market
needs. As of December 31, 1997, the Company employed approximately 125 persons
in its research and development groups, most of which are engineers.
PATENTS, LICENSES AND TRADEMARKS
The Company's products are sold under a variety of trademarks and trade
names. The Company owns trademark registrations or has filed trademark
applications for all trademarks and has registered all trade names that the
Company believes are material to the operation of its businesses. The Company
also owns various patents and from time to time acquires licenses from owners of
patents to apply such patents to its operations. As of December 31, 1997, the
Company had 740 registered and pending trademarks and 262 registered and pending
patents. The Company does not believe any single patent or license is material
to the operation of its businesses taken as a whole.
COMPETITION
The Company competes principally with a number of domestic manufacturers of
cutting and welding products, the majority of which compete only in limited
segments of the overall market. Management believes that competition is based
primarily on product quality, brand name, breadth and depth of product lines,
effectiveness of distribution channels, acumen of sales force, price and quality
of customer service. To date, the Company has experienced little direct foreign
competition in its U.S. markets due to the relatively limited size of such
markets, the inability of foreign manufacturers to establish effective
distribution channels and the relatively non-labor intensive nature of the
cutting and welding product manufacturing process. The Company also competes in
certain international markets in which it faces substantial competition from
foreign manufacturers of cutting and welding products.
RAW MATERIALS
The Company has not experienced any difficulties in obtaining raw materials
for its operations because its principal raw materials, copper, brass, steel and
plastic, are widely available and need not be specially manufactured for use by
the Company. Certain of the raw materials used in hardfacing products, such as
cobalt and chromium, are available primarily from sources outside the United
States, some of which are located in countries that may be subject to economic
and political conditions which could affect pricing and disrupt supply. Although
the Company has historically been able to obtain adequate supplies of these
materials at acceptable prices and has been able to recover the costs of any
increases in the price of raw materials in the form of higher unit sales prices,
restrictions in supply or significant fluctuations in the prices of cobalt,
chromium and other raw materials could adversely affect the Company's business.
36
<PAGE> 180
The Company also purchases certain products which it either uses in its
manufacturing processes or resells. These products include, but are not limited
to, electronic components, circuit boards, semi-conductors, motors, engines,
pressure gauges, springs, switches, lenses and chemicals. The Company believes
its sources of such products are adequate to meet foreseeable demand.
EMPLOYEES
As of December 31, 1997, the Company employed 3,563 people, of which
approximately 637 were engaged in sales and marketing activities, 225 were
engaged in administrative activities, 2,584 were engaged in manufacturing
activities and 117 were engaged in engineering activities. Labor unions
represent none of the Company's work force in the United States and virtually
all of the manufacturing employees in its foreign operations. The Company
believes that its employee relations are good. The Company has not experienced
any significant work stoppages.
FACILITIES
The Company operates 12 manufacturing facilities in the United States,
Italy, the Philippines and Australia. All domestic manufacturing facilities,
leases and leasehold interests are encumbered by liens securing the Company's
obligations under the New Credit Facility. The Company considers its plants and
equipment to be modern and well-maintained and believes its plants have
sufficient capacity to meet future anticipated expansion needs.
The Company leases and maintains a 43,600 square foot facility located in
St. Louis, Missouri, which houses the executive offices of the Company and its
operating subsidiaries, as well as all centralized services.
The following table describes the location and general character of the
Company's principal properties:
<TABLE>
<CAPTION>
SUBSIDIARY/ BUILDING SPACE/
LOCATION OF FACILITY NUMBER OF BUILDINGS PROPERTY SIZE
-------------------- ------------------- -------------
<S> <C> <C>
Thermal Dynamics/West Lebanon, New
Hampshire............................ 187,000 sq. ft. 8.0 acres
5 buildings (office, manufacturing,
sales training, future expansion)
Tweco/Wichita, Kansas.................. 220,816 sq. ft. 21.7 acres
3 buildings (office, manufacturing,
storage space)
Victor/Denton, Texas................... 222,403 sq. ft. 30.0 acres
4 buildings (office, manufacturing,
storage, sales training center)
Victor/Abilene, Texas.................. 123,740 sq. ft. 32.0 acres
1 building (office and manufacturing)
Thermadyne Canada/Oakville, Ontario,
Canada............................... 57,000 sq. ft. 8.3 acres
1 building (office and warehouse)
Modern Engineering Company/
Gallman, Mississippi................. 60,000 sq. ft. 60.0 acres
1 building (office and manufacturing)
Thermadyne Australia/Melbourne,
Australia............................ 588,000 sq. ft. 32.4 acres
8 buildings (office, manufacturing,
storage, research)
Thermadyne Australia/Cebu,
Philippines.......................... 34,600 sq. ft. 1.2 acres
1 building (office and manufacturing)
C&G/Itasca, Illinois................... 38,000 sq. ft. 2.0 acres
1 building (office, manufacturing,
future expansion)
Stoody/Bowling Green, Kentucky......... 185,000 sq. ft. 37.0 acres
1 building (office and manufacturing)
</TABLE>
37
<PAGE> 181
<TABLE>
<CAPTION>
SUBSIDIARY/ BUILDING SPACE/
LOCATION OF FACILITY NUMBER OF BUILDINGS PROPERTY SIZE
-------------------- ------------------- -------------
<S> <C> <C>
GenSet/Pavia, Italy.................... 193,000 sq. ft. 7.9 acres
2 buildings (office, manufacturing,
warehouse)
Thermal Arc/Troy, Ohio................. 120,000 sq. ft. 6.5 acres
1 building (office, manufacturing,
warehouse, sales training)
Woodland/Philadelphia, Pennsylvania.... 25,537 sq. ft. 32.4 acres
1 building (office and manufacturing)
</TABLE>
All of the above facilities are leased, except for the facilities located
in Melbourne, Cebu, Pavia and Gallman, which are owned. The Company also has
additional assembly and warehouse facilities in Canada, the United Kingdom,
Italy, Japan, Singapore, Mexico, the Philippines, Indonesia, Brazil and
Australia.
In addition, the Company has subleased 264,000 square feet of its 325,000
square foot facility in City of Industry, California, which formerly was the
manufacturing facility for certain products now manufactured at the Company's
Bowling Green, Kentucky facility.
The leases for the Company's leased and subleased properties will expire
from 1999 through 2010.
LEGAL PROCEEDINGS AND ENVIRONMENTAL MATTERS
The Company is a party to ordinary litigation incidental to its businesses,
including a number of product liability cases seeking substantial damages. The
Company maintains insurance against any product liability claims. Coverage for
most years has a $500,000 self insured retention with $500,000 of primary
insurance per claim. In addition, the Company maintains umbrella policies
providing an aggregate of $50,000,000 in coverage for product liability claims.
Although it is difficult to predict the outcome of litigation with any
certainty, the Company believes that the liabilities which might reasonably
result from such lawsuits, to the extent not covered by insurance, will not have
a material adverse effect on the Company's financial condition or results of
operations.
The Company's operations are subject to federal, state, local and foreign
laws and regulations relating to the storage, handling, generation, treatment,
emission, release, discharge and disposal of certain substances and wastes. The
Company is currently not aware of any citations or claims filed against it by
any local, state, federal and foreign governmental agencies which, if
successful, would have a material adverse effect on the Company's financial
condition or results of operations.
The Company may be required to incur costs relating to remediation of
properties, including properties at which the Company disposes of waste, and
environmental conditions could lead to claims for personal injury, property
damage or damages to natural resources. The Company is aware of environmental
conditions at certain properties which it now or previously owned or leased
which are undergoing remediation. The Company does not believe that the cost of
such remediation will have a material adverse effect on the Company's business,
financial condition or results of operations.
Certain environmental laws, including but not limited to, the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA" or "Superfund")
and the equivalent state Superfund laws, provide for strict, joint and several
liability for investigation and remediation of spills or other releases of
hazardous substances. Such laws may apply to conditions at properties presently
or formerly owned or operated by the Company or by its predecessors or
previously owned business entities, as well as to conditions at properties at
which wastes or other contamination attributable to the Company or its
predecessors or previously owned business entities come to be located. The
Company has in the past and may in the future be named a PRP at off-site
disposal sites to which it has sent waste. The Company does not believe that the
ultimate cost relating to Superfund sites will have a material adverse effect on
the Company's financial condition or results of operations. See "Risk
Factors -- Environmental Matters."
38
<PAGE> 182
THE MERGER AND MERGER FINANCING
THE MERGER FINANCING
The funding required to pay the cash portion of the Merger Consideration,
the Option Cash Proceeds and the ESPP Cash Proceeds, to refinance and/or retire
outstanding indebtedness of the Company, and to pay expenses incurred in
connection with the Merger was approximately $808 million. These cash
requirements were funded with the proceeds obtained from concurrent equity and
debt financings. The Issuers issued the Senior Subordinated Notes and the
Company entered into a syndicated senior secured loan facility providing for
term loan borrowings in the aggregate principal amount of approximately $330
million and revolving loan borrowings of $100 million. In connection with the
Merger, the Company borrowed all term loans available under the New Credit
Facility plus approximately $25 million of revolving loans. The remaining
revolving loans will be available to fund the working capital requirements of
the Company. The proceeds of such financings were distributed to Holdings in the
form of a dividend. See "Description of New Credit Facility" and "Certain
Relationships and Related Transactions."
Mercury issued approximately $94.6 million aggregate gross proceeds of the
Debentures. In connection with the Merger, Holdings succeeded to the obligations
of Mercury with respect to the Debentures. The DLJMB Funds also purchased
2,608,696 shares of Mercury Common Stock, 2,000,000 shares of Mercury Preferred
Stock and the DLJMB Warrants for approximately $140 million. As a result of the
Merger, the proceeds of such purchases became an asset of Holdings, each share
of Mercury Common Stock became a share of Holdings Common Stock, each share of
Mercury Preferred Stock will become a share of Holdings Preferred Stock and each
DLJMB Warrant to acquire Mercury Common Stock became exercisable for an equal
number of shares of Holdings Common Stock. In addition, in connection with the
Merger, certain members of senior management purchased 143,192 shares of
Holdings Common Stock for approximately $4.9 million through the Management
Share Purchase, of which approximately $3.6 million was provided through the
Management Loans.
THE MERGER
As a result of the Merger, each share of Holdings Common Stock held by
Holdings as treasury stock or owned by Mercury immediately prior to the
effectiveness of the Merger was cancelled, and no payment was made with respect
thereto; each share of Mercury Common Stock outstanding immediately prior to the
effectiveness of the Merger was converted into and became one share of Holdings
Common Stock with the same rights, powers and privileges as the shares so
converted; each share of Mercury Preferred Stock, outstanding immediately prior
to the effectiveness of the Merger was converted into and became one share of
preferred stock of Holdings with the same rights, powers and privileges as the
shares of preferred stock so converted; each outstanding DLJMB Warrant to
purchase Mercury Common Stock became exercisable for an equal number of shares
of Holdings Common Stock on the same terms and conditions as the DLJMB Warrant;
and each share of Holdings Common Stock outstanding immediately prior to the
effectiveness of the Merger converted into the following (the "Merger
Consideration"): for each such share with respect to which an election to retain
Holdings Common Stock was effectively made and not revoked ("Stock Electing
Shares"), the right to retain approximately one share of Holdings Common Stock,
and for each such share (other than Stock Electing Shares), the right to receive
in cash from Mercury an amount equal to $34.50 (the "Cash Merger
Consideration"). Because the Merger required approximately 4.3% (or 485,010) of
the outstanding shares of Holdings Common Stock prior to the Merger to be
retained by existing stockholders of Holdings, the right to receive the Merger
Consideration was subject to proration. As a result of proration, each Stock
Electing Share was converted into .076 of a share of Holdings Common Stock and
the right to receive $34.50 in cash in lieu of shares not converted into
Holdings Common Stock. As a result of the Merger, 10,690,283 shares of Holdings
Common Stock (approximately 95.7% of the presently issued and outstanding
shares) were converted into cash and approximately 4.3% (or 485,010) of such
shares were retained by existing stockholders. As a result of the Merger, the
shares of Mercury Common Stock were converted into Holdings Common Stock
representing approximately 80.6% of Holdings Common Stock (or 75.7% on a fully
diluted basis) after the Merger.
39
<PAGE> 183
As a result of the Merger, the DLJMB Warrants permit the holders thereof to
purchase an additional 353,428 shares of Holdings Common Stock.
As a result of the Merger, each outstanding option to acquire shares of
Holding Common Stock granted to employees and directors (excluding shares
subject to purchase under the Holding's Employee Stock Purchase Plan (the
"ESPP")), whether vested or not (the "Options"), were canceled. In lieu thereof
the holders of such Options received, with respect to each Option, a cash
payment in an amount equal to the product of (x) the excess, if any, of $34.50
over the exercise price of such Option and (y) the number of shares of Holding
Common Stock subject to such Option (the "Option Cash Proceeds").
In addition, upon effectiveness of the Merger, rights to purchase shares of
Holding Common Stock under the ESPP were canceled. In lieu thereof participants
in the ESPP received a cash payment in the amount equal to the product of the
number of shares of Holding Common Stock subject to purchase by such
participants thereunder and $34.50 (the "ESPP Cash Proceeds").
40
<PAGE> 184
MANAGEMENT
THE ISSUERS
The following table sets forth certain information concerning the members
of the board of directors and executive officers of Thermadyne LLC. Each
director of Thermadyne LLC also serves as a director of Thermadyne Capital, and
each officer of Thermadyne LLC serves in the same capacity for Thermadyne
Capital.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Randall E. Curran........ 43 Director, Chairman of the Board, President and Chief
Executive Officer
James H. Tate............ 50 Director, Senior Vice President and Chief Financial Officer
Peter T. Grauer.......... 52 Director
William F. Dawson, Jr.... 33 Director
Stephanie N. Josephson... 44 Vice President, General Counsel and Corporate Secretary
Thomas C. Drury.......... 41 Vice President, Human Resources
Robert D. Maddox......... 38 Vice President and Corporate Controller
</TABLE>
Randall E. Curran has been a director, Chairman of the Board, President and
Chief Executive Officer of Thermadyne LLC since May 1998. Mr. Curran has also
served as a Director of Holdings since February 1994 and was elected Chairman of
the Board and Chief Executive Officer of Holdings in February 1995, having
previously served as President of Holdings from August 1994 and as Executive
Vice President and Chief Operating Officer of Holdings from February 1994. He
also serves as President of Thermadyne Industries, Inc., a position he has held
since 1992. From 1986 to 1992, Mr. Curran was Chief Financial Officer of
Holdings and/or its predecessors. Prior to 1986, Mr. Curran held various
executive positions with Cooper Industries, Inc.
James H. Tate has been a director, Senior Vice President and Chief
Financial Officer of Thermadyne LLC since May 1998. Mr. Tate has also served as
a Director of Holdings since October 1995. He was elected Senior Vice President
and Chief Financial Officer in February 1995, having previously served as Vice
President of Holdings and Vice President and Chief Financial Officer of
Holdings' subsidiaries since April 1993. Prior to joining Holdings, Mr. Tate was
employed by the accounting firm of Ernst & Young LLP for eighteen years, the
last six of which he was a partner.
Peter T. Grauer has been a director of Thermadyne LLC since May 1998 and a
Managing Director of DLJ Merchant Banking II, Inc. ("DLJMB Inc."), and its
predecessor, since September 1992. Mr. Grauer is a director of Doane Products
Co., Total Renal Care Holdings, Inc., DecisionOne Holdings Corp., Nebco Evans
Holding Company, Ameriserve Food Distribution, Inc. and Bloomberg, Inc.
William F. Dawson, Jr. has been a director of Thermadyne LLC since May 1998
and a Principal of DLJMB Inc. since August 1997. From December 1995 to August
1997, he was a Senior Vice President in DLJSC's High Yield Capital Markets
Group. Prior thereto, Mr. Dawson was a Vice President in the Leveraged Finance
Group within DLJSC's Investment Banking Group. Mr. Dawson serves as a Director
of Von Hoffmann Corporation.
Stephanie N. Josephson has been Vice President, General Counsel and
Corporate Secretary of Thermadyne LLC since May 1998. Ms. Josephson is also Vice
President, General Counsel and Corporate Secretary of Holdings. Prior to joining
Holdings, Ms. Josephson was Corporate Counsel for Mills & Partners, Inc. from
1993 to 1995 and an Adjunct Professor at St. Louis University School of Business
in the MBA program from 1991 to 1993. Prior thereto, Ms. Josephson was employed
in Houston, Texas as Counsel for Cooper Industries, Inc. and in private practice
with the law firms Andrews & Kurth and Weycer and Kaplan from 1979 to 1991.
41
<PAGE> 185
Thomas C. Drury has been Vice President -- Human Resources of Thermadyne
LLC since May 1998. Mr. Drury has also been Vice President -- Human Resources
for Holdings since March 1995. Prior to that time, Mr. Drury served as Director
of Human Resources for Holdings since November 1991. Prior to joining Holdings,
Mr. Drury was Manager -- Human Resources at McDonnell Douglas Systems
Integration Company from 1988 through 1991.
Robert D. Maddox has been Vice President and Corporate Controller of
Thermadyne LLC since May 1998. Mr. Maddox has also served as Vice President and
Corporate Controller of Holdings since April 1996. Prior to that time, Mr.
Maddox served as Vice President and Controller of Holdings' operating
subsidiaries from April 1995 to April 1996 and Controller from May 1992 to April
1995. Prior to joining Holdings, Mr. Maddox was a senior audit manager with the
accounting firm of Ernst & Young LLP.
HOLDINGS
Board of Directors. The following table sets forth the name, age and
position with Holdings of each director of Holdings:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Randall E. Curran..................... 43 Chairman of the Board
James H. Tate......................... 50 Director
Peter T. Grauer....................... 52 Director
William F. Dawson, Jr................. 33 Director
John F. Fort III...................... 56 Director
Harold A. Poling...................... 72 Director
Lawrence M.v.D. Schloss............... 43 Director
</TABLE>
The following are brief biographies of each Holdings director who is not
also a director or executive officer of the Issuers.
John F. Fort III retired as Chairman of the Board of Tyco International LTD
in January of 1993. In 1964, after receiving degrees in Aeronautical Engineering
and Industrial Management from Princeton and MIT's Sloan School of Business
respectively, he joined the Simplex Wire & Cable Company (now a subsidiary of
Tyco). Mr. Fort held a broad range of positions throughout his thirty years at
Tyco. He currently holds directorships at Tyco International Ltd., Dover
Corporation, and Roper Industries. He is an active participant on advisory
boards at MIT, Princeton University, Full Circle Investments and the Appalachian
Mountain Club.
Harold A. Poling retired as Chairman of the Board and Chief Executive
Officer of Ford Motor Company on January 1, 1994, a position he held since 1990.
Mr. Poling is a director of Shell Oil Company, LTV Corporation, Flint Ink
Corporation and the Kellogg Company, and is a member of BHP International
Advisory Council, The VIAG International Board and the PGA Tour Policy Board. He
is a director of the Monmouth (Ill.) College Senate and Chairman of the Dean's
Advisory Council for the Indiana University School of Business. He was national
chairman of Indiana University's Annual Fund campaigns from 1986 to 1998.
Lawrence M.v.D. Schloss has been the Managing Partner of DLJ Merchant
Banking II, Inc. since November 1995. Prior to November 1995, he was the Chief
Operating Officer and a Managing Director of DLJ Merchant Banking, Inc. Mr.
Schloss currently serves as Chairman of the Board of McCulloch Corporation and
as a director of Wilson Greatbatch, Inc. and DecisionOne Holdings Corp. Mr.
Schloss has previously served as a director of GTECH Corporation (NYSE:GTK),
Krueger International, Inc., OSi Specialties, Inc. and MPB Corporation.
42
<PAGE> 186
Executive Officers. The following table sets forth certain information
concerning the current executive officers of Holdings:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Randall E. Curran..................... 43 President and Chief Executive Officer
James H. Tate......................... 50 Senior Vice President and Chief
Financial Officer
Stephanie N. Josephson................ 44 Vice President, General Counsel and
Corporate Secretary
Thomas C. Drury....................... 41 Vice President, Human Resources
Robert D. Maddox...................... 38 Vice President and Corporate
Controller
</TABLE>
43
<PAGE> 187
EXECUTIVE COMPENSATION
The following table sets forth for the years ended December 31, 1997, 1996
and 1995 certain compensation paid by Holdings to its Chief Executive Officer
and the four other most highly paid executive officers of Holdings whose cash
compensation exceeded $100,000 for the year ended December 31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)(1)
--------------------------- ---- --------- -------- ------------ ------------------
<S> <C> <C> <C> <C> <C>
Randall E. Curran..................... 1997 517,847 538,400 30,600 33,807
Chairman of the Board, President and 1996 498,921 385,050 91,000 8,008
Chief Executive Officer(2) 1995 482,919 409,116 65,000 7,728
James H. Tate......................... 1997 275,093 188,614 27,000 18,039
Director, Senior Vice President and 1996 241,012 169,114 36,000 7,403
Chief Financial Officer(3) 1995 221,454 158,965 20,000 3,991
Stephanie N. Josephson................ 1997 168,719 84,625 10,000 10,210
Vice President, General Counsel and 1996 129,573 70,208 6,000 6,489
Corporate Secretary(4) 1995 100,127 44,760 25,000 3,024
Thomas C. Drury....................... 1997 132,206 66,479 10,000 7,444
Vice President -- Human Resources(5) 1996 107,115 53,708 6,000 5,982
1995 92,557 32,669 25,000 4,160
Robert D. Maddox...................... 1997 134,254 67,417 5,000 7,749
Vice President and Controller(6) 1996 113,658 60,055 6,000 6,272
1995 98,039 36,556 10,000 4,378
</TABLE>
- ---------------
(1) All other compensation includes group life insurance premiums paid by
Holdings and contributions made on behalf of the named executive officers to
Holdings' 401(k) retirement and profit sharing plan. The amount of insurance
premiums paid and 401(k) contributions made on behalf of the named executive
officers for 1997 are as follows: Mr. Curran, $3,978 and $29,829,
respectively; Mr. Tate, $2,544 and $15,495, respectively; Ms. Josephson,
$1,138 and $9,072, respectively; Mr. Drury, $361 and $7,083, respectively;
and Mr. Maddox, $254 and $7,495, respectively.
(2) Mr. Curran was elected Chairman of the Board and Chief Executive Officer of
Holdings effective as of February 23, 1995, having previously served as
President of Holdings from August 1994 and as Executive Vice President and
Chief Operating Officer of Holdings from February 1994.
(3) Mr. Tate was elected Senior Vice President and Chief Financial Officer of
Holdings effective as of February 23, 1995, having previously served as Vice
President of Holdings and as Chief Financial Officer of Holdings'
subsidiaries. Mr. Tate was elected as a director of Holdings on October 26,
1995.
(4) Ms. Josephson was elected Corporate Counsel and Corporate Secretary of
Holdings on March 7, 1995, and was elected Vice President and General
Counsel of Holdings on April 26, 1995.
(5) Mr. Drury was elected Vice President -- Human Resources of Holdings on March
7, 1995.
(6) Mr. Maddox was elected Controller of Holdings on June 1, 1992, Vice
President and Controller of Thermadyne Industries, Inc. on April 1, 1995,
and Vice President of Holdings on April 18, 1996.
44
<PAGE> 188
The following table sets forth certain information related to stock options
granted to the named executive officers in 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE OR GRANT DATE
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION PRESENT VALUE
NAME GRANTED(#)(1) FISCAL YEAR (%) ($/SH) DATE ($)(2)
---- ------------- --------------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Randall E. Curran............. 30,600 14.1 26.875 02/05/07 491,742
James H. Tate................. 27,000 12.4 26.875 02/05/07 433,890
Stephanie N. Josephson........ 10,000 4.6 26.875 02/05/07 160,700
Thomas C. Drury............... 10,000 4.6 26.875 02/05/07 160,700
Robert D. Maddox.............. 5,000 2.3 26.875 02/05/07 80,350
</TABLE>
- ---------------
(1) The options to purchase Holdings Common Stock were granted under Holdings'
1993 Management Option Plan or the Holdings' 1996 Employee Stock Option Plan
and become exercisable in five equal annual installments commencing on the
first anniversary of the date of grant. As a result of the Merger, all
outstanding Options, whether or not vested, were canceled, and the holders
of such Options received a cash payment in an amount equal to the product of
(x) the excess, if any, of $34.50 over the exercise price of such Option
multiplied by (y) the number of shares of Holdings Common Stock subject to
such Option.
(2) The grant date present value of each option grant was determined using a
variation of the Black-Scholes option pricing model. The estimated values
presented are based on the following assumptions made as of the time of
grant: an expected dividend yield of 0%; an expected option term of 10
years; volatility of .339 (based on historical stock price observations just
prior to each grant); and a risk-free rate of 6.72%. As a result of the
Merger, all outstanding Options, whether or not vested, were canceled, and
the holders of such Options received a cash payment in an amount equal to
the product of (x) the excess, if any, of $34.50 over the exercise price of
such Option multiplied by (y) the number of shares of Holdings Common Stock
subject to such Option.
The following table provides information related to the number and value of
options held by the named executive officers at the end of 1997. On December 31,
1997, the closing sale price of Holdings Common Stock on NASDAQ was $29 1/2. No
named executive officer exercised any options during 1997.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
FISCAL YEAR-END AT FISCAL YEAR-END
--------------------------------- ---------------------------------
NAME EXERCISABLE(#) UNEXERCISABLE(#) EXERCISABLE($) UNEXERCISABLE($)
---- -------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Randall E. Curran.................. 244,200 142,400 4,139,725 1,574,850
James H. Tate...................... 53,700 67,800 893,975 624,275
Stephanie N. Josephson............. 11,200 29,800 177,975 328,775
Thomas C. Drury.................... 11,200 29,800 177,975 328,775
Robert D. Maddox................... 5,200 15,800 81,225 170,525
</TABLE>
As a result of the Merger, all outstanding Options, whether or not vested,
were canceled, and the holders of such Options received a cash payment in an
amount equal to the product of (x) the excess, if any, of $34.50 over the
exercise price of such Option multiplied by (y) the number of shares of Holdings
Common Stock subject to such Option.
EMPLOYMENT ARRANGEMENTS
Employment Contracts. In connection with the Merger, Holdings entered into
employment agreements with, among others, the following executive officers:
Randall E. Curran, James H. Tate, Stephanie N.
45
<PAGE> 189
Josephson, Robert D. Maddox and Thomas C. Drury. The employment agreements
terminate on May 22, 2001; however, such agreements automatically renew on each
May 22 for an additional period so that a new three-year term begins upon each
extension (unless the agreements are earlier terminated). Each such employee
serves in their current executive capacities with Holdings as a requirement of
their respective employment agreements.
Messrs. Curran, Tate, Maddox and Drury and Ms. Josephson are entitled to
base salaries (subject to increase at the Board of Directors' discretion) of
$538,400, $290,175, $145,000, $145,000 and $175,000, respectively. In addition,
each employee is entitled to participate in an annual bonus plan providing for
an annual bonus opportunity. Pursuant to such bonus plan, Mr. Curran is entitled
to an annual bonus opportunity of not less than 100% of his base salary, Mr.
Tate is entitled to an annual bonus opportunity of not less than 75% of his base
salary and Ms. Josephson and Messrs. Maddox and Drury are each entitled to an
annual bonus opportunity of not less than 55% of his or her base salary. Each
such executive also is entitled to such benefits as are customarily provided to
the executives of Holdings and its subsidiaries. Each such executive is required
to devote all of his or her business time and attention to the business of
Holdings and its subsidiaries.
Each employment agreement provides that upon termination without cause or
constructive termination of such executive's employment (which includes, among
other things, reductions of compensation, title, position or duties), such
executive will be entitled to receive such executive's then current salary and
other benefits through the later to occur of the termination date of the
agreement or 18 months from the date of termination of such executive's
employment.
Management Plans.
Management Incentive Plan. In connection with the Merger, Holdings adopted
the Thermadyne Holdings Corporation Management Incentive Plan (the "Incentive
Plan"), which provides for the granting of up to 500,000 shares of Holdings
Common Stock to certain officers and employees of the Company. In connection
with the Merger options to purchase approximately 322,966 shares of Holdings
Common Stock were granted to certain officers and employees of the Company at an
exercise price of $34.50. Pursuant to the terms of the Incentive Plan, options
granted to certain members of senior management provide for both a "Time Vesting
Option" and a "Cliff Vesting Option." Under the Time Vesting Option, the option
vests and is exercisable with respect to twenty percent of the shares subject to
the option on the day it was granted. Then, on each of the first five
anniversaries from that date the Time Vesting Option was granted, an additional
sixteen percent of the shares subject to the option vests and becomes
exercisable as long as the option recipient is still employed by Holdings or its
subsidiary. The Cliff Vesting Option becomes vested and exercisable with respect
to twenty percent of the shares on the thirtieth day after the availability of
the audited financial statements for each of the fiscal years ended December 31,
1998 through December 31, 2003, provided that the option recipient is still
employed by Holdings or its subsidiary, and further provided, that the targeted
implied common equity value of Holdings was met for each such fiscal year. If
the targeted implied common equity value of Holdings is not attained for any of
the fiscal years ending on or before December 31, 2002, the Cliff Vesting Option
will be treated as vested and exercisable if the target is attained for the
subsequent year as long as the Option recipient is still employed by Holdings or
its subsidiary. If, after eight years from receipt of the Cliff Vesting Option,
all shares subject to such option have not vested, such shares shall become
fully vested and exercisable as long as the option recipient is still employed
by Holdings or its subsidiary.
Direct Investment Program. In connection with the Merger, Holdings adopted
the Thermadyne Holdings Corporation Direct Investment Program (the "Investment
Program"), which provides for the purchase by certain members of management of
143,192 shares of Holdings Common Stock, of which 71,596 shares have been
designated as "Reinvestment Shares" and 71,596 shares have been designated as
"Coinvestment Shares." In connection with the Merger, Holdings issued all shares
available for issuance under the Investment Program. Of the Coinvestment Shares,
20% vest on each of the first five anniversaries of the date of purchase, so
long as the participant is employed by the Company or its subsidiary as of such
anniversary. Additionally, upon the occurrence of a Change of Control (as
defined therein), all unvested Coinvestment Shares held by a participant that is
employed by the Company or its subsidiary at such time shall vest. All
Reinvestment Shares became immediately vested at the time of purchase. A portion
of the
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<PAGE> 190
funds required to purchase the shares under the Investment Program were provided
through the proceeds of loans made by the Company to participants in the
Investment Program. In the event of a participant's termination for Cause (as
defined therein), the Company has the right to purchase shares of such
participant purchased under the Investment Program at a price equal to (i) the
lesser of (A) $34.50 and (B) the fair market value of such shares on the date of
purchase by the Company, with respect to Coinvestment Shares (whether or not
vested), and (ii) the fair market value of such shares on the date of purchase
by the Company, with respect to Reinvestment Shares. In the event of a
participant's termination other than for Cause or the participant's death, the
Company has the right to purchase shares of such participant purchased under the
Investment Program at a price equal to (i) the lesser of (A) the sum of $34.50
and the Allocable Interest (as defined therein) and (B) the fair market value of
such shares on the date of purchase by the Company, with respect to unvested
Coinvestment Shares, and (ii) the fair market value of such shares on the date
of purchase by the Company, with respect to Reinvestment Shares.
COMPENSATION OF DIRECTORS
Prior to the Merger, each director of Holdings, other than Messrs. Curran
and Tate, received a $12,000 annual retainer plus a $1,000 fee for each regular
meeting of the Board of Directors attended and a $500 fee for each meeting of a
board committee attended (other than meetings of the Executive Committee, for
which members of the committee other than Charles F. Moran, a former director of
Holdings, received a fee of $750). In addition to those fees, Mr. Moran, as the
Chairman of the Executive Committee, received aggregate compensation of $60,000
for services he provided during the twelve-month period ending February 28,
1997. For the period ending February 28, 1998, Mr. Moran received aggregate
compensation of $60,000 for services provided by him in his capacity as Chairman
of the Executive Committee during such period. Directors were also reimbursed
for all reasonable travel and other expenses of attending meetings of the Board
of Directors or committees of the Board of Directors.
On November 1, 1997, the Board of Directors granted options to purchase
1,000 shares of Holdings Common Stock to the following former directors of
Holdings pursuant to Holdings' Non-Employee Directors Stock Option Plan: Messrs.
Fletcher L. Byrom, Henry L. Druker, Richard L. Berger and Moran.
Compensation arrangements for directors of Holdings and the Company for
periods following the Merger have not yet been determined.
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<PAGE> 191
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF HOLDINGS
All of the Company's issued and outstanding capital stock is owned by
Holdings. The following table sets forth certain information with respect to the
beneficial ownership of Holdings Common Stock as of May 31, 1998 by (i) any
person or group who beneficially owns more than five percent of Holdings Common
Stock, (ii) by each executive officer and director of Holdings and (iii) all
directors and executive officers of Holdings and the Issuers as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER: SHARES BENEFICIALLY OWNED COMMON STOCK
- ------------------------------------- ------------------------- -------------------------
<S> <C> <C>
DLJ Merchant Banking Partners II, L.P. and
related investors(1)(2)........................ 2,962,124 82.5%
Lawrence M.v.D. Schloss(3)....................... -- --
DLJMB Inc.
277 Park Avenue
New York, NY 10172
Peter T. Grauer(3)............................... -- --
DLJMB Inc.
277 Park Avenue
New York, NY 10172
William F. Dawson, Jr.(3)........................ -- --
DLJMB Inc.
277 Park Avenue
New York, NY 10172
John F. Fort III................................. -- --
Harold A. Poling................................. -- --
Randall E. Curran(4)............................. 59,566 1.8
James H. Tate(5)................................. 19,660 *
Stephanie N. Josephson(6)........................ 12,430 *
Thomas C. Drury(6)............................... 9,860 *
Robert D. Maddox(6).............................. 10,428 *
All directors and officers as a group (10
persons)(3)(7)................................. 111,944 3.4
</TABLE>
- ---------------
* Represents less than 1 percent
(1) Includes 353,428 shares of Holdings Common Stock issuable upon the exercise
of the DLJMB Warrants. See "The Merger and the Merger Financing."
(2) Consists of shares held directly by the following investors related to
DLJMB: DLJ Offshore Partners II, C.V. ("Offshore"), a Netherlands Antilles
limited partnership, DLJ Diversified Partners, L.P. ("Diversified"), a
Delaware limited partnership, DLJMB Funding II, Inc. ("Funding"), a Delaware
corporation, DLJ Merchant Banking Partners II-A, L.P. ("DLJMBPIIA"), a
Delaware limited partnership, DLJ Diversified Partners-A L.P. ("Diversified
A"), a Delaware limited partnership, DLJ Millennium Partners, L.P.
("Millennium"), a Delaware limited partnership, DLJ Millennium Partners-A,
L.P. ("Millennium A"), a Delaware limited partnership, DLJ EAB Partners,
L.P. ("EAB"), UK Investment Plan 1997 Partners ("UK Partners"), a Delaware
partnership, DLJ First ESC L.P., a Delaware limited partnership ("DLJ First
ESC"), and DLJ ESC II, L.P., a Delaware limited partnership ("DLJ ESC II").
See "Certain Relationships and Related Transactions." The address of each of
DLJMB, Diversified, Funding, DLJMBPIIA, Diversified A, Millennium,
Millennium A, DLJ First ESC, DLJ ESC II and EAB is 277 Park Avenue, New
York, New York 10172. The address of Offshore is John B. Gorsiraweg 14,
Willemstad, Curacao, Netherlands Antilles. The address of UK Partners is
2121 Avenue of the Stars, Fox Plaza, Suite 3000, Los Angeles, California
90067.
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<PAGE> 192
(3) Messrs. Schloss, Grauer and Dawson are officers of DLJMB Inc., an affiliate
of DLJMB and the Initial Purchaser. Share data shown for such individuals
excludes shares shown as held by the DLJMB Funds, as to which such
individuals disclaim beneficial ownership.
(4) Includes 9,939 shares of Holdings Common Stock issuable upon the exercise of
vested stock options.
(5) Includes 5,168 shares of Holdings Common Stock issuable upon the exercise of
vested stock options.
(6) Includes 1,060 shares of Holdings Common Stock issuable upon the exercise of
vested stock options.
(7) Includes 18,287 shares of Holdings Common Stock issuable upon the exercise
of vested stock options.
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<PAGE> 193
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
DLJ Capital Funding received customary fees and reimbursement of expenses
in connection with the arrangement and syndication of the New Credit Facility
and as a lender thereunder. DLJSC also received customary fees in connection
with the distribution of the Old Senior Subordinated Notes and the Debentures,
and the offer to purchase and consent solicitation for the Company's outstanding
Senior Notes and Subordinated Notes. Additionally, DLJ Bridge Finance, Inc.
received customary fees in connection with its commitment to provide bridge
financing in the event that the issuance of the Senior Subordinated Notes and
the Debentures did not occur. The aggregate fees received by these DLJ entities
for these services were approximately $20 million.
Pursuant to a letter agreement dated January 16, 1998 (the "Engagement
Letter"), DLJMB engaged DLJSC to act as DLJMB's exclusive financial advisor with
respect to the Merger and, following the Merger, to act as the Company's
exclusive financial advisor for a period of five years (the "Engagement Period")
with respect to the review and analysis of financial and structural alternatives
available to the Company. Upon the consummation of the Merger, DLJMB's
obligations under the Engagement Letter were assumed by the Company.
As compensation for the services to be provided by DLJSC under the
Engagement Letter, DLJSC received a fee of $4,000,000 upon the consummation of
the Merger and will be entitled to receive an annual advisory fee of $300,000,
payable quarterly in equal installments of $75,000. DLJSC will also be entitled
to reimbursement for all of its out-of-pocket expenses incurred in connection
with its engagement.
During the Engagement Period, DLJSC is also entitled to act as the
Company's exclusive financial advisor, sole placement agent, sole initial
purchaser, sole managing underwriter or sole dealer-manager, as the case may be,
with respect to any Transaction (as hereinafter defined) the Company determines
to pursue. The term "Transaction" includes the following: (i) the sale, merger,
consolidation or any other business combination, in one or a series of
transactions, involving any portion of the business, securities or assets of the
Company; (ii) the acquisition (and any related matters such as financings,
divestitures, etc.) in one or a series of transactions, of all or a portion of
the business, securities or assets of another entity or person; (iii) any
recapitalization, refinancing, repurchase or restructuring of the Company's
equity or debt securities or indebtedness or any amendments or modifications to
the Company's debt securities or indentures whether or not in connection
therewith, involving, by or on behalf of the Company, an offer to purchase or
exchange for cash, property, securities, indebtedness or other consideration, or
a solicitation of consents, waivers of authorizations with respect thereto; (iv)
any spin-off, split-off or other extraordinary dividend of cash, securities or
other assets to stockholders of the Company; or (v) any sale of securities of
the Company effected pursuant to a private sale or an underwritten public
offering.
The Company has agreed to indemnify and hold harmless DLJSC and its
affiliates, and the respective directors, officers, agents and employees of
DLJSC and its affiliates (each, an "Indemnified Person") from and against any
losses, claims, damages, judgments, assessments, costs and other liabilities and
will reimburse such Indemnified Persons for all fees and expenses (including the
reasonable fees and expenses of counsel) as they are incurred in investigating,
repairing, pursuing or defending any claim, action, proceeding or investigation
arising out of or in connection with advice or services rendered or to be
rendered by any Indemnified Person pursuant to the Engagement Letter, the
transactions contemplated by the Engagement Letter or any Indemnified Person's
action or inactions in connection with any such advice, services or
transactions, other than liabilities or expenses that are determined by a
judgment of a court of competent jurisdiction to have resulted solely from such
Indemnified Person's gross negligence or willful misconduct.
The Engagement Letter makes available the resources of DLJSC concerning a
variety of financial and operational matters. The services that have been and
will continue to be provided by DLJSC could not otherwise be obtained by the
Company without the addition of personnel or the engagement of outside
professional advisors. In the opinion of management, the fees provided for under
the Engagement Letter reasonably reflect the benefits received and to be
received by the Company.
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<PAGE> 194
The Company has entered into an Investors' Agreement with the DLJMB Funds
and the senior executive officers of the Company (the "Investors' Agreement").
The Investors' Agreement, among other things, contains provisions regarding the
composition of the Board of Directors of the Company, grants the parties thereto
certain registration rights and contains provisions requiring the senior
executive officers parties thereto to sell their shares of Holdings Common Stock
in connection with certain sales of the Holdings Common Stock by the DLJMB Funds
("drag-along rights") and granting the senior executive officers parties thereto
the right to include a portion of their shares of Holdings Common Stock in
certain sales of the Holdings Common Stock by the DLJMB Funds ("tag-along
rights").
In connection with the Merger, a portion of the funds required to purchase
the shares under the Investment Program were provided through the Management
Loans. Messrs. Curran, Tate, Maddox and Drury and Ms. Josephson received
secured, non-recourse loans from the Company in the amount of $1,249,890,
$367,606, $237,630, $223,222 and $288,413, respectively. The loans bear interest
at the rate of 5.69% per annum and are due in full on May 22, 2006. Upon the
termination of a participant's employment with the Company, other than as a
result of the participant's death, any outstanding loan will become due and
payable.
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<PAGE> 195
LIMITED LIABILITY COMPANY AGREEMENT
Pursuant to a limited liability company agreement dated May 5, 1998 (the
"LLC Agreement"), Holdings formed Thermadyne LLC as a limited liability company
in accordance with the laws of Delaware. The LLC Agreement governs the relative
rights and duties of the members, directors and officers of the Company and
provides that initially Thermadyne LLC shall have only one member, Holdings.
Holdings' membership interest in Thermadyne LLC is not transferable and new
members in Thermadyne LLC may be admitted only with the written consent of, and
upon such terms and conditions as are approved by, Holdings.
LIMITED LIABILITY
As with a corporation, the sole member of Thermadyne LLC is not liable for
the debts, liabilities, contracts or other obligations of Thermadyne LLC in
excess of their capital contributions.
MANAGEMENT
Thermadyne LLC is managed by the board of directors (the "Board"),
currently consisting of four members. See "Management -- The Issuers." Directors
will be elected at an annual meeting of the members of Thermadyne LLC, which
currently only consists of Holdings. At all meetings of the Board, a majority of
the directors shall constitute a quorum for the transaction of business.
Thermadyne LLC's officers are appointed by the Board.
DISSOLUTION
Thermadyne LLC shall be dissolved upon the first to occur of the following
events: (i) the election of the member to dissolve the Company; or (ii) the
entry of a decree of judicial dissolution under Section 18-802 of the Delaware
Limited Liability Company Act. In any such dissolution, Holdings will be
appointed as the liquidator of Thermadyne LLC.
LIABILITY, EXCULPATION AND INDEMNIFICATION
The LLC Agreement provides that no officer, director or certain other
persons shall have any liability to Thermadyne LLC by reason of any action taken
or failure to act on behalf of Thermadyne LLC, except to the extent such person
has been found to have acted with willful misconduct. Thermadyne LLC is also
required to indemnify such persons in the event they are made, or threatened to
be made, party to any legal proceeding by reason of the fact that they are
acting in such capacity on behalf of Thermadyne LLC to the fullest extent
permitted by Delaware corporate law.
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<PAGE> 196
DESCRIPTION OF NEW CREDIT FACILITY
The New Credit Facility has been provided by a syndicate of banks and other
financial institutions led by DLJSC, as arranger (the "Arranger"), DLJ Capital
Funding, Inc., as syndication agent (the "Syndication Agent"), ABN AMRO Bank
N.V., Chicago Branch, as administrative agent (the "Administrative Agent"), and
Societe Generale, as documentation agent. The New Credit Facility includes a
$330 million term loan facility (the "Term Loan Facility") and a $100 million
revolving credit facility (subject to adjustment as provided below), which
provides for revolving loans and up to $50 million of letters of credit (the
"Revolving Credit Facility"). The Term Loan Facility is comprised of a term A
facility of $100 million (the "Term A Facility"), which has a maturity of six
years, a term B facility of $115 million (the "Term B Facility"), which has a
maturity of seven years, and a term C facility of $115 million (the "Term C
Facility"), which has a maturity of eight years. The Revolving Credit Facility
terminates six years after the date of initial funding of the New Credit
Facility and is subject to a potential, but uncommitted, increase of up to $25
million at the Company's request at any time prior to such sixth anniversary.
Such increase is available only if one or more financial institutions agrees, at
the time of the Company's request, to provide it.
The New Credit Facility bears interest, at the Company's option, at the
Administrative Agent's alternate base rate or at the reserve-adjusted London
Interbank Offered Rate ("LIBOR") plus, in each case, applicable margins of (i)
in the case of alternate base rate loans, (x) 1.00% for revolving and Term A
loans, (y) 1.25% for Term B loans and (z) 1.50% for Term C loans and (ii) in the
case of LIBOR loans, (x) 2.25% for revolving and Term A loans, (y) 2.50% for
Term B loans and (z) 2.75% for Term C loans.
The Company pays a commitment fee calculated at a rate of 0.50% per annum
on the daily average unused commitment under the Revolving Credit Facility
(whether or not then available). Such fee is payable quarterly in arrears and
upon termination of the Revolving Credit Facility (whether at stated maturity or
otherwise).
Beginning six months after the consummation of the Merger and the Merger
Financing, the applicable margins for the Term A Facility and the Revolving
Credit Facility, as well as the commitment fee and letter of credit fee, is
subject to possible reductions based on the ratio of consolidated Debt to EBITDA
(each as defined in the New Credit Facility).
The Company pays a letter of credit fee calculated (i) in the case of
standby letters of credit, at a rate per annum equal to the then applicable
margin for LIBOR loans under the Revolving Credit Facility minus 0.125% and (ii)
in the case of documentary letters of credit, at a rate per annum equal to 1.25%
plus, in each case, a fronting fee on the stated amount of each letter of
credit. Such fees are payable quarterly in arrears. In addition, the Company
pays customary transaction charges in connection with any letters of credit.
The Term Loan Facility is subject to the following amortization schedule:
<TABLE>
<CAPTION>
YEAR TERM LOAN A TERM LOAN B TERM LOAN C
---- ----------- ----------- -----------
<S> <C> <C> <C>
1............................... 0.0% 1.0% 1.0%
2............................... 5.0% 1.0% 1.0%
3............................... 10.0% 1.0% 1.0%
4............................... 20.0% 1.0% 1.0%
5............................... 25.0% 1.0% 1.0%
6............................... 40.0% 1.0% 1.0%
7............................... -- 94.0% 1.0%
8............................... -- -- 93.0%
------ ------ ------
100.0% 100.0% 100.0%
</TABLE>
The Term Loan Facility is subject to mandatory prepayment: (i) with 100% of
the net cash proceeds from the issuance of debt, subject to certain exceptions,
(ii) with 100% of the net cash proceeds of asset sales and casualty events,
subject to certain exceptions, (iii) with 50% of the Company's excess cash flow
(as defined in the New Credit Facility) to the extent that the Leverage Ratio
(as defined in the New Credit Facility) exceeds 3.5 to 1.0, and (iv) with 50% of
the net cash proceeds from the issuance of equity to the
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<PAGE> 197
extent that the Leverage Ratio exceeds 4.0 to 1.0. The Company's obligations
under the New Credit Facility are secured by a first-priority perfected lien on:
(i) substantially all domestic property and assets, tangible and intangible
(other than accounts receivable sold or to be sold into the accounts receivable
program and short term real estate leases), of the Company and its domestic
subsidiaries (other than the special purpose subsidiaries involved in the
accounts receivable program); (ii) the capital stock of (a) the Company held by
Holdings and (b) all subsidiaries of the Company (provided that no more than 65%
of the equity interest in non-U.S. subsidiaries held by the Company and its
domestic subsidiaries and no equity interests in subsidiaries held by foreign
subsidiaries are required to be pledged); and (iii) all intercompany
indebtedness. Holdings has guaranteed the obligations of the Company under the
New Credit Facility. In addition, obligations under the New Credit Facility are
guaranteed by all domestic subsidiaries.
The New Credit Facility contains customary covenants and restrictions on
the Company's ability to engage in certain activities, including, but not
limited to: (i) limitations on the incurrence of liens and indebtedness, (ii)
restrictions on sale lease-back transactions, consolidations, mergers, sale of
assets, capital expenditures, transactions with affiliates and investments, and
(iii) severe restrictions on dividends, and other similar distributions.
The New Credit Facility contains financial covenants requiring the Company
to maintain a minimum level of adjusted EBITDA (as defined in the New Credit
Facility); a minimum Interest Coverage Ratio (as defined in the New Credit
Facility); a minimum Fixed Charge Coverage Ratio (as defined in the New Credit
Facility); and a maximum Leverage Ratio (as defined in the New Credit Facility).
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DESCRIPTION OF NEW SENIOR SUBORDINATED NOTES
GENERAL
The New Senior Subordinated Notes will be issued pursuant to an Indenture
(the "Indenture") among the Issuers and State Street Bank and Trust Company, as
trustee (the "Trustee"). The terms of the New Senior Subordinated Notes include
those stated in the Indenture and those made part of the Indenture by reference
to the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The
New Senior Subordinated Notes are subject to all such terms, and Holders of New
Senior Subordinated Notes are referred to the Indenture and the Trust Indenture
Act for a statement thereof. A copy of the Indenture has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part and the
summary herein of certain provisions thereof does not purport to be complete and
is qualified in its entirety by reference thereto. The definitions of certain
terms used in the following summary are set forth below under "-- Certain
Definitions." For purposes of this summary, the term "Company' refers only to
Thermadyne LLC and not to any of its Subsidiaries.
The New Senior Subordinated Notes will be general unsecured obligations of
the Issuers and will be subordinated in right of payment to all existing and
future Senior Indebtedness of the Issuers (including borrowings under the New
Credit Facility). The New Senior Subordinated Notes will rank pari passu with
any future senior subordinated Indebtedness of the Issuers and will rank senior
in right of payment to all future subordinated Indebtedness of the Issuers. The
New Senior Subordinated Notes will be effectively subordinated to all
liabilities of the Issuers' subsidiaries that are not Guarantors. The New Senior
Subordinated Notes will be unconditionally guaranteed on a senior subordinated
basis by certain of the Company's existing domestic subsidiaries. The Note
Guarantees will be general unsecured obligations of the Guarantors, will be
subordinated in right of payment to all existing and future Senior Indebtedness
of the Guarantors, including indebtedness under the New Credit Facility, and
will rank senior in right of payment to any future subordinated indebtedness of
the Guarantors. On a pro forma basis after giving effect to the Merger,
including the Merger Financing and the application of the proceeds thereof, as
of March 31, 1998, the Company and the Guarantors would have had outstanding
approximately $379.5 million of Senior Indebtedness and the Company's
non-Guarantor subsidiaries would have had approximately $87.0 million of
outstanding liabilities, including trade payables. The Indenture will permit the
Company and its Subsidiaries to incur additional Indebtedness, including Senior
Indebtedness, in the future. See "Risk Factors -- Subordination; Asset
Encumbrances" and "-- Certain Covenants -- Incurrence of Indebtedness and
Issuance of Preferred Stock."
Thermadyne Capital, a wholly-owned subsidiary of the Company incorporated
in Delaware, was formed for the purpose of serving as a co-issuer of the Senior
Subordinated Notes in order to facilitate the Original Offering. The Company
believes that certain prospective purchasers of the Senior Subordinated Notes
may be restricted in their ability to purchase debt securities of limited
liability companies, such as the Company, unless such debt securities are
jointly issued by a corporation. Thermadyne Capital will not have any
substantial operations or assets and will not have any revenues. As a result,
prospective purchasers of the New Senior Subordinated Notes should not expect
Thermadyne Capital to participate in servicing the interest and principal
obligations on the New Senior Subordinated Notes.
All of the Company's Subsidiaries (other than Thermadyne Capital and
Thermadyne Receivables, Inc.) are Restricted Subsidiaries. However, under
certain circumstances, the Company will be permitted to designate current or
future Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries will
not be subject to the restrictive covenants set forth in the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The New Senior Subordinated Notes will initially be limited in aggregate
principal amount to $207.0 million and will mature on June 1, 2008. Interest on
the New Senior Subordinated Notes will accrue at the rate of 9 7/8% per annum
and will be payable semi-annually in arrears on June 1 and December 1,
commencing on December 1, 1998, to Holders of record on the immediately
preceding May 15 and November 15. Interest on the New Senior Subordinated Notes
will accrue from the most recent date to which
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<PAGE> 199
interest has been paid or, if no interest has been paid, from the date of
original issuance. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months. Principal of, premium, if any, and interest
and Liquidated Damages, if any, on the New Senior Subordinated Notes will be
payable at the office or agency of the Issuers maintained for such purpose
within the City and State of New York or, at the option of the Issuers, payment
of interest and Liquidated Damages may be made by check mailed to the Holders of
the New Senior Subordinated Notes at their respective addresses set forth in the
register of Holders of New Senior Subordinated Notes; provided that all payments
of principal, premium, interest and Liquidated Damages with respect to New
Senior Subordinated Notes represented by one or more permanent global New Senior
Subordinated Notes will be paid by wire transfer of immediately available funds
to the account of the Depository Trust Company or any successor thereto. Until
otherwise designated by the Issuers, the Issuers' office or agency in New York
will be the office of the Trustee maintained for such purpose. The New Senior
Subordinated Notes will be issued in denominations of $1,000 and integral
multiples thereof.
Subject to the covenants described below, the Issuers may issue additional
notes under the Indenture having the same terms in all respects as the New
Senior Subordinated Notes (or in all respects except for the payment of interest
on the New Senior Subordinated Notes (i) scheduled and paid prior to the date of
issuance of such notes or (ii) payable on the first Interest Payment Date
following such date of issuance). The New Senior Subordinated Notes and any such
additional notes would be treated as a single class for all purposes under the
Indenture.
SUBORDINATION
The payment of Subordinated Note Obligations will be subordinated in right
of payment, as set forth in the Indenture, to the prior payment in full in cash
or cash equivalents of all Senior Indebtedness, whether outstanding on the date
of the Indenture or thereafter incurred.
Upon any distribution to creditors of the Issuers in a liquidation or
dissolution of the Issuers or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Issuers or their property, an
assignment for the benefit of creditors or any marshalling of the Issuers'
assets and liabilities, the holders of Senior Indebtedness will be entitled to
receive payment in full in cash or cash equivalents of all Obligations due in
respect of such Senior Indebtedness (including interest after the commencement
of any such proceeding at the rate specified in the applicable Senior
Indebtedness) before the Holders of New Senior Subordinated Notes will be
entitled to receive any payment with respect to the Subordinated Note
Obligations, and until all Obligations with respect to Senior Indebtedness are
paid in full in cash or cash equivalents, any distribution to which the Holders
of New Senior Subordinated Notes would be entitled shall be made to the holders
of Senior Indebtedness (except that Holders of Senior Subordinated Notes may
receive and retain Permitted Junior Securities and payments made from the trust
described under "-- Legal Defeasance and Covenant Defeasance").
The Issuers also may not make any payment upon or in respect of the
Subordinated Note Obligations (except in Permitted Junior Securities or from the
trust described under "-- Legal Defeasance and Covenant Defeasance") if (a) a
default in the payment of the principal of, premium, if any, or interest on or
commitment fees relating to, Designated Senior Indebtedness occurs and is
continuing beyond any applicable period of grace or (b) any other default occurs
and is continuing with respect to Designated Senior Indebtedness that permits
holders of the Designated Senior Indebtedness as to which such default relates
to accelerate its maturity and the Trustee receives a notice of such default (a
"Payment Blockage Notice") from the Issuers or the holders of any Designated
Senior Indebtedness. Payments on the Senior Subordinated Notes may and shall be
resumed (a) in the case of a payment default, upon the date on which such
default is cured or waived and (b) in case of a nonpayment default, the earlier
of the date on which such nonpayment default is cured or waived or 179 days
after the date on which the applicable Payment Blockage Notice is received,
unless the maturity of any Designated Senior Indebtedness has been accelerated.
No new period of payment blockage may be commenced unless and until 360 days
have elapsed since the effectiveness of the immediately prior Payment Blockage
Notice. No nonpayment default that existed or was continuing on the date of
delivery of any Payment Blockage Notice to the Trustee shall be, or be made, the
basis for a
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subsequent Payment Blockage Notice unless such default shall have been waived or
cured for a period of not less than 90 days.
"Designated Senior Indebtedness" means (a) any Indebtedness outstanding
under the New Credit Facility and (b) any other Senior Indebtedness permitted
under the Indenture the principal amount of which is $25.0 million or more and
that has been designated by the Issuers as "Designated Senior Indebtedness."
"Permitted Junior Securities" means Equity Interests in the Issuers or debt
securities of the Issuers that are subordinated to all Senior Indebtedness (and
any debt securities issued in exchange for Senior Indebtedness) to substantially
the same extent as, or to a greater extent than, the Senior Subordinated Notes
are subordinated to Senior Indebtedness.
"Senior Indebtedness" means, with respect to any Person, (a) all
Obligations of such Person outstanding under the New Credit Facility and all
Hedging Obligations payable to a lender or an Affiliate thereof or to a Person
that was a lender or an Affiliate thereof at the time the contract was entered
into under the New Credit Facility or any of its Affiliates, including, without
limitation, interest accruing subsequent to the filing of, or which would have
accrued but for the filing of, a petition for bankruptcy, whether or not such
interest is an allowable claim in such bankruptcy proceeding, (b) any other
Indebtedness, unless the instrument under which such Indebtedness is incurred
expressly provides that it is subordinated in right of payment to any other
Senior Indebtedness of such Person and (c) all Obligations with respect to the
foregoing. Notwithstanding anything to the contrary in the foregoing, Senior
Indebtedness will not include (i) any liability for federal, state, local or
other taxes, (ii) any Indebtedness of such Person (other than pursuant to the
New Credit Facility) to any of its Subsidiaries or other Affiliates, (iii) any
trade payables or (iv) any Indebtedness that is incurred in violation of the
Indenture.
"Subordinated Note Obligations" means all Obligations with respect to the
Senior Subordinated Notes, including, without limitation, principal, premium (if
any), interest and Liquidated Damages payable pursuant to the terms of the
Senior Subordinated Notes (including upon the acceleration or redemption
thereof), together with and including any amounts received or receivable upon
the exercise of rights of rescission or other rights of action (including claims
for damages) or otherwise.
The Indenture further requires that the Issuers promptly notify holders of
Senior Indebtedness if payment of the Senior Subordinated Notes is accelerated
because of an Event of Default. As a result of the subordination provisions
described above, in the event of a liquidation or insolvency, New Holders of
Senior Subordinated Notes may recover less ratably than creditors of the Issuers
who are holders of Senior Indebtedness.
NOTE GUARANTEES
The Company's payment obligations under the New Senior Subordinated Notes
will be jointly and severally guaranteed (the "Note Guarantees") by the
Guarantors. The Note Guarantee of each Guarantor will be subordinated to the
prior payment in full in cash or cash equivalents of all Senior Indebtedness of
such Guarantor (including such Guarantor's guarantee of the New Credit Facility)
to the same extent that the New Senior Subordinated Notes are subordinated to
Senior Indebtedness of the Company. The obligations of each Guarantor under its
Note Guarantee will be limited so as not to constitute a fraudulent conveyance
under applicable law.
The Indenture provides that no Guarantor may consolidate with or merge with
or into (whether or not such Guarantor is the surviving Person), another
corporation, Person or entity whether or not affiliated with such Guarantor
unless: (i) subject to the provisions of the following paragraph, the Person
formed by or surviving any such consolidation or merger (if other than such
Guarantor) assumes all the obligations of such Guarantor pursuant to a
supplemental indenture in form and substance reasonably satisfactory to the
Trustee, under the Senior Subordinated Notes, the Indenture and the Registration
Rights Agreement; (ii) immediately after giving effect to such transaction, no
Default or Event of Default exists; (iii) the Company would, at the time of such
transaction and after giving pro forma effect thereto as if such transaction had
occurred at the beginning of the applicable four-quarter period, be permitted to
incur at least $1.00 of
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additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the covenant described under the caption " -- Incurrence of
Indebtedness and Issuance of Preferred Stock." The requirements of clause (iii)
of this paragraph will not apply in the case of a consolidation with or merger
with or into the Company or another Guarantor.
The Indenture provides that, in the event of a sale or other disposition of
all of the assets of any Guarantor, by way of merger, consolidation or
otherwise, or a sale or other disposition of all of the capital stock of any
Guarantor, such Guarantor (in the event of a sale or other disposition, by way
of such a merger, consolidation or otherwise, of all of the capital stock of
such Guarantor) or the corporation acquiring the property (in the event of a
sale or other disposition of all of the assets of such Guarantor) will be
released and relieved of any obligations under its Note Guarantee; provided that
the Net Proceeds of such sale or other disposition are applied in accordance
with the applicable provisions of the Indenture. See "Repurchase at the Option
of Holders."
OPTIONAL REDEMPTION
Except as provided below, the New Senior Subordinated Notes will not be
redeemable at the Issuers' option prior to June 1, 2003. Thereafter, the New
Senior Subordinated Notes will be subject to redemption at any time at the
option of the Issuers, in whole or in part, upon not less than 30 nor more than
60 days' notice, in cash at the redemption prices (expressed as percentages of
principal amount) set forth below, plus accrued and unpaid interest and
Liquidated Damages, if any, thereon to the applicable redemption date, if
redeemed during the twelve-month period beginning on June 1 of the years
indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2003..................................................... 104.938%
2004..................................................... 103.292%
2005..................................................... 101.646%
2006 and thereafter...................................... 100.000%
</TABLE>
Notwithstanding the foregoing, on or prior to June 1, 2001, the Issuers may
redeem up to 35% of the aggregate principal amount of Senior Subordinated Notes
ever issued under the Indenture in cash at a redemption price of 109.875% of the
principal amount thereof, plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the redemption date, with the net cash proceeds of
one or more Public Equity Offerings; provided that at least 65% of the aggregate
principal amount of Senior Subordinated Notes ever issued under the Indenture
remains outstanding immediately after the occurrence of any such redemption; and
provided further that such redemption shall occur within 90 days of the date of
the closing of any such Public Equity Offering.
In addition, at any time prior to June 1, 2003, the Issuers may, at their
option upon the occurrence of a Change of Control, redeem the New Senior
Subordinated Notes, in whole but not in part, upon not less than 30 nor more
than 60 days' prior notice (but in no event may any such redemption occur more
than 60 days after the occurrence of such Change of Control), in cash at a
redemption price equal to (i) the present value of the sum of all the remaining
interest (excluding accrued and unpaid interest, if any), premium and principal
payments that would become due on the New Senior Subordinated Notes as if the
New Senior Subordinated Notes were to remain outstanding and be redeemed on June
1, 2003, computed using a discount rate equal to the Treasury Rate plus 50 basis
points, plus (ii) accrued and unpaid interest and Liquidated Damages, if any, to
the date of redemption.
"Treasury Rate" means, as of any redemption date, the yield to maturity as
of such redemption date of United States Treasury securities with a constant
maturity (as compiled and published in the most recent Federal Reserve
Statistical Release H.15 (519) that has become publicly available at least two
Business Days prior to the redemption date (or, if such Statistical Release is
no longer published, any publicly available source of similar market data)) most
nearly equal to the period from the redemption date to June 1, 2003; provided
that if the period from the redemption date to June 1, 2003 is less than one
year, the weekly average
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yield on actually traded United States Treasury securities adjusted to a
constant maturity of one year shall be used.
SELECTION AND NOTICE
If less than all of the Senior Subordinated Notes are to be redeemed at any
time, selection of New Senior Subordinated Notes for redemption will be made by
the Trustee in compliance with the requirements of the principal national
securities exchange, if any, on which the New Senior Subordinated Notes are
listed, or, if the New Senior Subordinated Notes are not so listed, on a pro
rata basis, by lot or by such method as the Trustee shall deem fair and
appropriate; provided that no New Senior Subordinated Notes of $1,000 or less
shall be redeemed in part. Notices of redemption shall be mailed by first class
mail at least 30 but not more than 60 days before the redemption date to each
Holder of New Senior Subordinated Notes to be redeemed at its registered
address. Notices of redemption may not be conditional. If any New Senior
Subordinated Note is to be redeemed in part only, the notice of redemption that
relates to such New Senior Subordinated Note shall state the portion of the
principal amount thereof to be redeemed. A new Senior Subordinated Note in
principal amount equal to the unredeemed portion thereof will be issued in the
name of the Holder thereof upon cancellation of the original New Senior
Subordinated Note. New Senior Subordinated Notes called for redemption become
due on the date fixed for redemption. On and after the redemption date, interest
ceases to accrue on New Senior Subordinated Notes or portions of them called for
redemption.
MANDATORY REDEMPTION
The Issuers are not required to make mandatory redemption of, or sinking
fund payments with respect to, the New Senior Subordinated Notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of New Senior
Subordinated Notes will have the right to require the Issuers to repurchase all
or any part (equal to $1,000 or an integral multiple thereof) of such Holder's
New Senior Subordinated Notes pursuant to the offer described below (the "Change
of Control Offer") at an offer price in cash equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the date of repurchase (the "Change of Control
Payment"). Within 60 days following any Change of Control, the Issuers will (or
will cause the Trustee to) mail a notice to each Holder describing the
transaction or transactions that constitute the Change of Control and offering
to repurchase New Senior Subordinated Notes on the date specified in such
notice, which date shall be no earlier than 30 days and no later than 60 days
from the date such notice is mailed (the "Change of Control Payment Date"),
pursuant to the procedures required by the Indenture and described in such
notice. The Issuers will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the New Senior Subordinated Notes as a result of a Change of
Control. To the extent that the provisions of any securities laws or regulations
conflict with the provisions of the Indenture relating to such Change of Control
Offer, the Issuers will comply with the applicable securities laws and
regulations and shall not be deemed to have breached their obligations described
in the Indenture by virtue thereof.
On the Change of Control Payment Date, the Issuers will, to the extent
lawful, (a) accept for payment all New Senior Subordinated Notes or portions
thereof properly tendered pursuant to the Change of Control Offer, (b) deposit
with the Paying Agent an amount equal to the Change of Control Payment in
respect of all New Senior Subordinated Notes or portions thereof so tendered and
(c) deliver or cause to be delivered to the Trustee the New Senior Subordinated
Notes so accepted together with an Officers' Certificate stating the aggregate
principal amount of New Senior Subordinated Notes or portions thereof being
purchased by the Issuers. The Paying Agent will promptly mail to each Holder of
New Senior Subordinated Notes so tendered the Change of Control Payment for such
New Senior Subordinated Notes, and the Trustee will promptly authenticate and
mail (or cause to be transferred by book-entry) to each Holder a new New Senior
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Subordinated Note equal in principal amount to any unpurchased portion of the
Senior Subordinated Notes surrendered, if any; provided that each such new
Senior Subordinated Note will be in a principal amount of $1,000 or an integral
multiple thereof. The Indenture will provide that, prior to complying with the
provisions of this covenant, but in any event within 90 days following a Change
of Control, the Issuers will either repay all outstanding Senior Indebtedness or
obtain the requisite consents, if any, under all agreements governing
outstanding Senior Indebtedness to permit the repurchase of Senior Subordinated
Notes required by this covenant. The Issuers will publicly announce the results
of the Change of Control Offer on or as soon as practicable after the Change of
Control Payment Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the Holders of the New Senior Subordinated Notes to
require that the Issuers repurchase or redeem the New Senior Subordinated Notes
in the event of a takeover, recapitalization or similar transaction.
The New Credit Facility prohibits the Issuers from purchasing any Senior
Subordinated Notes and also will provide that certain change of control events
(which may include events not otherwise constituting a Change of Control under
the Indenture) with respect to the Issuers would constitute a default
thereunder. Any future credit agreements or other agreements relating to Senior
Indebtedness to which any Issuer becomes a party may contain similar
restrictions and provisions. In the event a Change of Control occurs at a time
when the Issuers are prohibited from purchasing Senior Subordinated Notes, the
Issuers could seek the consent of its lenders to the purchase of Senior
Subordinated Notes or could attempt to refinance the borrowings that contain
such prohibition. If the Issuers do not obtain such a consent or repay such
borrowings, the Issuers will remain prohibited from purchasing Senior
Subordinated Notes. In such case, the Issuers' failure to purchase tendered
Senior Subordinated Notes would constitute an Event of Default under the
Indenture, which would, in turn, constitute a default under the New Credit
Facility. In such circumstances, the subordination provisions in the Indenture
would likely restrict payments to the Holders of Senior Subordinated Notes.
The Issuers will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all New Senior Subordinated Notes validly tendered and not withdrawn
under such Change of Control Offer.
"Change of Control" means the occurrence of any of the following: (a) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Subsidiaries, taken as a
whole, to any "person" or "group" (as such terms are used in Section 13(d) of
the Exchange Act), other than the Principals and their Related Parties; (b) the
adoption of a plan for the liquidation or dissolution of one or both of the
Issuers; (c) the consummation of any transaction (including, without limitation,
any merger or consolidation) the result of which is that any "person" or "group"
(as such terms are used in Section 13(d) of the Exchange Act), other than the
Principals and their Related Parties, becomes the "beneficial owner" (as such
term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly
or indirectly through one or more intermediaries, of 50% or more of the voting
power of the outstanding voting stock of the Company; (d) the first day on which
a majority of the members of the board of directors of the Company are not
Continuing Members or (e) the first day on which the Company fails to own 100%
of the issued and outstanding Equity Interests of Thermadyne Capital (other than
by reason of the merger of Thermadyne Capital with and into a corporate
successor to the Company).
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precise established definition of the phrase under applicable
law. Accordingly, the ability of a Holder of New Senior Subordinated Notes to
require the Issuers to repurchase such New Senior Subordinated Notes as a
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result of a sale, lease, transfer, conveyance or other disposition of less than
all of the assets of the Company and its Subsidiaries taken as a whole to
another Person or group may be uncertain.
"Continuing Members" means, as of any date of determination, any member of
the board of directors of the Company who (a) was a member of such board of
directors immediately after consummation of the Merger or (b) was nominated for
election or elected to such board of directors with the approval of, or whose
election to the board of directors was ratified by, at least a majority of the
Continuing Members who were members of such board of directors at the time of
such nomination or election.
ASSET SALES
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, consummate an Asset Sale unless (a) the
Company or such Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the fair market
value (evidenced by a resolution of the board of directors set forth in an
Officers' Certificate delivered to the Trustee) of the assets or Equity
Interests issued or sold or otherwise disposed of and (b) at least 75% of the
consideration therefor received by the Company or such Restricted Subsidiary is
in the form of (i) cash or Cash Equivalents or (ii) property or assets that are
used or useful in a Permitted Business, or the Capital Stock of any Person
engaged in a Permitted Business if, as a result of the acquisition by the
Company or any Restricted Subsidiary thereof, such Person becomes a Restricted
Subsidiary; provided that the amount of (x) any liabilities (as shown on the
Company's or such Restricted Subsidiary's most recent balance sheet), of the
Company or any Restricted Subsidiary (other than contingent liabilities and
liabilities that are by their terms subordinated to the Senior Subordinated
Notes or any guarantee thereof) that are assumed by the transferee of any such
assets pursuant to a customary novation agreement that releases the Company or
such Restricted Subsidiary from further liability, (y) any securities, notes or
other obligations received by the Company or any such Restricted Subsidiary from
such transferee that are contemporaneously (subject to ordinary settlement
periods) converted by the Company or such Restricted Subsidiary into cash or
Cash Equivalents (to the extent of the cash or Cash Equivalents received), and
(z) any Designated Noncash Consideration received by the Company or any of its
Restricted Subsidiaries in such Asset Sale having an aggregate fair market
value, taken together with all other Designated Noncash Consideration received
pursuant to this clause (z) that is at that time outstanding, not to exceed 15%
of Total Assets at the time of the receipt of such Designated Noncash
Consideration (with the fair market value of each item of Designated Noncash
Consideration being measured at the time received and without giving effect to
subsequent changes in value), shall be deemed to be cash for purposes of this
provision; and provided further that the 75% limitation referred to in clause
(b) above will not apply to any Asset Sale in which the cash or Cash Equivalents
portion of the consideration received therefrom, determined in accordance with
the foregoing proviso, is equal to or greater than what the after-tax proceeds
would have been had such Asset Sale complied with the aforementioned 75%
limitation.
Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
the Company or any such Restricted Subsidiary shall apply such Net Proceeds, at
its option (or to the extent the Company is required to apply such Net Proceeds
pursuant to the terms of the New Credit Facility), to (a) repay or purchase
Senior Indebtedness or Pari Passu Indebtedness of the Company or any
Indebtedness of any Restricted Subsidiary, provided that, if the Company shall
so repay or purchase Pari Passu Indebtedness of the Company, it will equally and
ratably reduce Indebtedness under the Senior Subordinated Notes if the Senior
Subordinated Notes are then redeemable, or, if the Senior Subordinated Notes may
not then be redeemed, the Company shall make an offer (in accordance with the
procedures set forth below for an Asset Sale Offer) to all Holders of Senior
Subordinated Notes to purchase at a purchase price equal to 100% of the
principal amount of the Senior Subordinated Notes, plus accrued and unpaid
interest and Liquidated Damages, if any, thereon to the date of purchase, the
Senior Subordinated Notes that would otherwise be redeemed, or (b) an investment
in property, the making of a capital expenditure or the acquisition of assets
that are used or useful in a Permitted Business, or Capital Stock of any Person
primarily engaged in a Permitted Business if (i) as a result of the acquisition
by the Company or any Restricted Subsidiary thereof, such Person becomes a
Restricted Subsidiary or (ii) the Investment in such Capital Stock is permitted
by clause (f) of the definition of Permitted Investments. Pending the final
application of any such Net Proceeds, the Company may
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temporarily reduce Indebtedness or otherwise invest such Net Proceeds in any
manner that is not prohibited by the Indenture. Any Net Proceeds from Asset
Sales that are not applied or invested as provided in the first sentence of this
paragraph will be deemed to constitute "Excess Proceeds." When the aggregate
amount of Excess Proceeds exceeds $15.0 million, the Company will be required to
make an offer to all Holders of Senior Subordinated Notes (an "Asset Sale
Offer") to purchase the maximum principal amount of Senior Subordinated Notes
that may be purchased out of the Excess Proceeds, at an offer price in cash in
an amount equal to 100% of the principal amount thereof, plus accrued and unpaid
interest and Liquidated Damages, if any, thereon to the date of purchase, in
accordance with the procedures set forth in the Indenture. To the extent that
any Excess Proceeds remain after consummation of an Asset Sale Offer, the
Company may use such Excess Proceeds for any purpose not otherwise prohibited by
the Indenture. If the aggregate principal amount of Senior Subordinated Notes
surrendered by Holders thereof in connection with an Asset Sale Offer exceeds
the amount of Excess Proceeds, the Trustee shall select the Senior Subordinated
Notes to be purchased as set forth under "-- Selection and Notice." Upon
completion of such offer to purchase, the amount of Excess Proceeds shall be
reset at zero.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Senior Subordinated Notes pursuant to an Asset Sale Offer. To
the extent that the provisions of any securities laws or regulations conflict
with the provisions of the Indenture relating to such Asset Sale Offer, the
Company will comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations described in the Indenture
by virtue thereof.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, (a) declare or pay
any dividend or make any other payment or distribution on account of the
Company's or any of its Restricted Subsidiaries' Equity Interests (other than
dividends or distributions payable in Equity Interests (other than Disqualified
Stock) of the Company or dividends or distributions payable to the Company or
any Wholly Owned Restricted Subsidiary of the Company); (b) purchase, redeem or
otherwise acquire or retire for value any Equity Interests of the Company, any
of its Restricted Subsidiaries or any other Affiliate of the Company (other than
any such Equity Interests owned by the Company or any Restricted Subsidiary of
the Company); (c) make any principal payment on or with respect to, or purchase,
redeem, defease or otherwise acquire or retire for value, any Indebtedness of
the Company that is subordinated in right of payment to the Senior Subordinated
Notes, except in accordance with the mandatory redemption or repayment
provisions set forth in the original documentation governing such Indebtedness
(but not pursuant to any mandatory offer to repurchase upon the occurrence of
any event); or (d) make any Restricted Investment (all such payments and other
actions set forth in clauses (a) through (d) above being collectively referred
to as "Restricted Payments"), unless, at the time of and after giving effect to
such Restricted Payment:
(i) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(ii) the Company would, immediately after giving pro forma effect
thereto as if such Restricted Payment had been made at the beginning of the
applicable four-quarter period, have been permitted to incur at least $1.00
of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test
set forth in the first paragraph of the covenant described under caption
"-- Incurrence of Indebtedness and Issuance of Preferred Stock"; and
(iii) such Restricted Payment, together with the aggregate amount of
all other Restricted Payments made by the Company and its Restricted
Subsidiaries after the date of the Indenture (excluding Restricted Payments
permitted by clauses (a) (to the extent that the declaration of any
dividend referred to therein reduces amounts available for Restricted
Payments pursuant to this clause (iii)), (b), (c),
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(e) through (j), (l), (m), (p), (q) and (r) of the next succeeding
paragraph), is less than the sum, without duplication, of (A) 50% of the
Consolidated Net Income of the Company for the period (taken as one
accounting period) commencing July 1, 1998 to the end of the Company's most
recently ended fiscal quarter for which internal financial statements are
available at the time of such Restricted Payment (or, if such Consolidated
Net Income for such period is a deficit, less 100% of such deficit), plus
(B) 100% of the Qualified Proceeds received by the Company on or after the
date of the Indenture from contributions to the Company's capital or from
the issue or sale on or after the date of the Indenture of Equity Interests
of the Company or of Disqualified Stock or convertible debt securities of
the Company to the extent that they have been converted into such Equity
Interests (other than Equity Interests, Disqualified Stock or convertible
debt securities sold to a Subsidiary of the Company and other than
Disqualified Stock or convertible debt securities that have been converted
into Disqualified Stock), plus (C) the amount equal to the net reduction in
Investments in Persons after the date of the Indenture who are not
Restricted Subsidiaries (other than Permitted Investments) resulting from
(x) Qualified Proceeds received as a dividend, repayment of a loan or
advance or other transfer of assets (valued at the fair market value
thereof) to the Company or any Restricted Subsidiary from such Persons, (y)
Qualified Proceeds received upon the sale or liquidation of such Investment
and (z) the redesignation of Unrestricted Subsidiaries (other than any
Unrestricted Subsidiary designated as such pursuant to clause (k) or (o) of
the following paragraph) whose assets are used or useful in, or which is
engaged in, one or more Permitted Business as Restricted Subsidiaries
(valued (proportionate to the Company's equity interest in such Subsidiary)
at the fair market value of the net assets of such Subsidiary at the time
of such redesignation).
The foregoing provisions will not prohibit:
(a) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would have
complied with the provisions of the Indenture;
(b) (i) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Indebtedness or Equity Interests of the Company
(the "Retired Capital Stock") in exchange for, or out of the net cash proceeds
of the substantially concurrent sale (other than to a Subsidiary of the Company)
of, other Equity Interests of the Company (other than any Disqualified Stock)
(the "Refunding Capital Stock"), provided that the amount of any such net cash
proceeds that are utilized for any such redemption, repurchase, retirement,
defeasance or other acquisition shall be excluded from clause (iii)(B) of the
preceding paragraph and (ii) if immediately prior to the retirement of Retired
Capital Stock, the declaration and payment of dividends thereon was permitted
under clause (f) of this paragraph, the declaration and payment of dividends on
the Refunding Capital Stock in an aggregate amount per year no greater than the
aggregate amount of dividends per annum that was declarable and payable on such
Retired Capital Stock immediately prior to such retirement; provided that, at
the time of the declaration of any such dividends, no Default or Event of
Default shall have occurred and be continuing or would occur as a consequence
thereof;
(c) the defeasance, redemption, repurchase, retirement or other acquisition
of subordinated Indebtedness of the Company with the net cash proceeds from an
incurrence of, or in exchange for, Permitted Refinancing Indebtedness;
(d) the repurchase, redemption or other acquisition or retirement for value
of any Equity Interests of the Company or Holdings held by any member of
Holdings' or the Company's (or any of its Restricted Subsidiaries') management
pursuant to any management equity subscription agreement or stock option
agreement and any dividend to Holdings to fund any such repurchase, redemption,
acquisition or retirement, provided that the aggregate price paid for all such
repurchased, redeemed, acquired or retired Equity Interests shall not exceed (x)
$7.5 million in any calendar year (with unused amounts in any calendar year
being carried over to succeeding calendar years subject to a maximum (without
giving effect to the following clause (y)) of $15.0 million in any calendar
year), plus (y) the aggregate cash proceeds received by the Company during such
calendar year from any reissuance of Equity Interests by the Company or Holdings
to members of management of the Company and its Restricted Subsidiaries and (ii)
no Default or Event of Default shall have occurred and be continuing immediately
after such transaction;
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(e) payments and transactions in connection with the Recapitalization, the
New Credit Facility (including commitment, syndication and arrangement fees
payable thereunder) and the application of the proceeds thereof, and the payment
of fees and expenses with respect thereto;
(f) the declaration and payment of dividends to holders of any class or
series of preferred stock (other than Disqualified Stock), provided that, at the
time of such issuance, after giving effect to such issuance on a pro forma
basis, the Fixed Charge Coverage Ratio for the Company for the most recently
ended four full fiscal quarters for which internal financial statements are
available immediately preceding the date of such issuance would have been no
less than 2.0 to 1;
(g) the payment of dividends or the making of loans or advances by the
Company to Holdings not to exceed $5.0 million in any fiscal year for costs and
expenses incurred by Holdings in its capacity as a holding company or for
services rendered by Holdings on behalf of the Company;
(h) payments or distributions to Holdings pursuant to any Tax Sharing
Agreement;
(i) the payment of dividends by a Restricted Subsidiary on any class of
common stock of such Restricted Subsidiary if (i) such dividend is paid pro rata
to all holders of such class of common stock and (ii) at least 51% of such class
of common stock is held by the Company or one or more of its Restricted
Subsidiaries;
(j) the repurchase of any class of common stock of a Restricted Subsidiary
if (i) such repurchase is made pro rata with respect to such class of common
stock and (ii) at least 51% of such class of common stock is held by the Company
or one or more of its Restricted Subsidiaries;
(k) any other Restricted Investment made in a Permitted Business which,
together with all other Restricted Investments made pursuant to this clause (k)
since the date of the Indenture, does not exceed $25.0 million (in each case,
after giving effect to all subsequent reductions in the amount of any Restricted
Investment made pursuant to this clause (k), either as a result of (i) the
repayment or disposition thereof for cash or (ii) the redesignation of an
Unrestricted Subsidiary as a Restricted Subsidiary (valued proportionate to the
Company's equity interest in such Subsidiary at the time of such redesignation)
at the fair market value of the net assets of such Subsidiary at the time of
such redesignation), in the case of clause (i) and (ii), not to exceed the
amount of such Restricted Investment previously made pursuant to this clause
(k); provided that no Default or Event of Default shall have occurred and be
continuing immediately after making such Restricted Investment;
(l) the declaration and payment of dividends to holders of any class or
series of Disqualified Stock of the Company or any Restricted Subsidiary issued
on or after the date of the Indenture in accordance with the covenant described
under the caption " -- Incurrence of Indebtedness and Issuance of Preferred
Stock"; provided that no Default or Event of Default shall have occurred and be
continuing immediately after making such Restricted Payment;
(m) repurchases of Equity Interests deemed to occur upon exercise of stock
options if such Equity Interests represent a portion of the exercise price of
such options;
(n) the payment of dividends or distributions on the Company's membership
interests, following the first public offering of the Company's membership
interests or Holdings' common stock after the date of the Indenture, of up to
6.0% per annum of (i) the net proceeds received by the Company from such public
offering of its membership interests or (ii) the net proceeds received by the
Company from such public offering of Holdings' common stock as common equity or
preferred equity (other than Disqualified Stock), other than, in each case, with
respect to public offerings with respect to the Company's membership interests
or Holdings' common stock registered on Form S-8; provided that no Default or
Event of Default shall have occurred and be continuing immediately after any
such payment of dividends or distributions;
(o) any other Restricted Payment which, together with all other Restricted
Payments made pursuant to this clause (o) since the date of the Indenture, does
not exceed $25.0 million (in each case, after giving effect to all subsequent
reductions in the amount of any Restricted Investment made pursuant to this
clause (o) either as a result of (i) the repayment or disposition thereof for
cash or (ii) the redesignation of an Unrestricted Subsidiary as a Restricted
Subsidiary (valued proportionate to the Company's equity interest in
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such Subsidiary at the time of such redesignation) at the fair market value of
the net assets of such Subsidiary at the time of such redesignation), in the
case of clause (i) and (ii), not to exceed the amount of such Restricted
Investment previously made pursuant to this clause (o); provided that no Default
or Event of Default shall have occurred and be continuing immediately after
making such Restricted Payment;
(p) the pledge by the Company of the Capital Stock of an Unrestricted
Subsidiary of the Company to secure Non-Recourse Debt of such Unrestricted
Subsidiary;
(q) the purchase, redemption or other acquisition or retirement for value
of any Equity Interests of any Restricted Subsidiary issued after the date of
the Indenture, provided that the aggregate price paid for any such repurchased,
redeemed, acquired or retired Equity Interests shall not exceed the sum of (i)
the amount of cash and Cash Equivalents received by such Restricted Subsidiary
from the issue or sale thereof and (ii) any accrued dividends thereon the
payment of which would be permitted pursuant to clause (l) above;
(r) distributions or payments of Receivables Fees; and
(s) dividends or distributions to Holdings solely in connection with the
purchase, redemption or other acquisition or retirement for value of rights
issued pursuant to Holdings' Rights Plan as in effect on the date of the
Indenture.
The board of directors of the Company may designate any Restricted
Subsidiary to be an Unrestricted Subsidiary if such designation would not cause
a Default. For purposes of making such designation, all outstanding Investments
by the Company and its Restricted Subsidiaries (except to the extent repaid in
cash) in the Subsidiary so designated will be deemed to be Restricted Payments
at the time of such designation and will reduce the amount available for
Restricted Payments under the first paragraph of this covenant. All such
outstanding Investments will be deemed to constitute Restricted Investments in
an amount equal to the greater of (i) the net book value of such Investments at
the time of such designation and (ii) the fair market value of such Investments
at the time of such designation. Such designation will only be permitted if such
Restricted Investment would be permitted at such time and if such Restricted
Subsidiary otherwise meets the definition of an Unrestricted Subsidiary.
The amount of (i) all Restricted Payments (other than cash) shall be the
fair market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the Company or such
Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment
and (ii) Qualified Proceeds (other than cash) shall be the fair market value on
the date of receipt thereof by the Company of such Qualified Proceeds. The fair
market value of any non-cash Restricted Payment shall be determined by the board
of directors of the Company whose resolution with respect thereto shall be
delivered to the Trustee. Not later than the date of making any Restricted
Payment, the Company shall deliver to the Trustee an Officers' Certificate
stating that such Restricted Payment is permitted and setting forth the basis
upon which the calculations required by the covenant "Restricted Payments" were
computed.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Indenture provides that (a) the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create, incur,
issue, assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Indebtedness), (b) the Company will not, and
will not permit any of its Restricted Subsidiaries to, issue any shares of
Disqualified Stock and (c) the Company will not permit any of its Restricted
Subsidiaries to issue any shares of preferred stock; provided that the Company
or any Restricted Subsidiary may incur Indebtedness (including Acquired
Indebtedness) or issue shares of Disqualified Stock if the Fixed Charge Coverage
Ratio for the Company's most recently ended four full fiscal quarters for which
internal financial statements are available immediately preceding the date on
which such additional Indebtedness is incurred or such Disqualified Stock is
issued would have been at least 2.0 to 1, determined on a consolidated pro forma
basis (including a pro forma application of the net proceeds therefrom), as if
the additional Indebtedness had been incurred, or the Disqualified Stock had
been issued, as the case may be, at the beginning of such four-quarter period.
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The provisions of the first paragraph of this covenant will not apply to
the incurrence of any of the following items of Indebtedness (collectively,
"Permitted Indebtedness"):
(i) the incurrence by the Company and its Restricted Subsidiaries of
Indebtedness under the New Credit Facility; provided that the aggregate
principal amount of all Indebtedness (with letters of credit being deemed
to have a principal amount equal to the maximum potential liability of the
Company and such Restricted Subsidiaries thereunder) then classified as
having been incurred in reliance upon this clause (i) that remains
outstanding under the New Credit Facility after giving effect to such
incurrence does not exceed an amount equal to $430.0 million;
(ii) the incurrence by the Company and its Restricted Subsidiaries of
Existing Indebtedness;
(iii) the incurrence by the Issuers of Indebtedness represented by
the Senior Subordinated Notes and the Indenture and by the Guarantors of
Indebtedness represented by the Note Guarantees;
(iv) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness represented by Capital Expenditure
Indebtedness, Capital Lease Obligations or purchase money obligations, in
each case, incurred for the purpose of financing all or any part of the
purchase price or cost of construction or improvement of property, plant or
equipment used in the business of the Company or such Restricted
Subsidiary, in an aggregate principal amount (or accreted value, as
applicable) not to exceed $40.0 million outstanding after giving effect to
such incurrence;
(v) Indebtedness arising from agreements of the Company or any
Restricted Subsidiary providing for indemnification, adjustment of purchase
price or similar obligations, in each case, incurred or assumed in
connection with the disposition of any business, assets or a Subsidiary,
other than guarantees of Indebtedness incurred by any Person acquiring all
or any portion of such business, assets or Restricted Subsidiary for the
purpose of financing such acquisition; provided that (A) such Indebtedness
is not reflected on the balance sheet of the Company or any Restricted
Subsidiary (contingent obligations referred to in a footnote or footnotes
to financial statements and not otherwise reflected on the balance sheet
will not be deemed to be reflected on such balance sheet for purposes of
this clause (A)) and (B) the maximum assumable liability in respect of such
Indebtedness shall at no time exceed the gross proceeds including non-cash
proceeds (the fair market value of such non-cash proceeds being measured at
the time received and without giving effect to any subsequent changes in
value) actually received by the Company and/or such Restricted Subsidiary
in connection with such disposition;
(vi) the incurrence by the Company or any of its Restricted
Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the
net proceeds of which are used to refund, refinance or replace Indebtedness
(other than intercompany Indebtedness) that was permitted by the Indenture
to be incurred;
(vii) the incurrence by the Company or any of its Restricted
Subsidiaries of intercompany Indebtedness between or among the Company
and/or any of its Restricted Subsidiaries; provided that (i) if the Company
is the obligor on such Indebtedness, such Indebtedness is expressly
subordinated to the prior payment in full in cash of all Obligations with
respect to the Senior Subordinated Notes and (ii)(A) any subsequent
issuance or transfer of Equity Interests that results in any such
Indebtedness being held by a Person other than the Company or a Restricted
Subsidiary thereof and (B) any sale or other transfer of any such
Indebtedness to a Person that is not either the Company or a Restricted
Subsidiary thereof shall be deemed, in each case, to constitute an
incurrence of such Indebtedness by the Company or such Restricted
Subsidiary, as the case may be, that was not permitted by this clause
(vii);
(viii) the incurrence by the Company or any of its Restricted
Subsidiaries of Hedging Obligations that are incurred for the purpose of
fixing or hedging (A) interest rate risk with respect to any floating rate
Indebtedness that is permitted by the terms of this Indenture to be
outstanding and (B) exchange rate risk with respect to agreements or
Indebtedness of such Person payable denominated in a currency other than
U.S. dollars, provided that such agreements do not increase the
Indebtedness of the obligor outstanding at any time other than as a result
of fluctuations in foreign currency exchange rates or interest rates or by
reason of fees, indemnities and compensation payable thereunder;
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(ix) the guarantee by the Company or any of its Restricted
Subsidiaries of Indebtedness of the Company or a Restricted Subsidiary of
the Company that was permitted to be incurred by another provision of this
covenant;
(x) the incurrence by the Company or any of its Restricted
Subsidiaries of Acquired Indebtedness in an aggregate principal amount (or
accreted value, as applicable) not to exceed $25.0 million outstanding
after giving effect to such incurrence;
(xi) obligations in respect of performance and surety bonds and
completion guarantees provided by the Company or any Restricted Subsidiary
in the ordinary course of business; and
(xii) the incurrence by the Company or any of its Restricted
Subsidiaries of additional Indebtedness in an aggregate principal amount
(or accreted value, as applicable) outstanding after giving effect to such
incurrence, including all Permitted Refinancing Indebtedness incurred to
refund, refinance or replace any Indebtedness incurred pursuant to this
clause (xii), not to exceed $50.0 million.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Indebtedness described in clauses (i) through (xii)
above or is entitled to be incurred pursuant to the first paragraph of this
covenant, the Company shall, in its sole discretion, classify such item of
Indebtedness in any manner that complies with this covenant and such item of
Indebtedness will be treated as having been incurred pursuant to only one of
such clauses or pursuant to the first paragraph hereof. In addition, the Company
may, at any time, change the classification of an item of Indebtedness (or any
portion thereof) to any other clause or to the first paragraph hereof provided
that the Company would be permitted to incur such item of Indebtedness (or such
portion thereof) pursuant to such other clause or the first paragraph hereof, as
the case may be, at such time of reclassification. Accrual of interest,
accretion or amortization of original issue discount will not be deemed to be an
incurrence of Indebtedness for purposes of this covenant.
All Indebtedness under the New Credit Facility outstanding on the date on
which Senior Subordinated Notes are first issued and authenticated under the
Indenture shall be deemed to have been incurred on such date in reliance on the
first paragraph of the covenant described under the caption " -- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock." As a
result, the Company will be permitted to incur significant additional secured
indebtedness under clause (i) of the definition of "Permitted Indebtedness." See
"Risk Factors."
LIENS
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume
or suffer to exist any Lien, other than a Permitted Lien, that secures
obligations under any Pari Passu Indebtedness or subordinated Indebtedness of
the Company on any asset or property now owned or hereafter acquired by the
Company or any of its Restricted Subsidiaries, or any income or profits
therefrom or assign or convey any right to receive income therefrom, unless the
Senior Subordinated Notes are equally and ratably secured with the obligations
so secured until such time as such obligations are no longer secured by a Lien;
provided that, in any case involving a Lien securing subordinated Indebtedness
of the Company, such Lien is subordinated to the Lien securing the Senior
Subordinated Notes to the same extent that such subordinated Indebtedness is
subordinated to the Senior Subordinated Notes.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to (a)(i) pay dividends or make any
other distributions to the Company or any of its Restricted Subsidiaries (A) on
its Capital Stock or (B) with respect to any other interest or participation in,
or measured by, its profits, or (ii) pay any Indebtedness owed to the Company or
any of its Restricted Subsidiaries, (b) make loans or advances to the Company or
any of its Restricted Subsidiaries or (c) transfer any of its properties or
assets to the Company or any of its Restricted Subsidiaries.
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However, the foregoing restrictions will not apply to encumbrances or
restrictions existing under or by reason of (a) Existing Indebtedness as in
effect on the date of the Indenture, (b) the New Credit Facility as in effect as
of the date of the Indenture, and any amendments, modifications, restatements,
renewals, increases, supplements, refundings, replacements or refinancings
thereof, (c) the Indenture and the Senior Subordinated Notes, (d) applicable law
and any applicable rule, regulation or order, (e) any agreement or instrument of
a Person acquired by the Company or any of its Restricted Subsidiaries as in
effect at the time of such acquisition (except to the extent created in
contemplation of such acquisition), which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person, other than
the Person, or the property or assets of the Person, so acquired, provided that,
in the case of Indebtedness, such Indebtedness was permitted by the terms of the
Indenture to be incurred, (f) customary non-assignment provisions in leases
entered into in the ordinary course of business and consistent with past
practices, (g) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions of the nature described in clause
(e) above on the property so acquired, (h) contracts for the sale of assets,
including, without limitation, customary restrictions with respect to a
Subsidiary pursuant to an agreement that has been entered into for the sale or
disposition of all or substantially all of the Capital Stock or assets of such
Subsidiary, (i) Permitted Refinancing Indebtedness, provided that the
restrictions contained in the agreements governing such Permitted Refinancing
Indebtedness are, in the good faith judgment of the Company's board of
directors, not materially less favorable, taken as a whole, to the Holders of
the Senior Subordinated Notes than those contained in the agreements governing
the Indebtedness being refinanced, (j) secured Indebtedness otherwise permitted
to be incurred pursuant to the covenants described under "-- Incurrence of
Indebtedness and Issuance of Preferred Stock" and "-- Liens" that limit the
right of the debtor to dispose of the assets securing such Indebtedness, (k)
restrictions on cash or other deposits or net worth imposed by customers under
contracts entered into in the ordinary course of business, (l) other
Indebtedness or Disqualified Stock of Restricted Subsidiaries permitted to be
incurred subsequent to the Issuance Date pursuant to the provisions of the
covenant described under "-- Incurrence of Indebtedness and Issuance of
Preferred Stock", (m) customary provisions in joint venture agreements and other
similar agreements entered into in the ordinary course of business, and (n)
restrictions created in connection with any Receivables Facility that, in the
good faith determination of the board of directors of the Company, are necessary
or advisable to effect such Receivables Facility.
MERGER, CONSOLIDATION, OR SALE OF ASSETS
The Indenture provides that the Company may not consolidate or merge with
or into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, convey or otherwise dispose of all or substantially all of its
properties or assets in one or more related transactions, to another Person
unless (a) the Company is the surviving corporation or the Person formed by or
surviving any such consolidation or merger (if other than the Company) or to
which such sale, assignment, transfer, conveyance or other disposition shall
have been made is a corporation organized or existing under the laws of the
United States, any state thereof or the District of Columbia, (b) the Person
formed by or surviving any such consolidation or merger (if other than the
Company) or the Person to which such sale, assignment, transfer, conveyance or
other disposition shall have been made assumes all the obligations of the
Company under the Registration Rights Agreement, the Senior Subordinated Notes
and the Indenture pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee, (c) immediately after such transaction no Default
or Event of Default exists and (d) the Company or the Person formed by or
surviving any such consolidation or merger (if other than the Company), or to
which such sale, assignment, transfer, conveyance or other disposition shall
have been made (i) will, at the time of such transaction and after giving pro
forma effect thereto as if such transaction had occurred at the beginning of the
applicable four-quarter period, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the first paragraph of the covenant described under the caption
"-- Incurrence of Indebtedness and Issuance of Preferred Stock" or (ii) would
(together with its Restricted Subsidiaries) have a higher Fixed Charge Coverage
Ratio immediately after such transaction (after giving pro forma effect thereto
as if such transaction had occurred at the beginning of the applicable
four-quarter period) than the Fixed Charge Coverage Ratio of the Company and its
Restricted Subsidiaries immediately prior to such transaction. The foregoing
clause (d) will not prohibit
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(a) a merger between the Company and a Wholly Owned Subsidiary of Holdings
created for the purpose of holding the Capital Stock of the Company, (b) a
merger between the Company and a Wholly Owned Restricted Subsidiary or (c) a
merger between the Company and an Affiliate incorporated solely for the purpose
of reincorporating the Company in another State of the United States so long as,
in each case, the amount of Indebtedness of the Company and its Restricted
Subsidiaries is not increased thereby. The Indenture provides that the Company
will not lease all or substantially all of its assets to any Person.
TRANSACTIONS WITH AFFILIATES
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer
or otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any transaction,
contract, agreement, understanding, loan, advance or guarantee with, or for the
benefit of, any Affiliate of the Company (each of the foregoing, an "Affiliate
Transaction"), unless (a) such Affiliate Transaction is on terms that are no
less favorable to the Company or such Restricted Subsidiary than those that
would have been obtained in a comparable transaction by the Company or such
Restricted Subsidiary with an unrelated Person and (b) the Company delivers to
the Trustee, with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of $7.5
million, either (i) a resolution of the board of directors set forth in an
Officers' Certificate certifying that such Affiliate Transaction complies with
clause (a) above and that such Affiliate Transaction has been approved by a
majority of the disinterested members of the board of directors or (ii) an
opinion as to the fairness to the Holders of such Affiliate Transaction from a
financial point of view issued by an accounting, appraisal or investment banking
firm of national standing.
Notwithstanding the foregoing, the following items shall not be deemed to
be Affiliate Transactions: (a) customary directors' fees, indemnification or
similar arrangements or any employment agreement or other compensation plan or
arrangement entered into by the Company or any of its Restricted Subsidiaries in
the ordinary course of business (including ordinary course loans to employees
not to exceed (i) $5.0 million outstanding in the aggregate at any time and (ii)
$2.0 million to any one employee) and consistent with the past practice of the
Company or such Restricted Subsidiary; (b) transactions between or among the
Company and/or its Restricted Subsidiaries; (c) payments of customary fees by
the Company or any of its Restricted Subsidiaries to DLJMB and its Affiliates
made for any financial advisory, financing, underwriting or placement services
or in respect of other investment banking activities, including, without
limitation, in connection with acquisitions or divestitures which are approved
by a majority of the board of directors in good faith; (d) any agreement as in
effect on the date of the Indenture or any amendment thereto (so long as such
amendment is not disadvantageous to the Holders of the Senior Subordinated Notes
in any material respect) or any transaction contemplated thereby; (e) payments
and transactions in connection with the Merger, the New Credit Facility
(including commitment, syndication and arrangement fees payable thereunder) and
the Original Offerings (including underwriting discounts and commissions in
connection therewith) and the application of the proceeds thereof, and the
payment of the fees and expenses with respect thereto; (f) Restricted Payments
that are permitted by the provisions of the Indenture described under the
caption "-- Restricted Payments"; (g) sales of accounts receivable, or
participations therein, in connection with any Receivables Facility; and (h)
transactions pursuant to the Management Loans.
SALE AND LEASEBACK TRANSACTIONS
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, enter into any sale and leaseback
transaction; provided that the Company or any Restricted Subsidiary may enter
into a sale and leaseback transaction if (a) the Company or such Restricted
Subsidiary, as the case may be, could have (i) incurred Indebtedness in an
amount equal to the Attributable Indebtedness relating to such sale and
leaseback transaction pursuant to the Fixed Charge Coverage Ratio test set forth
in the first paragraph of the covenant described under the caption
"-- Incurrence of Indebtedness and Issuance of Preferred Stock" and (ii)
incurred a Lien to secure such Indebtedness pursuant to the covenant described
under the caption "-- Liens," (b) the gross cash proceeds of such sale and
leaseback transaction are at least equal to the fair market value (as determined
in good faith by the board of directors and set forth in an
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Officers' Certificate delivered to the Trustee) of the property that is the
subject of such sale and leaseback transaction and (c) the transfer of assets in
such sale and leaseback transaction is permitted by, and the Company applies the
proceeds of such transaction in compliance with, the covenant described under
the caption "Repurchase at the Option of Holders -- Asset Sales."
NO SENIOR SUBORDINATED INDEBTEDNESS
The Indenture provides that (i) the Company will not Incur any Indebtedness
that is subordinate or junior in right of payment to any Senior Indebtedness and
senior in right of payment to the Senior Subordinated Notes, and (ii) no
Guarantor will Incur any Indebtedness that is subordinate or junior in right of
payment to any Senior Indebtedness and senior in any respect in right of payment
to the Note Guarantees.
ACCOUNTS RECEIVABLE FACILITY
The Indenture provides that no Accounts Receivable Subsidiary will incur
any Indebtedness if immediately after giving effect to such incurrence the
aggregate outstanding Indebtedness of all Accounts Receivable Subsidiaries
(excluding any Indebtedness owed to the Company or any Restricted Subsidiary)
would exceed $60.0 million.
RESTRICTIONS ON ACTIVITIES OF THERMADYNE CAPITAL
The Indenture provides that Thermadyne Capital may not hold any assets,
become liable for any obligations or engage in any business activities; provided
that Thermadyne Capital may be a co-obligor with respect to Senior Subordinated
Notes issued pursuant to the Indenture and the Senior Indebtedness and engage in
any activities directly related or necessary in connection therewith.
ADDITIONAL NOTE GUARANTEES
The Indenture provides that, if any Restricted Subsidiary of the Company
that is a Domestic Subsidiary guarantees any Indebtedness under the New Credit
Facility, then such Restricted Subsidiary shall become a Guarantor and execute a
Supplemental Indenture and deliver an Opinion of Counsel, in accordance with the
terms of the Indenture.
REPORTS
The Indenture provides that, whether or not required by the rules and
regulations of the Securities and Exchange Commission (the "Commission"), so
long as any Senior Subordinated Notes are outstanding, the Company will furnish
to the Holders of Senior Subordinated Notes (a) all quarterly and annual
financial information that would be required to be contained in a filing with
the Commission on Forms 10-Q and 10-K if the Company were required to file such
Forms, including a "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and, with respect to the annual information only, a
report thereon by the Company's certified independent accountants and (b) all
current reports that would be required to be filed with the Commission on Form
8-K if the Company were required to file such reports, in each case, within the
time periods specified in the Commission's rules and regulations. In addition,
following the consummation of the Exchange Offer, whether or not required by the
rules and regulations of the Commission, the Company will file a copy of all
such information and reports with the Commission for public availability within
the time periods specified in the Commission's rules and regulations (unless the
Commission will not accept such a filing) and make such information available to
securities analysts and prospective investors upon request. In addition, the
Company and the Guarantors have agreed that, for so long as any Senior
Subordinated Notes remain outstanding, they will furnish to the Holders and to
securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act.
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EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (a) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the Senior Subordinated Notes (whether or
not prohibited by the subordination provisions of the Indenture); (b) default in
payment when due of the principal of or premium, if any, on the Senior
Subordinated Notes (whether or not prohibited by the subordination provisions of
the Indenture); (c) failure by the Company or any of its Restricted Subsidiaries
for 30 days after receipt of notice from the Trustee or Holders of at least 25%
in principal amount of the Senior Subordinated Notes then outstanding to comply
with the provisions described under the captions "Repurchase at the Option of
Holders -- Change of Control," "-- Asset Sales," "Certain Covenants --
Restricted Payments," "-- Incurrence of Indebtedness and Issuance of Preferred
Stock" or "Merger, Consolidation or Sale of Assets"; (d) failure by the Company
for 60 days after notice from the Trustee or the Holders of at least 25% in
principal amount of the Senior Subordinated Notes then outstanding to comply
with any of its other agreements in the Indenture or the Senior Subordinated
Notes; (e) default under any mortgage, indenture or instrument under which there
may be issued or by which there may be secured or evidenced any Indebtedness for
money borrowed by the Company or any of its Restricted Subsidiaries (or the
payment of which is guaranteed by the Company or any of its Restricted
Subsidiaries), whether such Indebtedness or guarantee now exists, or is created
after the date of the Indenture, which default (i) is caused by a failure to pay
Indebtedness at its stated final maturity (after giving effect to any applicable
grace period provided in such Indebtedness) (a "Payment Default") or (ii)
results in the acceleration of such Indebtedness prior to its stated final
maturity and, in each case, the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness under which
there has been a Payment Default or the maturity of which has been so
accelerated, aggregates $10.0 million or more; (f) failure by the Company or any
of its Restricted Subsidiaries to pay final judgments aggregating in excess of
$10.0 million (net of any amounts with respect to which a reputable and
creditworthy insurance company has acknowledged liability in writing), which
judgments are not paid, discharged or stayed for a period of 60 days; (g) except
as permitted by the Indenture, any Note Guarantee shall be held in any judicial
proceeding to be unenforceable or invalid or shall cease for any reason to be in
full force and effect or any Guarantor, or any Person acting of behalf of any
Guarantor, shall deny or disaffirm its obligations under its Note Guarantee; and
(h) certain events of bankruptcy or insolvency with respect to the Company or
any of its Restricted Subsidiaries that is a Significant Subsidiary.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Senior
Subordinated Notes may declare all the Senior Subordinated Notes to be due and
payable immediately; provided that, so long as any Indebtedness permitted to be
incurred pursuant to the New Credit Facility shall be outstanding, such
acceleration shall not be effective until the earlier of (a) an acceleration of
any such Indebtedness under the New Credit Facility or (b) five business days
after receipt by the Issuers and the administrative agent under the New Credit
Facility of written notice of such acceleration. Notwithstanding the foregoing,
in the case of an Event of Default arising from certain events of bankruptcy or
insolvency with respect to the Company or any Significant Subsidiary, all
outstanding Senior Subordinated Notes will become due and payable without
further action or notice. Holders of the Senior Subordinated Notes may not
enforce the Indenture or the Senior Subordinated Notes except as provided in the
Indenture. In the event of a declaration of acceleration of the Senior
Subordinated Notes because an Event of Default has occurred and is continuing as
a result of the acceleration of any Indebtedness described in clause (e) of the
preceding paragraph, the declaration of acceleration of the Senior Subordinated
Notes shall be automatically annulled if the holders of any Indebtedness
described in clause (e) have rescinded the declaration of acceleration in
respect of such Indebtedness within 30 days of the date of such declaration and
if (i) the annulment of the acceleration of the Senior Subordinated Notes would
not conflict with any judgment or decree of a court of competent jurisdiction
and (ii) all existing Events of Default, except non-payment of principal or
interest on the Senior Subordinated Notes that became due solely because of the
acceleration of the Senior Subordinated Notes, have been cured or waived.
Subject to certain limitations, Holders of a majority in principal amount
of the then outstanding Senior Subordinated Notes may direct the Trustee in its
exercise of any trust or power. The Trustee may withhold
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from Holders of the Senior Subordinated Notes notice of any continuing Default
or Event of Default (except a Default or Event of Default relating to the
payment of principal or interest) if it determines that withholding notice is in
their interest.
The Holders of a majority in aggregate principal amount of the Senior
Subordinated Notes then outstanding by notice to the Trustee may on behalf of
the Holders of all of the Senior Subordinated Notes waive any existing Default
or Event of Default and its consequences under the Indenture except a continuing
Default or Event of Default in the payment of interest on, or the principal of,
the Senior Subordinated Notes.
The Issuers are required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Issuers are required upon
becoming aware of any Default or Event of Default to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF MEMBER, DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No member, director, officer, employee, incorporator or stockholder of any
Issuer, as such, shall have any liability for any obligations of any Issuer
under the Senior Subordinated Notes or the Indenture or for any claim based on,
in respect of, or by reason of, such obligations or their creation. Each Holder
of Senior Subordinated Notes by accepting a Senior Subordinated Note waives and
releases all such liability. The waiver and release are part of the
consideration for issuance of the Senior Subordinated Notes. Such waiver may not
be effective to waive liabilities under the federal securities laws, and it is
the view of the Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Issuers may, at their option and at any time, elect to have all of
their and the Guarantors' obligations discharged with respect to the outstanding
Senior Subordinated Notes, the Note Guarantees and the Indenture ("Legal
Defeasance") except for (a) the rights of Holders of outstanding Senior
Subordinated Notes to receive payments in respect of the principal of, premium,
if any, and interest and Liquidated Damages, if any, on such Senior Subordinated
Notes when such payments are due from the trust referred to below, (b) the
Issuers' obligations with respect to the Senior Subordinated Notes concerning
issuing temporary Senior Subordinated Notes, registration of Senior Subordinated
Notes, mutilated, destroyed, lost or stolen Senior Subordinated Notes and the
maintenance of an office or agency for payment and money for security payments
held in trust, (c) the rights, powers, trusts, duties and immunities of the
Trustee, and the Issuers' obligations in connection therewith and (d) the Legal
Defeasance provisions of the Indenture. In addition, the Issuers may, at their
option and at any time, elect to have their obligations released with respect to
certain covenants that are described in the Indenture ("Covenant Defeasance")
and thereafter any omission to comply with such obligations shall not constitute
a Default or Event of Default with respect to the Senior Subordinated Notes. In
the event Covenant Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, rehabilitation and insolvency events) described under
"Events of Default and Remedies" will no longer constitute an Event of Default
with respect to the Senior Subordinated Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (a)
the Issuers must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Senior Subordinated Notes, cash in U.S. dollars,
non-callable Government Securities, or a combination thereof, in such amounts as
will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, premium, if any, and
interest and Liquidated Damages, if any, on the outstanding Senior Subordinated
Notes on the stated maturity or on the applicable redemption date, as the case
may be, and the Issuers must specify whether the Senior Subordinated Notes are
being defeased to maturity or to a particular redemption date, (b) in the case
of Legal Defeasance, the Issuers shall have delivered to the Trustee an opinion
of counsel in the United States reasonably acceptable to the Trustee confirming
that (i) the Issuers has received from, or there has been published by, the
Internal Revenue Service a ruling or (ii) since the date of the Indenture, there
has been a change in the applicable federal income tax law, in either case to
the effect that, and based thereon such opinion of counsel shall confirm that,
subject to customary assumptions and exclusions, the
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Holders of the outstanding Senior Subordinated Notes will not recognize income,
gain or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Legal
Defeasance had not occurred, (c) in the case of Covenant Defeasance, the Issuers
shall have delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that, subject to customary
assumptions and exclusions, the Holders of the outstanding Senior Subordinated
Notes will not recognize income, gain or loss for federal income tax purposes as
a result of such Covenant Defeasance and will be subject to federal income tax
on the same amounts, in the same manner and at the same times as would have been
the case if such Covenant Defeasance had not occurred, (d) no Default or Event
of Default shall have occurred and be continuing on the date of such deposit
(other than a Default or Event of Default resulting from the borrowing of funds
to be applied to such deposit) or, insofar as Events of Default from bankruptcy
or insolvency events are concerned, at any time in the period ending on the
123rd day after the date of deposit, (e) such Legal Defeasance or Covenant
Defeasance will not result in a breach or violation of, or constitute a default
under, any material agreement or instrument (other than the Indenture) to which
the Company or any of its Subsidiaries is a party or by which the Company or any
of its Subsidiaries is bound, (f) the Issuers must have delivered to the Trustee
an opinion of counsel to the effect that, subject to customary assumptions and
exclusions, after the 123rd day following the deposit, the trust funds will not
be subject to the effect of Section 547 of the United States Bankruptcy Code or
any analogous New York State law provision or any other applicable federal or
New York bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally, (g) the Issuers must deliver to the Trustee an
Officers' Certificate stating that the deposit was not made by the Issuers with
the intent of preferring the Holders of Senior Subordinated Notes over the other
creditors of the Issuers with the intent of defeating, hindering, delaying or
defrauding creditors of the Issuers or others, and (h) the Issuers must deliver
to the Trustee an Officers' Certificate and an opinion of counsel (which opinion
may be subject to customary assumptions and exclusions), each stating that all
conditions precedent provided for relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange New Senior Subordinated Notes in
accordance with the Indenture. The Registrar and the Trustee may require a
Holder, among other things, to furnish appropriate endorsements and transfer
documents and the Issuers may require a Holder to pay any taxes and fees
required by law or permitted by the Indenture. The Issuers are not required to
transfer or exchange any New Senior Subordinated Note selected for redemption.
Also, the Issuers are not required to transfer or exchange any Senior
Subordinated Note for a period of 15 days before a selection of New Senior
Subordinated Notes to be redeemed. The registered Holder of a New Senior
Subordinated Note will be treated as the owner of it for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture,
the Note Guarantees and the Senior Subordinated Notes may be amended or
supplemented with the consent of the Holders of at least a majority in principal
amount of the Senior Subordinated Notes then outstanding (including, without
limitation, consents obtained in connection with a purchase of, or tender offer
or exchange offer for, Senior Subordinated Notes), and any existing default or
compliance with any provision of the Indenture, the Note Guarantees or the
Senior Subordinated Notes may be waived with the consent of the Holders of a
majority in principal amount of the then outstanding Senior Subordinated Notes
(including, without limitation, consents obtained in connection with a purchase
of, or tender offer or exchange offer for, Senior Subordinated Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Senior Subordinated Notes held by a non-consenting Holder)
(a) reduce the principal amount of Senior Subordinated Notes whose Holders must
consent to an amendment, supplement or waiver, (b) reduce the principal of or
change the fixed maturity of any Senior Subordinated Note or alter the
provisions with respect to the redemption of the Senior Subordinated Notes
(other than the provisions described under the caption
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"-- Repurchase at the Option of Holders"), (c) reduce the rate of or change the
time for payment of interest on any Senior Subordinated Note, (d) waive a
Default or Event of Default in the payment of principal of or premium, if any,
or interest or Liquidated Damages, if any, on the Senior Subordinated Notes
(except a rescission of acceleration of the Senior Subordinated Notes by the
Holders of at least a majority in aggregate principal amount of the Senior
Subordinated Notes and a waiver of the payment default that resulted from such
acceleration), (e) make any Senior Subordinated Note payable in money other than
that stated in the Senior Subordinated Notes, (f) make any change in the
provisions of the Indenture relating to waivers of past Defaults, (g) waive a
redemption payment with respect to any Senior Subordinated Note (other than the
provisions described under the caption "-- Repurchase at the Option of
Holders"), (h) release any Guarantor from its obligations under its Note
Guarantee or the Indenture, except in accordance with the terms of the
Indenture, or (i) make any change in the foregoing amendment and waiver
provisions. Notwithstanding the foregoing, any (i) amendment to or waiver of the
covenant described under the caption "-- Repurchase at the Option of
Holders -- Change of Control," and (ii) amendment to Article 10 of the Indenture
(which relates to subordination) will require the consent of the Holders of at
least two-thirds in aggregate principal amount of the Senior Subordinated Notes
then outstanding if such amendment would materially adversely affect the rights
of Holders of Senior Subordinated Notes.
Notwithstanding the foregoing, without the consent of any Holder of Senior
Subordinated Notes, the Issuers, the Guarantors and the Trustee may amend or
supplement the Indenture, the Note Guarantees or the Senior Subordinated Notes
to cure any ambiguity, defect or inconsistency, to provide for uncertificated
Senior Subordinated Notes in addition to or in place of certificated Senior
Subordinated Notes, to provide for the assumption of the Issuers' obligations to
Holders of Senior Subordinated Notes in the case of a merger or consolidation or
sale of all or substantially all of the Issuers' assets, to make any change that
would provide any additional rights or benefits to the Holders of Senior
Subordinated Notes or that does not materially adversely affect the legal rights
under the Indenture of any such Holder, or to comply with requirements of the
Commission in order to effect or maintain the qualification of the Indenture
under the Trust Indenture Act or to provide for additional Note Guarantees of
the Senior Subordinated Notes.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of any Issuer, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
The Holders of a majority in principal amount of the then outstanding
Senior Subordinated Notes will have the right to direct the time, method and
place of conducting any proceeding for exercising any remedy available to the
Trustee, subject to certain exceptions. The Indenture provides that in case an
Event of Default shall occur (which shall not be cured), the Trustee will be
required, in the exercise of its power, to use the degree of care of a prudent
man in the conduct of his own affairs. Subject to such provisions, the Trustee
will be under no obligation to exercise any of its rights or powers under the
Indenture at the request of any Holder of Senior Subordinated Notes, unless such
Holder shall have offered to the Trustee security and indemnity satisfactory to
it against any loss, liability or expense.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Accounts Receivable Subsidiary" means an Unrestricted Subsidiary of the
Company to which the Company or any of its Restricted Subsidiaries sells any of
its accounts receivable pursuant to a Receivables Facility.
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"Acquired Indebtedness" means, with respect to any specified Person, (a)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (b) Indebtedness secured by a Lien
encumbering an asset acquired by such specified Person at the time such asset is
acquired by such specified Person.
"Acquisition" means the acquisition of Holdings by the Principals.
"Affiliate" of any specified Person means any other Person which, directly
or indirectly, controls, is controlled by or is under direct or indirect common
control with, such specified Person. For purposes of this definition, "control,"
when used with respect to any Person, means the power to direct the management
and policies of such Person, directly or indirectly, whether through the
ownership of voting securities, by contract or otherwise, and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"Asset Sale" means (a) the sale, lease, conveyance, disposition or other
transfer (a "disposition") of any properties, assets or rights (including,
without limitation, by way of a sale and leaseback) (provided that the sale,
lease, conveyance or other disposition of all or substantially all of the assets
of the Company and its Subsidiaries taken as a whole will be governed by the
provisions of the Indenture described under the caption "-- Change of Control"
and/or the provisions described under the caption "-- Merger, Consolidation or
Sale of Assets" and not by the provisions of the Asset Sale covenant), and (b)
the issuance, sale or transfer by the Company or any of its Restricted
Subsidiaries of Equity Interests of any of the Company's Restricted
Subsidiaries, in the case of either clause (a) or (b), whether in a single
transaction or a series of related transactions (i) that have a fair market
value in excess of $5.0 million or (ii) for net proceeds in excess of $5.0
million. Notwithstanding the foregoing, the following items shall not be deemed
to be Asset Sales: (a) dispositions in the ordinary course of business; (b) a
disposition of assets by the Company to a Restricted Subsidiary or by a
Restricted Subsidiary to the Company or to another Restricted Subsidiary; (c) a
disposition of Equity Interests by a Restricted Subsidiary to the Company or to
another Restricted Subsidiary; (d) the sale and leaseback of any assets within
90 days of the acquisition thereof; (e) foreclosures on assets; (f) any exchange
of like property pursuant to Section 1031 of the Internal Revenue Code of 1986,
as amended, for use in a Permitted Business; (g) any sale of Equity Interests
in, or Indebtedness or other securities of, an Unrestricted Subsidiary; (h) a
Permitted Investment or a Restricted Payment that is permitted by the covenant
described under the caption "-- Restricted Payments"; and (i) sales of accounts
receivable, or participations therein, in connection with any Receivables
Facility.
"Attributable Indebtedness" in respect of a sale and leaseback transaction
means, at the time of determination, the present value (discounted at the rate
of interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
"Capital Expenditure Indebtedness" means Indebtedness incurred by any
Person to finance the purchase or construction or any property or assets
acquired or constructed by such Person which have a useful life or more than one
year so long as (a) the purchase or construction price for such property or
assets is included in "addition to property, plant or equipment" in accordance
with GAAP, (b) the acquisition or construction of such property or assets is not
part of any acquisition of a Person or line of business and (c) such
Indebtedness is incurred within 90 days of the acquisition or completion of
construction of such property or assets.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means (a) in the case of a corporation, corporate stock,
(b) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (c) in the case of a partnership or limited liability company,
partnership or membership
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interests (whether general or limited) and (d) any other interest or
participation that confers on a Person the right to receive a share of the
profits and losses of, or distributions of assets of, the issuing Person.
"Cash Equivalents" means (i) Government Securities, (ii) any certificate of
deposit maturing not more than 365 days after the date of acquisition issued by,
or time deposit of, an Eligible Institution or any lender under the New Credit
Facility, (iii) commercial paper maturing not more than 365 days after the date
of acquisition of an issuer (other than an Affiliate of the Company) with a
rating, at the time as of which any investment therein is made, of "A-3' (or
higher) according to S&P or "P-2" (or higher) according to Moody's or carrying
an equivalent rating by a nationally recognized rating agency if both of the two
named rating agencies cease publishing ratings of investments, (iv) any bankers
acceptances of money market deposit accounts issued by an Eligible Institution
and (v) any fund investing exclusively in investments of the types described in
clauses (i) through (iv) above.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person and its Restricted Subsidiaries for
such period plus, to the extent deducted in computing Consolidated Net Income,
(a) an amount equal to any extraordinary or non-recurring loss plus any net loss
realized in connection with an Asset Sale, (b) provision for taxes based on
income or profits of such Person and its Restricted Subsidiaries for such
period, (c) Fixed Charges of such Person for such period, (d) depreciation,
amortization (including amortization of goodwill and other intangibles) and all
other non-cash charges (excluding any such non-cash charge to the extent that it
represents an accrual of or reserve for cash expenses in any future period or
amortization of a prepaid cash expense that was paid in a prior period) of such
Person and its Restricted Subsidiaries for such period, (e) net periodic
post-retirement benefits, (f) other income or expense net as set forth on the
face of such Person's statement of operations, (g) expenses and charges of the
Company related to the Recapitalization, the New Credit Facility and the
application of the proceeds thereof which are paid, taken or otherwise accounted
for within 90 days of the consummation of the Merger, and (h) any
non-capitalized transaction costs incurred in connection with actual or proposed
financings, acquisition or divestitures (including, but not limited to,
financing and refinancing fees and costs incurred in connection with the
Recapitalization), in each case, on a consolidated basis and determined in
accordance with GAAP. Notwithstanding the foregoing, the provision for taxes
based on the income or profits of, the Fixed Charges of, and the depreciation
and amortization and other non-cash charges of, a Restricted Subsidiary of a
Person shall be added to Consolidated Net Income to compute Consolidated Cash
Flow only to the extent (and in the same proportion) that Net Income of such
Restricted Subsidiary was included in calculating the Consolidated Net Income of
such Person.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum of, without duplication, (a) the interest expense of such Person
and its Restricted Subsidiaries for such period, on a consolidated basis,
determined in accordance with GAAP (including amortization of original issue
discount, non-cash interest payments, the interest component of all payments
associated with Capital Lease Obligations, imputed interest with respect to
Attributable Debt, commissions, discounts and other fees and charges incurred in
respect of letter of credit or bankers' acceptance financings, and net payments,
if any, pursuant to Hedging Obligations; provided that in no event shall any
amortization of deferred financing costs be included in Consolidated Interest
Expense); and (b) the consolidated capitalized interest of such Person and its
Restricted Subsidiaries for such period, whether paid or accrued; provided,
however, that Receivables Fees shall be deemed not to constitute Consolidated
Interest Expense. Notwithstanding the foregoing, the Consolidated Interest
Expense with respect to any Restricted Subsidiary that is not a Wholly Owned
Restricted Subsidiary shall be included only to the extent (and in the same
proportion) that the net income of such Restricted Subsidiary was included in
calculating Consolidated Net Income.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that (a) the Net Income (or loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Restricted Subsidiary
thereof, (b) the Net Income (or loss) of any Restricted Subsidiary shall be
excluded to the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income (or loss) is
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not at the date of determination permitted without any prior governmental
approval (that has not been obtained) or, directly or indirectly, by operation
of the terms of its charter or any agreement, instrument, judgment, decree,
order, statute, rule or governmental regulation applicable to that Restricted
Subsidiary, (c) the Net Income (or loss) of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition shall
be excluded and (d) the cumulative effect of a change in accounting principles
shall be excluded.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Designated Noncash Consideration" means the fair market value of non-cash
consideration received by the Company or one of its Restricted Subsidiaries in
connection with an Asset Sale that is so designated as Designated Noncash
Consideration pursuant to an Officers' Certificate, setting forth the basis of
such valuation, executed by the principal executive officer and the principal
financial officer of the Company, less the amount of cash or Cash Equivalents
received in connection with a sale of such Designated Noncash Consideration.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable), or upon the happening of any event (other than any event solely
within the control of the issuer thereof), matures or is mandatorily redeemable,
pursuant to a sinking fund obligation or otherwise, is exchangeable for
Indebtedness (except to the extent exchangeable at the option of such Person
subject to the terms of any debt instrument to which such Person is a party) or
redeemable at the option of the Holder thereof, in whole or in part, on or prior
to the date on which the Senior Subordinated Notes mature; provided that any
Capital Stock that would constitute Disqualified Stock solely because the
holders thereof have the right to require the Company to repurchase such Capital
Stock upon the occurrence of a Change of Control or an Asset Sale shall not
constitute Disqualified Stock if the terms of such Capital Stock provide that
the Company may not repurchase or redeem any such Capital Stock pursuant to such
provisions unless such repurchase or redemption complies with the covenant
described under the caption " -- Certain Covenants -- Restricted Payments," and
provided further that, if such Capital Stock is issued to any plan for the
benefit of employees of the Company or its Subsidiaries or by any such plan to
such employees, such Capital Stock shall not constitute Disqualified Stock
solely because it may be required to be repurchased by the Company in order to
satisfy applicable statutory or regulatory obligations.
"DLJMB" means DLJ Merchant Banking Partners II, L.P. and its Affiliates.
"Domestic Subsidiary" means a Subsidiary that is organized under the laws
of the United States or any State, district or territory thereof.
"Eligible Institution" means a commercial banking institution that has
combined capital and surplus not less than $100.0 million or its equivalent in
foreign currency, whose short-term debt is rated "A-3" or higher according to
Standard & Poor's Ratings Group ("S&P") or "P-2" or higher according to Moody's
Investor Services, Inc. ("Moody's") or carrying an equivalent rating by a
nationally recognized rating agency if both of the two named rating agencies
cease publishing ratings of investments.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Existing Indebtedness" means Indebtedness of the Company and its
Restricted Subsidiaries (other than Indebtedness under the New Credit Facility)
in existence on the date of the Indenture, until such amounts are repaid.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (a) the Consolidated Interest Expense of such Person for
such period and (b) all dividend payments on any series of preferred stock of
such Person (other than dividends payable solely in Equity Interests that are
not Disqualified Stock), in each case, on a consolidated basis and in accordance
with GAAP.
"Fixed Charge Coverage Ratio" means, with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
(exclusive of amounts attributable to discontinued
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operations, as determined in accordance with GAAP, or operations and businesses
disposed of prior to the Calculation Date (as defined)) to the Fixed Charges of
such Person for such period (exclusive of amounts attributable to discontinued
operations, as determined in accordance with GAAP, or operations and businesses
disposed of prior to the Calculation Date). In the event that the referrent
Person or any of its Subsidiaries incurs, assumes, guarantees or redeems any
Indebtedness (other than revolving credit borrowings) or issues or redeems
preferred stock subsequent to the commencement of the period for which the Fixed
Charge Coverage Ratio is being calculated but prior to the date on which the
event for which the calculation of the Fixed Charge Coverage Ratio is made (the
"Calculation Date"), then the Fixed Charge Coverage Ratio shall be calculated
giving pro forma effect to such incurrence, assumption, guarantee or redemption
of Indebtedness, or such issuance or redemption of preferred stock, as if the
same had occurred at the beginning of the applicable four-quarter reference
period. In addition, for purposes of making the computation referred to above,
acquisitions that have been made by the Company or any of its Subsidiaries,
including all mergers or consolidations and any related financing transactions,
during the four-quarter reference period or subsequent to such reference period
and on or prior to the Calculation Date shall be calculated to include the
Consolidated Cash Flow of the acquired entities on a pro forma basis after
giving effect to cost savings resulting from employee terminations, facilities
consolidations and closings, standardization of employee benefits and
compensation practices, consolidation of property, casualty and other insurance
coverage and policies, standardization of sales and distribution methods,
reductions in taxes other than income taxes and other cost savings reasonably
expected to be realized from such acquisition, as determined in good faith by an
officer of the Company (regardless of whether such cost savings could then be
reflected in pro forma financial statements under GAAP, Regulation S-X
promulgated by the Commission or any other regulation or policy of the
Commission) and without giving effect to clause (c) of the proviso set forth in
the definition of Consolidated Net Income, and shall be deemed to have occurred
on the first day of the four-quarter reference period and Consolidated Cash Flow
for such reference period shall be calculated.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the Indenture.
"guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit or
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Guarantors" means (i) each of the Domestic Subsidiaries of the Company
that is a Restricted Subsidiary on the date of the Indenture and (ii) any other
Subsidiary that executes a Note Guarantee in accordance with the provisions of
the Indenture.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (a) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (b) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
"Holdings" means Thermadyne Holdings Corporation, a Delaware corporation,
the corporate parent of the Company, or its successors.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person in respect of borrowed money or evidenced by bonds, notes, debentures or
similar instruments or letters of credit (or reimbursement agreements in respect
thereof) or banker's acceptances or representing Capital Lease Obligations or
the balance deferred and unpaid of the purchase price of any property or
representing any Hedging Obligations, except any such balance that constitutes
an accrued expense or trade payable, if and to the extent any of the foregoing
Indebtedness (other than letters of credit and Hedging Obligations) would appear
as a liability upon a balance sheet of such Person prepared in accordance with
GAAP, as well as all Indebtedness of others secured by a Lien on any asset of
such Person (whether or not such Indebtedness is assumed by such Person) and, to
the extent not otherwise included, the guarantee by such Person of any
Indebtedness of any other Person, provided that Indebtedness shall not include
the pledge by the Company of
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the Capital Stock of an Unrestricted Subsidiary of the Company to secure
Non-Recourse Debt of such Unrestricted Subsidiary. The amount of any
Indebtedness outstanding as of any date shall be (a) the accreted value thereof
(together with any interest thereon that is more than 30 days past due), in the
case of any Indebtedness that does not require current payments of interest, and
(b) the principal amount thereof, in the case of any other Indebtedness.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees by the referent Person of, and Liens on any
assets of the referent Person securing, Indebtedness or other obligations of
other Persons), advances or capital contributions (excluding commission, travel
and similar advances to officers and employees made in the ordinary course of
business), purchases or other acquisitions for consideration of Indebtedness,
Equity Interests or other securities, together with all items that are or would
be classified as investments on a balance sheet prepared in accordance with
GAAP, provided that an investment by the Company for consideration consisting of
common equity securities of the Company shall not be deemed to be an Investment.
If the Company or any Restricted Subsidiary of the Company sells or otherwise
disposes of any Equity Interests of any direct or indirect Restricted Subsidiary
of the Company such that, after giving effect to any such sale or disposition,
such Person is no longer a Subsidiary of the Company, the Company shall be
deemed to have made an Investment on the date of any such sale or disposition
equal to the fair market value of the Equity Interests of such Restricted
Subsidiary not sold or disposed of in an amount determined as provided in the
final paragraph of the covenant described under the caption "-- Restricted
Payments."
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
"Management Loans" means one or more loans by the Company or Holdings to
officers and/or directors of the Company and any of its Restricted Subsidiaries
to finance the purchase by such officers and directors of common stock of
Holdings; provided, however, that the aggregate principal amount of all such
Management Loans outstanding at any time shall not exceed $5.0 million.
"Merger" means the merger of Mercury Acquisition Corp., a Delaware
corporation, with and into Holdings on or prior to the date of issuance of the
Senior Subordinated Notes.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (a) any gain (or
loss), together with any related provision for taxes on such gain (or loss),
realized in connection with (i) any Asset Sale (including, without limitation,
dispositions pursuant to sale and leaseback transactions) or (ii) the
extinguishment of any Indebtedness of such Person or any of its Restricted
Subsidiaries and (b) any extraordinary or nonrecurring gain (or loss), together
with any related provision for taxes on such extraordinary or nonrecurring gain
(or loss).
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of, without duplication,
(a) the direct costs relating to such Asset Sale (including, without limitation,
legal, accounting and investment banking fees, and sales commissions, recording
fees, title transfer fees and appraiser fees and cost of preparation of assets
for sale) and any relocation expenses incurred as a result thereof, (b) taxes
paid or payable as a result thereof (after taking into account any available tax
credits or deductions and any tax sharing arrangements), (c) amounts required to
be applied to the repayment of Indebtedness (other than revolving credit
Indebtedness incurred pursuant to the New Credit Facility) secured by a Lien on
the asset or assets that were the subject of such Asset Sale and (d) any reserve
established in accordance with GAAP or any amount placed in escrow, in either
case for adjustment in respect of the sale price of such asset or assets until
such time as such reserve is reversed or such escrow arrangement is terminated,
in which case Net
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Proceeds shall include only the amount of the reserve so reversed or the amount
returned to the Company or its Restricted Subsidiaries from such escrow
arrangement, as the case may be.
"New Credit Facility" means that certain Credit Agreement, dated as of May
22, 1998, by and among the Company and certain of its foreign subsidiaries,
Donaldson, Lufkin & Jenrette Securities Corporation, as arranger, DLJ Capital
Funding, Inc., as syndication agent, and ABN AMRO Bank N.V., Chicago Branch, as
administrative agent, including any related notes, guarantees, collateral
documents, instruments and agreements executed in connection therewith, and, in
each case, as amended, modified, renewed, refunded, replaced or refinanced from
time to time, including, without limitation, any agreement (i) extending or
shortening the maturity of any Indebtedness incurred thereunder or contemplated
thereby, (ii) adding or deleting borrowers or guarantors thereunder, (iii)
increasing the amount of Indebtedness incurred thereunder or available to be
borrowed thereunder, provided that on the date such Indebtedness is incurred it
would not be prohibited by clause (i) of Section 4.09 of the Indenture or (iv)
otherwise altering the terms and conditions thereof. Indebtedness under the New
Credit Facility outstanding on the date on which Senior Subordinated Notes are
first issued and authenticated under the Indenture shall be deemed to have been
incurred on such date in reliance on the first paragraph of Section 4.09.
"Non-Recourse Debt" means Indebtedness (i) no default with respect to,
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any of its Restricted Subsidiaries to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its stated maturity; and (ii) as to which the lenders have been notified in
writing that they will not have any recourse to the stock (other than the stock
of an Unrestricted Subsidiary pledged by the Company to secure debt of such
Unrestricted Subsidiary) or assets of the Company or any of its Restricted
Subsidiaries; provided that in no event shall Indebtedness of any Unrestricted
Subsidiary fail to be Non-Recourse Debt solely as a result of any default
provisions contained in a guarantee thereof by the Company or any of its
Restricted Subsidiaries if the Company or such Restricted Subsidiary was
otherwise permitted to incur such guarantee pursuant to the Indenture.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Original Offerings" means the offering of the Senior Subordinated Notes by
the Issuers and the concurrent offering of senior discount debentures by
Holdings.
"Pari Passu Indebtedness" means Indebtedness of the Company that ranks pari
passu in right of payment to the Senior Subordinated Notes.
"Permitted Business" means any business in which the Company and its
Restricted Subsidiaries are engaged on the date of the Indenture or any business
reasonably related, incidental or ancillary thereto.
"Permitted Investments" means (a) any Investment in the Company or in a
Restricted Subsidiary of the Company, (b) any Investment in cash or Cash
Equivalents, (c) any Investment by the Company or any Restricted Subsidiary of
the Company in a Person, if as a result of such Investment (i) such Person
becomes a Restricted Subsidiary of the Company or (ii) such Person is merged,
consolidated or amalgamated with or into, or transfers or conveys substantially
all of its assets to, or is liquidated into, the Company or a Wholly Owned
Restricted Subsidiary of the Company, (d) any Investment made as a result of the
receipt of non-cash consideration from an Asset Sale that was made pursuant to
and in compliance with the covenant described under the caption ' -- Repurchase
at the Option of Holders -- Asset Sales," (e) any Investment acquired solely in
exchange for Equity Interests (other than Disqualified Stock) of the Company,
(f) any Investment in a Person engaged in a Permitted Business (other than an
Investment in an Unrestricted Subsidiary) having an aggregate fair market value,
taken together with all other Investments made pursuant to this clause (f) that
are at that time outstanding, not to exceed 15% of Total Assets at the time of
such Investment (with the fair market value of each Investment being measured at
the time made and without giving effect to subsequent changes in value), (g)
Investments relating to any special purpose Wholly Owned Subsidiary of the
Company organized in connection with a Receivables Facility that, in the good
faith determination of the board of
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directors of the Company, are necessary or advisable to effect such Receivables
Facility and (h) the Management Loans.
"Permitted Liens" means: (i) Liens on property of a Person existing at the
time such Person is merged into or consolidated with the Company or any
Restricted Subsidiary, provided that such Liens were not incurred in
contemplation of such merger or consolidation and do not secure any property or
assets of the Company or any Restricted Subsidiary other than the property or
assets subject to the Liens prior to such merger or consolidation; (ii) Liens
existing on the date of the Indenture; (iii) Liens securing Indebtedness
consisting of Capitalized Lease Obligations, purchase money Indebtedness,
mortgage financings, industrial revenue bonds or other monetary obligations, in
each case incurred solely for the purpose of financing all or any part of the
purchase price or cost of construction or installation of assets used in the
business of the Company or its Restricted Subsidiaries, or repairs, additions or
improvements to such assets, provided that (A) such Liens secure Indebtedness in
an amount not in excess of the original purchase price or the original cost of
any such assets or repair, additional or improvement thereto (plus an amount
equal to the reasonable fees and expenses in connection with the incurrence of
such Indebtedness), (B) such Liens do not extend to any other assets of the
Company or its Restricted Subsidiaries (and, in the case of repair, addition or
improvements to any such assets, such Lien extends only to the assets (and
improvements thereto or thereon) repaired, added to or improved), (C) the
Incurrence of such Indebtedness is permitted by " -- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock" and (D)
such Liens attach within 365 days of such purchase, construction, installation,
repair, addition or improvement; (iv) Liens to secure any refinancings,
renewals, extensions, modification or replacements (collectively, "refinancing")
(or successive refinancings), in whole or in part, of any Indebtedness secured
by Liens referred to in the clauses above so long as such Lien does not extend
to any other property (other than improvements thereto); (v) Liens securing
letters of credit entered into in the ordinary course of business and consistent
with past business practice; (vi) Liens on and pledges of the capital stock of
any Unrestricted Subsidiary securing Non-Recourse Debt of such Unrestricted
Subsidiary; (vii) Liens securing Indebtedness (including all Obligations) under
the New Credit Facility; and (viii) other Liens securing Indebtedness that is
permitted by the terms of the Indenture to be outstanding having an aggregate
principal amount at any one time outstanding not to exceed $50.0 million.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries;
provided that (a) the principal amount (or accreted value, if applicable) of
such Permitted Refinancing Indebtedness does not exceed the principal amount of
(or accreted value, if applicable), plus premium, if any, and accrued interest
on the Indebtedness so extended, refinanced, renewed, replaced, defeased or
refunded (plus the amount of reasonable expenses incurred in connection
therewith), (b) such Permitted Refinancing Indebtedness has a final maturity
date no earlier than the final maturity date of, and has a Weighted Average Life
to Maturity equal to or greater than the Weighted Average Life to Maturity of,
the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded, and (c) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to the Senior
Subordinated Notes, such Permitted Refinancing Indebtedness is subordinated in
right of payment to, the Senior Subordinated Notes on terms at least as
favorable, taken as a whole, to the Holders of Senior Subordinated Notes as
those contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded.
"Principals" means DLJMB.
"Public Equity Offering" means any issuance of membership interests by the
Company (other than to Holdings and other than Disqualified Stock) or common
stock or preferred stock by Holdings (other than Disqualified Stock) that is
registered pursuant to the Securities Act, other than issuances registered on
Form S-8 and issuances registered on Form S-4, excluding issuances of membership
interests or common stock pursuant to employee benefit plans of Holdings or the
Company or otherwise as compensation to employees of the Company or Holdings.
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"Qualified Proceeds" means any of the following or any combination of the
following: (i) cash; (ii) Cash Equivalents; (iii) assets that are used or useful
in a Permitted Business; and (iv) the Capital Stock of any Person engaged in a
Permitted Business if, in connection with the receipt by the Company or any
Restricted Subsidiary of the Company of such Capital Stock, (A) such Person
becomes a Restricted Subsidiary of the Company or any Restricted Subsidiary of
the Company or (B) such Person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its assets to, or is
liquidated into, the Company or any Restricted Subsidiary of the Company.
"Recapitalization" means the Acquisition, the Merger and the Original
Offerings.
"Receivables Facility" means one or more receivables financing facilities,
as amended from time to time, pursuant to which the Company or any of its
Restricted Subsidiaries sells its accounts receivable to an Accounts Receivable
Subsidiary.
"Receivables Fees" means distributions or payments made directly or by
means of discounts with respect to any participation interests issued or sold in
connection with, and other fees paid to a Person that is not a Restricted
Subsidiary in connection with, any Receivables Facility.
"Related Party" means, with respect to any Principal, (i) any controlling
stockholder or partner of such Principal on the date of the Indenture, or (ii)
any trust, corporation, partnership or other entity, the beneficiaries,
stockholders, partners, owners or Persons beneficially holding (directly or
through one or more Subsidiaries) a 51% or more controlling interest of which
consist of the Principals and/or such other Persons referred to in the
immediately preceding clauses (i) or (ii).
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the date
hereof.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any Person, (a) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (b) any partnership or limited liability company (i) the sole
general partner or the managing general partner or managing member of which is
such Person or a Subsidiary of such Person or (ii) the only general partners or
managing members of which are such Person or of one or more Subsidiaries of such
Person (or any combination thereof).
"Tax Sharing Agreement" means any tax sharing agreement or arrangement
between the Company and Holdings, as the same may be amended from time to time;
provided that in no event shall the amount permitted to be paid pursuant to all
such agreements and/or arrangements exceed the amount the Company would be
required to pay for income taxes were it to file a consolidated tax return for
itself and its consolidated Restricted Subsidiaries as if it were a corporation
that was a parent of a consolidated group.
"Total Assets" means the total consolidated assets of the Company and its
Restricted Subsidiaries, as shown on the most recent balance sheet (excluding
the footnotes thereto) of the Company.
"Unrestricted Subsidiary" means any Subsidiary (other than Thermadyne
Capital) that is designated by the board of directors as an Unrestricted
Subsidiary pursuant to a board resolution, but only to the extent that
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such Subsidiary: (a) has no Indebtedness other than Non-Recourse Debt; (b) is
not party to any agreement, contract, arrangement or understanding with the
Company or any Restricted Subsidiary of the Company unless the terms of any such
agreement, contract, arrangement or understanding are no less favorable to the
Company or such Restricted Subsidiary than those that might be obtained at the
time from Persons who are not Affiliates of the Company; (c) is a Person with
respect to which neither the Company nor any of its Restricted Subsidiaries has
any direct or indirect obligation (i) to subscribe for additional Equity
Interests (other than Investments described in clause (g) of the definition of
Permitted Investments) or (ii) to maintain or preserve such Person's financial
condition or to cause such Person to achieve any specified levels, of operating
results; and (d) has not guaranteed or otherwise directly or indirectly provided
credit support for any Indebtedness of the Company or any of its Restricted
Subsidiaries. Any such designation by the board of directors shall be evidenced
to the Trustee by filing with the Trustee a certified copy of the board
resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing conditions and was
permitted by the covenant described under the caption entitled "-- Certain
Covenants -- Restricted Payments." If, at any time, any Unrestricted Subsidiary
would fail to meet the foregoing requirements as a Unrestricted Subsidiary, it
shall thereafter cease to be an Unrestricted Subsidiary for purposes of the
Indenture and any Indebtedness of such Subsidiary shall be deemed to be incurred
by a Restricted Subsidiary of the Company as of such date (and, if such
Indebtedness is not permitted to be incurred as of such date under the covenant
described under the caption entitled "-- Certain Covenants -- Incurrence of
Indebtedness and Issuance of Preferred Stock," the Company shall be in default
of such covenant). The board of directors of the Company may at any time
designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided
that such designation shall be deemed to be an incurrence of Indebtedness by a
Restricted Subsidiary of the Company of any outstanding Indebtedness of such
Unrestricted Subsidiary and such designation shall only be permitted if (i) such
Indebtedness is permitted under the covenant described under the caption
entitled "-- Certain Covenants -- Incurrence of Indebtedness and Issuance
Preferred of Stock" and (ii) no Default or Event of Default would be in
existence following such designation.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the sum of the
products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (b) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all the outstanding Capital Stock or other ownership
interests of which (other than directors' qualifying shares) shall at the time
be owned by such Person or by one or more Wholly Owned Restricted Subsidiaries
of such Person or by such Person and one or more Wholly Owned Restricted
Subsidiaries of such Person.
BOOK-ENTRY; DELIVERY AND FORM
Except as described in the next paragraph, the New Senior Subordinated
Notes initially will be represented by one or more permanent global certificates
in definitive, duly registered form (the "Global Senior Subordinated Notes").
The Global Senior Subordinated Notes will be deposited on the Issue Date with,
or on behalf of, DTC and registered in the name of a nominee of DTC.
The Global Notes. The Issuers expect that pursuant to procedures
established by DTC (i) upon the issuance of the Global Senior Subordinated
Notes, DTC or its custodian will credit, on its internal system, the principal
amount of New Senior Subordinated Notes of the individual beneficial interests
represented by such Global Senior Subordinated Notes to the respective accounts
of persons who have accounts with such depositary and (ii) ownership of
beneficial interests in the Global Senior Subordinated Notes will be shown
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on, and the transfer of such ownership will be effected only through, records
maintained by DTC or its nominee (with respect to interests of persons who have
accounts with DTC ("participants")) and the records of participants (with
respect to interests of persons other than participants). Qualified
Institutional Buyers ("QIB's") and institutional Accredited Investors who are
not QIB's may hold their interests in the Global Senior Subordinated Notes
directly through DTC if they are participants in such system, or indirectly
through organizations which are participants in such system.
So long as DTC, or its nominee, is the registered owner or holder of the
New Senior Subordinated Notes, DTC or such nominee, as the case may be, will be
considered the sole owner or holder of the New Senior Subordinated Notes
represented by such Global Senior Subordinated Notes for all purposes under the
Indenture. No beneficial owner of an interest in the Global Senior Subordinated
Notes will be able to transfer that interest except in accordance with DTC's
procedures.
Payments of the principal of, premium (if any) and interest on, the Global
Senior Subordinated Notes will be made to DTC or its nominee, as the case may
be, as the registered owner thereof. None of the Issuers, the Guarantors, the
Trustee or any Paying Agent will have any responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interests in the Global Senior Subordinated Notes or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interest.
The Issuers expect that DTC or its nominee, upon receipt of any payment of
principal, premium, if any and interest on the Global Senior Subordinated Notes,
will credit participants' accounts with payments in amount proportionate to
their respective beneficial interests in the principal amount of the Global
Notes as shown on the records of DTC or its nominee. The Issuers also expect
that payments by participants to owners of beneficial interests in the Global
Senior Subordinated Notes held through such participants will be governed by
standing instructions and customary practice, as is now the case with securities
held for the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
through DTC's same-day funds system in accordance with DTC rules and will be
settled in same day funds. If a holder requires physical delivery of a
Certificated Security for any reason, including to sell New Senior Subordinated
Notes to persons in states which require physical delivery of the New Senior
Subordinated Notes, or to pledge such securities, such holder must transfer its
interest in a Global Senior Subordinated Note, in accordance with the normal
procedures of DTC.
DTC has advised the Issuers that it will take any action permitted to be
taken by a holder of New Notes (including the presentation of New Senior
Subordinated Notes for exchange as described below) only at the direction of one
or more participants to whose account the DTC interests in the Global Senior
Subordinated Notes are credited and only in respect of such portion of the
aggregate principal amount of New Senior Subordinated Notes as to which such
participant or participants has or have given such direction.
DTC has advised the Issuers as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Securities Exchange Act of 1934, as amended.
DTC was created to hold securities for its participants and facilitate the
clearance and settlement of securities transactions between participants through
electronic book-entry changes in accounts of its participants, thereby
eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers, banks, trust companies and clearing corporations
and certain other organizations. Indirect access to the DTC system is available
to others such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly ("indirect participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Senior Subordinated Note among participants
of DTC, it is under no obligation to perform such procedures, and such
procedures may be discontinued at any time. None of the Issuers, the Guarantors
nor the
84
<PAGE> 228
Trustee will have any responsibility for the performance by DTC or its
participants or indirect participants of their respective obligations under the
rules and procedures governing their operations.
Certificated Securities. If DTC is at any time unwilling or unable to
continue as a depositary for the Global Senior Subordinated Note and a successor
depositary is not appointed by the Issuer within 90 days, Certificated
Securities will be issued in exchange for the Global Senior Subordinated Notes.
85
<PAGE> 229
PLAN OF DISTRIBUTION
This Prospectus is to be used by DLJSC in connection with offers and sales
of the New Senior Subordinated Notes in market-making transactions effected from
time to time. DLJSC may act as a principal or agent in such transactions,
including as agent for the counterparty when acting as principal or as agent for
both counterparties, and may receive compensation in the form of discounts and
commissions, including from both counterparties when it acts as agent for both.
Such sales will be made at prevailing market prices at the time of sale, at
prices related thereto or at negotiated prices.
DLJMB, an affiliate of DLJSC, and certain of its affiliates beneficially
own approximately 82.5% of the common stock of Holdings. Peter T. Grauer, a
principal of DLJMB, is a member of the Board of Directors of Holdings and the
Issuers; William F. Dawson, Jr., a principal of DLJMB, is a member of the Board
of Directors of Holdings and the Issuers; and Lawrence M.v.D Schloss, a
principal of DLJMB, is a member of the Board of Directors of Holdings. Further,
DLJ Capital Funding, Inc., an affiliate of DLJSC, acted as syndication agent in
connection with the New Credit Facility for which it received certain customary
fees and expenses. In addition, DLJSC received a merger advisory fee of $4.0
million in cash from Holdings after consummation of the Merger. DLJSC has
informed the Issuers that it does not intend to confirm sales of the New Senior
Subordinated Notes to any accounts over which it exercises discretionary
authority without the prior specific written approval of such transactions by
the customer.
The Issuers have been advised by DLJSC that, subject to applicable laws and
regulations, DLJSC currently intends to make a market in the New Senior
Subordinated Notes following completion of the Exchange Offer. However, DLJSC is
not obligated to do so and any such market-making may be interrupted or
discontinued at any time without notice. In addition, such market-making
activity will be subject to the limits imposed by the Securities Act and the
Exchange Act. There can be no assurance that an active trading market will
develop or be sustained. See "Risk Factors -- Trading Market for the New Senior
Subordinated Notes."
DLJSC has, from time to time, provided investment banking and other
financial advisory services to the Company in the past for which they have
received customary compensation, including fees received in connection with the
offering of the Senior Subordinated Notes, and may provide such services and
financial advisory services to the Company in the future. DLJSC acted as
purchasers in connection with the initial sale of the Senior Subordinated Notes
and the Debentures and received an underwriting discount of approximately $9
million in connection therewith. See "Certain Relationships and Related
Transactions."
DLJSC and the Issuers have entered into the Registration Rights Agreement
with respect to the use by DLJSC of this Prospectus. Pursuant to such agreement,
the Issuers agreed to bear all registration expenses incurred under such
agreement, and the Issuers agreed to indemnify the Initial Purchaser against
certain liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the New Senior Subordinated Notes will be passed upon for
the Issuers and the Guarantors by Weil, Gotshal & Manges LLP, Dallas, Texas and
New York, New York.
EXPERTS
The Consolidated Financial Statements of Holdings at December 31, 1997 and
1996 and for each of the three years in the period ended December 31, 1997, and
the related financial statement schedule appearing in this Registration
Statement and related Prospectus have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports thereon appearing elsewhere
herein, and are included in reliance upon such reports of such firm given upon
their authority as experts in accounting and auditing.
86
<PAGE> 230
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA FINANCIAL DATA
The following unaudited condensed consolidated pro forma financial data
(the "Pro Forma Financial Data") of the Company are based on historical
consolidated financial statements of Holdings as adjusted to give effect to
certain transactions described below and to the Merger, including the Merger
Financing and the application of the proceeds thereof. For additional
information regarding the Merger, see "The Merger and Merger Financing." The
unaudited condensed consolidated pro forma statement of operations for the
quarter ended March 31, 1998 gives effect to the Merger and the Merger Financing
and the application of the proceeds thereof as if it had occurred at the
beginning of such period. The unaudited condensed consolidated pro forma
statements of operations for the twelve months ended March 31, 1998 and the year
ended December 31, 1997 give effect to the Arcsys Acquisition and the Woodland
Acquisition and, in the case of the year ended December 31, 1997, the GenSet
Acquisition, and the Merger, including the Merger Financing and the application
of the proceeds thereof, as if they all had occurred at the beginning of the
respective period. The pro forma statement of operations data have been derived
as if the balance sheet of the Company at the beginning of the respective period
was the pro forma balance sheet as of March 31, 1998. For additional information
regarding the GenSet Acquisition, the Arcsys Acquisition and the Woodland
Acquisition, see the discussion under the caption "Recent
Events -- Acquisitions" in Note 2 to Holdings' consolidated financial
statements. The unaudited condensed consolidated pro forma balance sheet gives
effect to the Merger, including the Merger Financing and the application of the
proceeds thereof, as if it had occurred on March 31, 1998. The pro forma
adjustments are based upon available information and upon certain assumptions
that management believes are reasonable under the circumstances. The Pro Forma
Financial Data and accompanying notes should be read in conjunction with the
historical consolidated financial statements of Holdings, including the notes
thereto, and other financial information pertaining to Holdings. The Pro Forma
Financial Data do not purport to represent what the Company's actual results of
operations or actual financial position would have been if the Merger, including
the Merger Financing and the application of the proceeds thereof, and the GenSet
Acquisition, the Arcsys Acquisition and the Woodland Acquisition in fact
occurred on such dates or to project the Company's results of operations or
financial position for any future period or date. The Pro Forma Financial Data
do not give effect to any transactions other than the GenSet Acquisition, the
Arcsys Acquisition, the Woodland Acquisition and the Merger, including the
Merger Financing and the application of the proceeds thereof, discussed in the
notes to the Pro Forma Financial Data included elsewhere herein.
As a result of the Merger, the Company incurred various expenses in
connection with consummating the transaction. See Note 2 to the Unaudited
Consolidated Pro Forma Statement of Operations for a more detailed explanation
of these expenses. While the exact timing, nature and amount of these costs have
not yet been fully determined, the Company anticipates that a significant
one-time pretax charge will be recorded in its second fiscal quarter. As a
result of the foregoing, the Company expects to record a significant net loss in
its second fiscal quarter. Because this loss will result directly from the
one-time charge incurred in connection with the Merger, and this charge will be
funded entirely through the proceeds of the Merger Financing, the Company does
not expect this loss to materially impact its liquidity, ongoing operations or
market position. For a discussion of the consequences of the incurrence of
indebtedness in connection with the Merger Financing, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
The pro forma adjustments were applied to the respective historical
consolidated financial statements of Holdings to reflect and account for the
Merger as a recapitalization; accordingly, the historical basis of the Company's
assets and liabilities has not been impacted thereby.
P-1
<PAGE> 231
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA BALANCE SHEET(1)
<TABLE>
<CAPTION>
MARCH 31, 1998
---------------------------------------
MERGER
HISTORICAL ADJUSTMENTS(1) PRO FORMA
---------- -------------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 0.2 $ -- $ 0.2
Accounts receivable..................................... 82.2 -- 82.2
Inventories............................................. 119.0 -- 119.0
Prepaid expenses and other.............................. 8.3 -- 8.3
------- ------- -------
Total current assets............................ 209.7 -- 209.7
Property, plant and equipment, net........................ 86.0 -- 86.0
Deferred financing costs.................................. 5.6 15.5(2) 15.5
(5.6)(3)
Intangibles, net.......................................... 33.8 -- 33.8
Deferred income taxes..................................... 35.5 16.8(4) 52.3
Other assets.............................................. 1.9 -- 1.9
------- ------- -------
Total assets.................................... $ 372.5 $ 26.7 $ 399.2
======= ======= =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable........................................ $ 49.9 $ -- $ 49.9
Accrued and other liabilities........................... 26.5 -- 26.5
Accrued interest........................................ 13.0 (13.0)(1) --
Income taxes payable.................................... 9.7 -- 9.7
Current maturities of long-term obligations............. 6.3 (6.3)(1) --
------- ------- -------
Total current liabilities....................... 105.4 (19.3) 86.1
New Credit Facility:
Revolving credit facility............................... -- 33.2(1) 33.2
Term loans.............................................. -- 330.0(1) 330.0
Senior Subordinated Notes................................. -- 205.4(1) 205.4
Outstanding Senior Notes.................................. 99.3 (99.3)(1) --
Outstanding Subordinated Notes............................ 179.3 (179.3)(1) --
Other existing long-term debt, less current maturities.... 85.6 (66.8)(1) 18.8
Other long-term liabilities............................... 59.7 -- 59.7
Stockholders' deficit..................................... (156.8) (177.2)(5) (334.0)
------- ------- -------
Total liabilities and stockholders' deficit..... $ 372.5 $ 26.7 $ 399.2
======= ======= =======
</TABLE>
See accompanying notes to Unaudited Condensed Consolidated Pro Forma Balance
Sheet.
P-2
<PAGE> 232
NOTES TO UNAUDITED CONDENSED CONSOLIDATED PRO FORMA BALANCE SHEET
(IN MILLIONS)
(1) The sources of cash at the Company level will include borrowings under the
New Credit Facility and the Senior Subordinated Notes ($568.6 million), of
which an estimated $21.4 million will be used to pay related fees and
expenses and the remaining $547.2 million will be dividended to Holdings.
Sources and uses of cash and cash equivalents in the Merger, including the
Merger Financing and the application of the proceeds thereof as of March 31,
1998, are as follows:
<TABLE>
<S> <C>
TOTAL USES:
Cash to purchase shares..................................... $368.8
Option cash proceeds........................................ 18.1
Management Loans............................................ 3.6
Repayment of Outstanding Subordinated Notes(a).............. 179.3
Repayment of Outstanding Senior Notes(a).................... 99.3
Repayment of outstanding U.S., Australian and Italian bank
facilities................................................ 73.1
Payment of accrued interest................................. 13.0
Estimated transaction fees and expenses..................... 52.9
------
Total cash uses................................... $808.1
======
TOTAL SOURCES:
New Credit Facility
Revolving credit facility(a).............................. $ 33.2
Term loans................................................ 330.0
Senior Subordinated Notes(b)................................ 205.4
Debentures issued by Holdings............................... 94.6
Common stock purchased by management........................ 4.9
Redeemable PIK preferred stock and warrants purchased by
DLJMB..................................................... 50.0
Common stock purchased by DLJMB............................. 90.0
------
Total cash sources................................ $808.1
======
</TABLE>
- ---------------
(a)Assumes that all of the Outstanding Subordinated Notes and Outstanding
Senior Notes are purchased by Holdings. The purchase by Holdings of less
than 100% of each of such notes would result in a reduction in the
amount of borrowings under the New Credit Facility; however, management
does not believe that such changes would have a material effect on the
information presented herein.
(b)Represents the issuance of $207 million aggregate principal amount of
Senior Subordinated Notes at a discount.
(2) Represents the portion of estimated transaction fees and expenses
attributable to the New Credit Facility, the Senior Subordinated Notes and
related interim financing commitments. See Note 6 to the Company's Unaudited
Condensed Consolidated Pro Forma Statement of Operations.
(3) The adjustment reflects the $5.6 million write-off of deferred debt issuance
costs associated with retiring the existing indebtedness. See Notes 2 and 6
to the Company's Unaudited Condensed Consolidated Pro Forma Statement of
Operations for an explanation of the pro forma income statement impact.
P-3
<PAGE> 233
(4) Reflects tax benefit of expense adjustments at a 35.0% rate as shown below:
<TABLE>
<S> <C> <C>
Option cash proceeds........................................ $18.1
Non-capitalized transaction fees and expenses............. 34.2
Less: estimated non-deductible portion.................... (10.0)
-----
Deductible non-capitalized transaction fees and expenses.... 24.2
Write-off of deferred debt issuance costs................... 5.6
-----
Total deductible expenses................................... 47.9
-----
Tax rate.................................................... 35.0%
-----
Tax benefit................................................. $16.8
=====
</TABLE>
(5) Represents the change in the stockholders' deficit as a result of the
Merger, including the Merger Financing and the application of the proceeds
thereof:
<TABLE>
<S> <C>
Cash to purchase shares (a)................................. $(368.8)
Net proceeds from Debentures issued by Holdings............. 91.3
Redeemable preferred stock and warrants purchased by
DLJMB..................................................... 50.0
Common stock purchased by management (b).................... 4.9
Common stock purchased by DLJMB............................. 90.0
Receivable related to Management Loans (c).................. (3.6)
Non-capitalized transaction fees and expenses (d)........... (34.2)
Write-off of deferred debt issuance costs................... (5.6)
Option cash proceeds (e).................................... (18.1)
Tax benefit of expense adjustments.......................... 16.8
-------
Total change in stockholders' deficit............. $(177.2)
=======
</TABLE>
- ---------------
(a) Assumes 10,690,283 shares are purchased for $34.50 per share. See "The
Merger and Merger Financing."
(b) Represents the Management Share Purchase (certain members of senior
management's anticipated purchase of 141,002 shares of the common stock
of the surviving corporation for $34.50 per share). See "Executive
Compensation -- Employment Contracts -- Employment Arrangements
Following the Merger."
(c) Represents loans provided to certain members of senior management by
the company to facilitate the Management Share Purchase.
(d) Represents all non-capitalized transaction fees and expenses and
includes estimated legal, accounting, advisory and consulting fees of
$17.4 million and estimated debt prepayment fees of $16.8 million. The
tax benefit of these expenses is included separately in the table
above.
(e) Represents the purchase of 1,033,668 options at an average purchase
price of $17.47 (the difference between $34.50 and $17.03, the average
exercise price of the Options). See "The Merger and Merger Financing."
P-4
<PAGE> 234
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA
STATEMENT OF OPERATIONS(1)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED MARCH 31, 1998
-------------------------------------------------------------------------
1997 ACQUISITIONS(1)
COMPANY ------------------------------- MERGER
HISTORICAL ARCSYS WOODLAND ADJUSTMENTS ADJUSTMENTS PRO FORMA(2)
---------- ------ -------- ----------- ----------- ------------
(IN MILLIONS, EXCEPT FOR RATIO DATA)
<S> <C> <C> <C> <C> <C> <C>
Net sales..................... $534.5 $11.2 $ 2.5 -- -- $548.2
Operating expenses:
Cost of goods sold.......... 331.6 9.0 1.6 -- -- 342.2
Selling, general and
administrative
expenses................. 111.5 1.7 0.9 -- -- 114.1
Amortization of goodwill.... 1.6 -- -- -- -- 1.6
Amortization of other
intangibles.............. 5.6 0.2 -- -- -- 5.8
Net periodic postretirement
benefits................. 2.8 -- -- -- -- 2.8
------ ----- ----- ----- ------ ------
Income from operations........ 81.4 0.3 -- -- -- 81.7
Other (income) expense:
Interest expense............ 44.6 -- 0.2 0.2(3) 50.0(4) 57.1
(37.9)(5)
Amortization of deferred
financing costs.......... 1.5 -- -- -- 2.0(6) 2.0
(1.5)(6)
Other....................... 3.3 -- -- -- -- 3.3
------ ----- ----- ----- ------ ------
Income (loss) from continuing
operations before taxes..... 32.0 0.3 (0.2) (0.2) (12.6) 19.3
Income tax provision
(benefit)................... 15.1 -- -- (0.1)(3) (4.4)(7) 10.6
------ ----- ----- ----- ------ ------
Income (loss) from continuing
operations available to
common...................... $ 16.9 $ 0.3 $(0.2) $(0.1) $ (8.2) $ 8.7
OTHER DATA:
Adjusted EBITDA(8)............ $104.6 $ 0.8 $ 0.4 $ -- $ -- $105.8
Depreciation.................. 13.1 0.3 0.2 -- -- 13.6
Capital expenditures.......... 17.7 0.1 -- -- -- 17.8
Ratio of earnings to fixed
charges(9).................. 1.6x -- -- -- -- 1.3x
</TABLE>
See accompanying notes to Unaudited Condensed Consolidated Pro Forma Statement
of Operations.
P-5
<PAGE> 235
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
PRO FORMA STATEMENT OF OPERATIONS
(IN MILLIONS)
(1) Represents the financial results for the companies acquired during 1997 for
the periods not included in the Company Historical column as follows: Arcsys
(4/1/97-9/25/97) and Woodland (4/1/97-11/24/97).
(2) The pro forma balance sheet reflects non-recurring charges aggregating $58.1
million (comprised of $18.1 million related to employee stock options and
related plans; $17.4 million of non-capitalizable transaction fees; $16.8
million of debt pre-payment penalties and the write-off of $5.6 million of
related deferred issuance costs) and estimated tax benefits of $16.8
million. The amounts related to debt prepayment penalties and debt issuance
costs will be reflected net of tax benefits as an extraordinary item. These
amounts have not been reflected in the unaudited pro forma consolidated
statements of operations.
(3) Reflects the additional interest expense and associated tax benefit
attributable to the acquisitions, all of which were financed with borrowings
under the Company's revolving credit facility.
<TABLE>
<CAPTION>
ARCSYS WOODLAND TOTAL
------ -------- -----
<S> <C> <C> <C>
Acquisition................................................. $ 7.5 $ 2.6 $10.1
Average interest rate....................................... 7.80% 7.80%
Annual interest............................................. $ 0.6 $ 0.2 $ 0.8
Months to include in pro forma.............................. 6 8
Incremental pro forma interest.............................. $ 0.3 $ 0.1 $ 0.4
Less historical interest included in reported results....... (0.2)
-----
Adjustment.................................................. $ 0.2
=====
TAXES:
Tax benefit on incremental interest at assumed rate of
35.0%..................................................... $ 0.1
=====
</TABLE>
(4) Reflects the additional interest expense attributable to the Merger
Financing, as follows:
<TABLE>
<CAPTION>
RATE AMOUNT INTEREST
---- ------ --------
<S> <C> <C> <C>
New Credit Facility:(a) Revolving Credit
Facility...................................... LIBOR(b) +2.25% $ 33.2 $ 2.7
Term Loans:
Term A........................................ LIBOR(b) +2.25% 100.0 7.9
Term B........................................ LIBOR(b) +2.50% 115.0 9.3
Term C........................................ LIBOR(b) +2.75% 115.0 9.6
------ -----
Total Term Loans...................... 330.0 26.8
Senior Subordinated Notes....................... 9.88% 207.0 20.4
-----
49.9
Amortization of Issuance Discount for Senior
Subordinated Notes............................ 10 yrs 1.6 0.1
-----
$50.0
=====
</TABLE>
- ---------------
(a) A one-eighth of one percent change in interest rates would impact
interest expense for borrowings under the New Credit Facility and the
Senior Subordinated Notes, collectively, in the amount of approximately
$0.7 million.
(b) Calculations based on LIBOR at 5.63%.
The borrowings under the New Credit Facility assume that all of the
Outstanding Subordinated Notes and Outstanding Senior Notes are
purchased by Holdings. The purchase by Holdings of less than 100% of
each of such notes would result in a reduction in the amount of
borrowings under the
P-6
<PAGE> 236
New Credit Facility; however, the management does not believe that such
changes would have a material effect on the information presented
herein.
(5) Reflects the elimination of interest expense attributable to indebtedness to
be paid in connection with the Merger, as follows:
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED
MARCH 31,
1998
-------------
<S> <C>
Outstanding U.S., Australian and Italian bank facilities.... $ 8.4
Outstanding Senior Notes.................................... 10.2
Outstanding Subordinated Notes.............................. 19.3
-----
$37.9
=====
</TABLE>
See Note 8 to Holdings' Consolidated Financial Statements for a description
of interest rates applicable to outstanding indebtedness.
(6) Reflects the net change in amortization of capitalized financing costs, as
follows:
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED
FEES YEARS MARCH 31, 1998
----- ----- --------------
<S> <C> <C> <C>
Elimination of existing amortization of capitalized
financing
costs................................................. $(1.5)
Amortization of capitalized financing costs for new
debt:
Revolving Credit Facility............................. $ 2.3 6 0.4
Term A................................................ 2.3 6 0.4
Term B................................................ 2.6 7 0.4
Term C................................................ 2.6 8 0.3
Senior Subordinated Notes............................. 5.7 10 0.5
----- -----
Total new capitalized financing costs......... $15.5 2.0
===== -----
$ 0.5
=====
</TABLE>
Financing costs are amortized using the effective interest method.
(7) Adjustment reflects the income tax effect of all pro forma entries above at
a rate of 35.0%.
(8) "Adjusted EBITDA" is defined as operating income plus depreciation,
amortization of goodwill, amortization of intangibles and net periodic
postretirement benefits expense and is a key financial measure but should
not be construed as an alternative to operating income or cash flows from
operating activities (as determined in accordance with generally accepted
accounting principles). Adjusted EBITDA is also one of the financial
measures by which the Company's compliance with its covenants is calculated
under its debt agreements. The Company believes that Adjusted EBITDA is a
useful supplement to net income (loss) and other consolidated income
statement data in understanding cash flows generated from operations that
are available for taxes, debt service and capital expenditures. However, the
Company's method of computation may or may not be comparable to other
similarly titled measures of other companies. In addition, Adjusted EBITDA
is not necessarily indicative of amounts that may be available for
discretionary uses and does not reflect any legal or contractual
restrictions on the Company's use of funds.
(9) For purposes of calculating the ratio of earnings to fixed charges, earnings
consist of income before income taxes plus fixed charges. Fixed charges
consist of interest expense, amortization of deferred financing costs and
one-third of the rent expense from operating leases, which management
believes is a reasonable approximation of the interest component of rent
expense.
P-7
<PAGE> 237
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA
STATEMENT OF OPERATIONS(1)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
----------------------------------------------------------------------------------
1997 ACQUISITIONS(1)
COMPANY ---------------------------------------- MERGER
HISTORICAL GENSET ARCSYS WOODLAND ADJUSTMENTS ADJUSTMENTS PRO FORMA(2)
---------- ------ ------ -------- ----------- ----------- ------------
(IN MILLIONS, EXCEPT FOR RATIO DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.................. $520.4 $ 2.4 $17.4 $ 4.0 -- -- $544.2
Operating expenses:
Cost of goods sold....... 320.0 2.1 14.2 2.6 -- -- 338.9
Selling, general and
administrative
expenses.............. 110.7 0.4 2.7 1.2 -- -- 115.0
Amortization of
goodwill.............. 1.6 0.1 -- -- -- -- 1.7
Amortization of other
intangibles........... 6.8 -- 0.2 -- -- -- 7.0
Net periodic
postretirement
benefits.............. 2.8 -- -- -- -- -- 2.8
------ ----- ----- ----- ----- ------ ------
Income from operations..... 78.5 (0.2) 0.3 0.2 -- -- 78.8
Other (income) expense:
Interest expense......... 45.3 0.2 -- 0.3 0.4(3) 50.0(4) 57.0
(39.2)(5)
Amortization of deferred
financing costs....... 1.6 -- -- -- -- 2.0(6) 2.0
(1.6)(6)
Other.................... 3.1 (0.1) -- -- -- -- 3.0
------ ----- ----- ----- ----- ------ ------
Income (loss) from
continuing operations
before taxes............. 28.5 (0.3) 0.3 (0.1) (0.4) (11.2) 16.8
Income tax provision
(benefit)................ 13.4 0.1 -- 0.1 (0.2)(3) (3.9)(7) 9.5
------ ----- ----- ----- ----- ------ ------
Income (loss) from
continuing operations
available to common...... $ 15.1 $(0.4) $ 0.3 $(0.2) $(0.2) $ (7.3) $ 7.3
OTHER DATA:
Adjusted EBITDA(8)......... $102.1 $ -- $ 0.9 $ 0.4 $ -- $ -- $103.4
Depreciation............... 12.5 0.1 0.4 0.2 -- -- 13.2
Capital expenditures....... 16.3 -- 0.2 -- -- -- 16.5
Ratio of earnings to fixed
charges(9)............... 1.6x -- -- -- -- -- 1.3x
</TABLE>
See accompanying notes to Unaudited Condensed Consolidated Pro Forma Statement
of Operations.
P-8
<PAGE> 238
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
---------------------------------------
COMPANY MERGER
HISTORICAL ADJUSTMENTS PRO FORMA(2)
---------- ----------- ------------
(IN MILLIONS, EXCEPT FOR RATIO DATA)
<S> <C> <C> <C>
Net sales................................................. $131.8 -- $131.8
Operating expenses:
Cost of goods sold...................................... 81.8 -- 81.8
Selling, general and administrative expenses............ 27.1 -- 27.1
Amortization of goodwill................................ 0.4 -- 0.4
Amortization of other intangibles....................... 0.5 -- 0.5
Net periodic postretirement benefits.................... 0.6 -- 0.6
------ ----- ------
Income from operations.................................... 21.4 -- 21.4
Other (income) expense:
Interest expense........................................ 10.8 12.6(4) 14.6
(8.8)(5)
Amortization of deferred financing costs................ 0.4 0.5(6) 0.5
(0.4)(6)
Other................................................... (0.2) -- (0.2)
------ ----- ------
Income (loss) from continuing operations before taxes..... 10.4 (3.9) 6.5
Income tax provision (benefit)............................ 4.6 (1.4)(7) 3.2
------ ----- ------
Income (loss) from continuing operations available to
common.................................................. $ 5.8 $(2.5) $ 3.3
OTHER DATA:
Adjusted EBITDA(8)........................................ $ 26.5 $ -- $ 26.5
Depreciation.............................................. 3.6 -- 3.6
Capital expenditures...................................... 3.8 -- 3.8
Ratio of earnings to fixed charges(9)..................... 1.9x -- 1.4x
</TABLE>
See accompanying notes to Unaudited Condensed Consolidated Pro Forma Statement
of Operations.
P-9
<PAGE> 239
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
PRO FORMA STATEMENTS OF OPERATIONS
(IN MILLIONS)
(1) Represents the financial results for the companies acquired during 1997 for
the periods not included in the Company Historical column as follows: GenSet
(1/1/97-1/31/97), Arcsys (1/1/97-9/25/97) and Woodland (1/1/97-11/24/97).
(2) The pro forma balance sheet reflects non-recurring charges aggregating $58.1
million (comprised of $18.1 million related to employee stock options and
related plans; $17.4 million of non-capitalizable transaction fees; $16.8
million of debt pre-payment penalties and the write-off of $5.6 million of
related deferred issuance costs) and estimated tax benefits of $16.8
million. The amounts related to debt prepayment penalties and debt issuance
costs will be reflected net of tax benefits as an extraordinary item. These
amounts have not been reflected in the unaudited pro forma consolidated
statements of operations.
(3) Reflects the additional interest expense and associated tax benefit
attributable to the acquisitions, all of which were financed with borrowings
under the Company's revolving credit facility.
<TABLE>
<CAPTION>
GENSET ARCSYS WOODLAND TOTAL
------ ------ -------- -----
<S> <C> <C> <C> <C>
Acquisition......................................... $27.8 $7.5 $2.6 $37.9
Average interest rate............................... 8.04% 7.80% 7.80%
Annual interest..................................... $ 2.2 $0.6 $0.2 $ 3.0
Months to include in pro forma...................... 1 9 11
Incremental pro forma interest...................... $ 0.2 $0.4 $0.2 $ 0.8
Less historical interest included in reported
results........................................... (0.4)
-----
Adjustment.......................................... $ 0.4
=====
TAXES:
Tax benefit on incremental interest at assumed rate
of 35.0%.......................................... $ 0.2
=====
</TABLE>
(4) Reflects the additional interest expense attributable to the Merger
Financing, as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 1998 DECEMBER 31, 1997
------------------ -----------------
RATE AMOUNT INTEREST INTEREST
---- ------ ------------------ -----------------
<S> <C> <C> <C> <C>
New Credit Facility:(a)
Revolving Credit
Facility.......... LIBOR (b) + 2.25% $ 33.2 $ 0.7 $ 2.7
Term Loans:
Term A............ LIBOR (b) + 2.25% 100.0 2.0 7.9
Term B............ LIBOR (b) + 2.50% 115.0 2.3 9.3
Term C............ LIBOR (b) + 2.75% 115.0 2.4 9.6
------ ----- -----
Total Term
Loans...... 330.0 6.7 26.8
Senior Subordinated
Notes................ 9.88% 207.0 5.1 20.4
----- -----
$12.5 $49.9
Amortization of
Issuance
Discount for Senior
Subordinated
Notes............. 10 yrs 1.6 0.1 0.1
----- -----
$12.6 $50.0
===== =====
</TABLE>
- ---------------
(a) A one-eighth of one percent change in interest rates would impact interest
expense for borrowings under the New Credit Facility and the Senior
Subordinated Notes, collectively, in the amount of approximately $0.2
million and $0.7 million for the three months ended March 31, 1998 and the
year ended December 31, 1997, respectively.
P-10
<PAGE> 240
(b) Calculations based on LIBOR at 5.63%.
The borrowings under the New Credit Facility assume that all of the
Outstanding Subordinated Notes and Outstanding Senior Notes are purchased by
Holdings. The purchase by Holdings of less than 100% of each of such notes
would result in a reduction in the amount of borrowings under the New Credit
Facility; however, the management does not believe that such changes would
have a material effect on the information presented herein.
(5) Reflects the elimination of interest expense attributable to indebtedness to
be paid in connection with the Merger, as follows:
<TABLE>
<CAPTION>
YEAR ENDED
THREE MONTHS ENDED DECEMBER 31,
MARCH 31, 1998 1997
------------------ ----------------
<S> <C> <C>
Outstanding U.S., Australian and Italian bank
facilities...................................... $1.5 $ 9.7
Outstanding Senior Notes.......................... 2.5 10.2
Outstanding Subordinated Notes.................... 4.8 19.3
---- -----
$8.8 $39.2
==== =====
</TABLE>
See Note 8 to Holdings' Consolidated Financial Statements for a description
of interest rates applicable to outstanding indebtedness.
(6) Reflects the net change in amortization of capitalized financing costs, as
follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
FEES YEARS MARCH 31, 1998 DECEMBER 31, 1997
----- ----- -------------- -----------------
<S> <C> <C> <C> <C>
Elimination of existing amortization
of capitalized financing costs..... $(0.4) $(1.6)
Amortization of capitalized financing
costs for new debt:
Revolving Credit Facility.......... $ 2.3 6 0.1 0.4
Term A............................. 2.3 6 0.1 0.4
Term B............................. 2.6 7 0.1 0.4
Term C............................. 2.6 8 0.1 0.3
Senior Subordinated Notes.......... 5.7 10 0.1 0.5
----- ----- -----
Total new capitalized
financing costs.......... $15.5 0.5 $ 2.0
----- -----
$ 0.1 $ 0.4
===== =====
</TABLE>
Financing costs are amortized using the effective interest method.
(7) Adjustment reflects the income tax effect of all pro forma entries above at
a rate of 35.0%.
(8) "Adjusted EBITDA" is defined as operating income plus depreciation,
amortization of goodwill, amortization of intangibles and net periodic
postretirement benefits expense and is a key financial measure but should
not be construed as an alternative to operating income or cash flows from
operating activities (as determined in accordance with generally accepted
accounting principles). Adjusted EBITDA is also one of the financial
measures by which the Company's compliance with its covenants is calculated
under its debt agreements. The Company believes that Adjusted EBITDA is a
useful supplement to net income (loss) and other consolidated income
statement data in understanding cash flows generated from operations that
are available for taxes, debt service and capital expenditures. However, the
Company's method of computation may or may not be comparable to other
similarly titled measures of other companies. In addition, Adjusted EBITDA
is not necessarily indicative of amounts that may be available for
discretionary uses and does not reflect any legal or contractual
restrictions on the Company's use of funds.
(9) For purposes of calculating the ratio of earnings to fixed charges, earnings
consist of income before income taxes plus fixed charges. Fixed charges
consist of interest expense, amortization of deferred financing costs and
one-third of the rent expense from operating leases, which management
believes is a reasonable approximation of the interest component of rent
expense.
P-11
<PAGE> 241
THERMADYNE HOLDINGS CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets at December 31, 1997 and 1996
(audited) and March 31, 1998 (unaudited).................. F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996, and 1995 (audited) and the three
months ended March 31, 1998 and 1997 (unaudited).......... F-4
Consolidated Statements of Shareholders' Equity (Deficit)
for the years ended December 31, 1997, 1996, and 1995
(audited) and the three months ended March 31, 1998
(unaudited)............................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996, and 1995 (audited) and the three
months ended March 31, 1998 and 1997 (unaudited).......... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 242
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Thermadyne Holdings Corporation
We have audited the accompanying consolidated balance sheets of Thermadyne
Holdings Corporation and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our 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 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, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Thermadyne Holdings Corporation and subsidiaries at December 31, 1997 and 1996,
and the consolidated results of its operations and cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Orange County, California
February 5, 1998
F-2
<PAGE> 243
THERMADYNE HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
----------- ------------ ------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 173 $ 1,481 $ 1,420
Accounts receivable, less allowance for doubtful
accounts of $2,278, $2,217 and $1,649,
respectively........................................ 82,171 76,847 54,286
Inventories............................................ 118,966 105,135 79,542
Prepaid expenses and other............................. 8,316 8,534 9,763
Net assets of discontinued operations.................. -- -- 29,455
--------- --------- ---------
Total current assets........................... 209,626 191,997 174,466
Property, plant and equipment, at cost, net.............. 86,025 85,257 75,624
Deferred financing costs, net............................ 5,550 5,754 7,508
Intangibles, at cost, net................................ 33,797 33,970 62,645
Deferred income taxes.................................... 35,551 35,552 23,206
Other assets............................................. 1,893 1,997 9,956
--------- --------- ---------
Total assets................................... $ 372,442 $ 354,527 $ 353,405
========= ========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable....................................... $ 49,906 $ 55,390 $ 28,266
Accrued and other liabilities.......................... 26,478 32,697 29,257
Accrued interest....................................... 12,976 5,680 6,461
Income taxes payable................................... 9,725 4,769 7,948
Deferred income taxes.................................. -- -- 1,324
Current maturities of long-term obligations............ 6,256 4,912 4,205
--------- --------- ---------
Total current liabilities...................... 105,341 103,448 77,461
Long-term obligations, less current maturities........... 364,160 353,175 417,135
Other long-term liabilities.............................. 59,718 60,751 44,078
Shareholders' equity (deficit):
Common stock, $.01 par value, 25,000,000 shares
authorized, 11,217,233, 11,189,675 and 11,020,311
shares issued and outstanding, at March 31, 1998,
December 31, 1997 and 1996, respectively............ 112 112 110
Additional paid-in capital............................. 149,358 149,023 143,237
Accumulated deficit.................................... (293,399) (299,208) (333,465)
Accumulated other comprehensive income................. (12,848) (12,774) 4,849
--------- --------- ---------
Total shareholders' deficit.................... (156,777) (162,847) (185,269)
--------- --------- ---------
Total liabilities and shareholders' deficit.... $ 372,442 $ 354,527 $ 353,405
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 244
THERMADYNE HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1997 1996 1995
------------- ------------- ---------------- ---------------- ----------------
(UNAUDITED) (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net sales....................... $131,829 $117,751 $520,440 $439,744 $ 316,778
Operating expenses:
Cost of goods sold............ 81,784 70,342 320,120 259,835 175,945
Selling, general and
administrative expenses..... 27,064 26,270 110,696 95,907 74,681
Amortization of goodwill...... 382 357 1,591 83,033 92,931
Amortization of other
intangibles................. 518 1,692 6,776 12,377 48,401
Net periodic postretirement
benefits.................... 650 585 2,750 2,731 2,124
-------- -------- -------- -------- ---------
Operating income (loss)......... 21,431 18,505 78,507 (14,139) (77,304)
Other income (expense):
Interest expense.............. (10,834) (11,538) (45,325) (45,655) (41,269)
Amortization of deferred
financing costs............. (370) (460) (1,587) (2,711) (4,860)
Other......................... 166 406 (3,051) (968) 103
-------- -------- -------- -------- ---------
Income (loss) from continuing
operations before income
taxes and extraordinary
item.......................... 10,393 6,913 28,544 (63,473) (123,330)
Income tax provision
(benefit)..................... 4,584 2,981 13,475 (534) 8,518
-------- -------- -------- -------- ---------
Income (loss) from continuing
operations before
extraordinary item............ 5,809 3,932 15,069 (62,939) (131,848)
Discontinued operations:
Gain on sale of discontinued
operations, net of income
taxes of $12,623 and
$14,732, respectively....... -- -- 16,015 8,480 --
Income (loss) from
discontinued operations, net
of income taxes............. -- 1,036 3,173 (5,463) (28,952)
-------- -------- -------- -------- ---------
Income (loss) before
extraordinary item............ 5,809 4,968 34,257 (59,922) (160,800)
Extraordinary item -- loss on
early extinguishment of
long-term debt, net of income
tax benefit of $2,001......... -- -- -- (3,715) --
-------- -------- -------- -------- ---------
Net income (loss)............... $ 5,809 $ 4,968 $ 34,257 $(63,637) $(160,800)
======== ======== ======== ======== =========
Basic earnings per share
amounts:
Income (loss) from continuing
operations.................. $ 0.52 $ 0.36 $ 1.36 $ (5.83) $ (12.97)
Net income (loss)............. $ 0.52 $ 0.45 $ 3.09 $ (5.89) $ (15.81)
Diluted earnings per share
amounts:
Income (loss) from continuing
operations.................. $ 0.50 $ 0.35 $ 1.33 $ (5.83) $ (12.97)
Net income (loss)............. $ 0.50 $ 0.44 $ 3.01 $ (5.89) $ (15.81)
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 245
THERMADYNE HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND THE THREE MONTHS ENDED
MARCH 31, 1998
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN ACCUMULATED COMPREHENSIVE
STOCK CAPITAL DEFICIT INCOME TOTAL
------ ---------- ----------- ------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
January 1, 1995............... $100 $129,900 $(109,028) $ (350) $ 20,622
Comprehensive income:
Net loss............................. -- -- (160,800) -- (160,800)
Other comprehensive income --
Foreign currency translation......... -- -- -- (758) (758)
---------
Comprehensive income................... (161,558)
---------
Exercise of stock options.............. 5 6,261 -- -- 6,266
Stock issued under employee stock
purchase plan........................ 2 2,422 -- -- 2,424
---- -------- --------- -------- ---------
December 31, 1995............. 107 138,583 (269,828) (1,108) (132,246)
Comprehensive income:
Net loss............................. -- -- (63,637) -- (63,637)
Other comprehensive income --
Foreign currency translation......... -- -- -- 5,957 5,957
---------
Comprehensive income................... (57,680)
---------
Exercise of stock options.............. 2 2,424 -- -- 2,426
Stock issued under employee stock
purchase plan........................ 1 2,230 -- -- 2,231
---- -------- --------- -------- ---------
December 31, 1996............. 110 143,237 (333,465) 4,849 (185,269)
Comprehensive income:
Net income........................... -- -- 34,257 -- 34,257
Other comprehensive income --
Foreign currency translation......... -- -- -- (17,623) (17,623)
---------
Comprehensive income................... 16,634
---------
Exercise of stock options.............. 1 1,498 -- -- 1,499
Stock issued under employee stock
purchase plan........................ 1 1,993 -- -- 1,994
Recognition of net operating loss
carryforwards........................ -- 2,295 -- -- 2,295
---- -------- --------- -------- ---------
December 31, 1997............. 112 149,023 (299,208) (12,774) (162,847)
Comprehensive income:
Net income........................... -- -- 5,809 -- 5,809
Other comprehensive income --
Foreign currency translation......... -- -- -- (74) (74)
---------
Comprehensive income................... 5,735
---------
Exercise of stock options.............. -- 335 -- -- 335
---- -------- --------- -------- ---------
March 31, 1998................ $112 $149,358 $(293,399) $(12,848) $(156,777)
==== ======== ========= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 246
THERMADYNE HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash flows provided by (used in) operating
activities:
Net income (loss)................... $ 5,809 $ 4,968 $ 34,257 $(63,637) $(160,800)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Net periodic postretirement benefits....... 650 585 2,750 2,731 2,206
Depreciation............................... 3,556 2,876 12,448 11,651 10,689
Amortization of goodwill................... 382 357 1,591 83,033 102,985
Amortization of other intangibles.......... 518 1,692 6,776 12,377 48,517
Amortization of deferred financing costs... 370 460 1,587 2,711 4,860
Recognition of net operating loss
carryforwards............................ -- 586 2,343 8,534 4,491
Deferred income taxes...................... -- (586) (1,836) (21,882) --
Noncash charges for discontinued
operations............................... -- 565 1,621 13,949 30,328
Gain on sale of discontinued operations.... -- -- (16,015) (8,480) --
Extraordinary item......................... -- -- -- 3,715 --
Changes in operating assets and liabilities:
Accounts receivable........................ (6,179) (2,577) (19,905) (10,166) (5,942)
Inventories................................ (13,502) (4,625) (17,228) (10,107) (7,541)
Prepaid expenses and other................. (52) (334) (1,628) (1,957) (291)
Accounts payable........................... (5,347) 358 20,605 3,498 2,818
Accrued and other liabilities.............. (6,246) (7,762) (5,757) (4,510) 2,963
Accrued interest........................... 7,370 7,249 (258) 643 (658)
Income taxes payable....................... 5,098 (1,513) (3,498) 1,379 (2,363)
Other long-term liabilities................ (1,562) (321) (3,152) (2,124) (2,519)
Discontinued operations.................... -- 903 285 97 1,465
-------- -------- --------- -------- ---------
Total adjustments................... (14,944) (2,087) (19,271) 85,092 192,008
-------- -------- --------- -------- ---------
Net cash provided by operating
activities........................ (9,135) 2,881 14,986 21,455 31,208
-------- -------- --------- -------- ---------
Cash flows provided by (used in) investing
activities:
Capital expenditures, net.................. (3,756) (2,395) (16,339) (11,447) (7,154)
Change in other assets..................... (349) 8,512 4,162 (4,399) (64)
Acquisitions, net of cash.................. (640) (27,755) (37,895) (74,011) (3,370)
Investing activities of discontinued
operations............................... -- (570) (1,680) (3,766) (5,133)
Proceeds from sale of discontinued
operations............................... -- -- 88,543 112,359 --
-------- -------- --------- -------- ---------
Net cash provided by (used in)
investing activities.............. (4,745) (22,208) 36,791 18,736 (15,721)
-------- -------- --------- -------- ---------
Cash flows provided by (used in) financing
activities:
Change in long-term receivables............ 263 17 170 (283) 47
Repayment of long-term obligations......... (10,592) (9,928) (131,486) (150,384) (26,263)
Borrowing of long-term obligations......... 22,370 33,683 72,855 119,854 505
Issuance of common stock................... 335 436 3,069 4,146 7,761
Change in accounts receivable
securitization........................... 376 4,631 5,676 (9,994) 731
Financing fees............................. -- -- -- (3,855) (189)
Financing activities of discontinued
operations............................... -- (1,227) (2,808) (1,732) (11)
Other...................................... (180) (2,168) 808 1,639 (3,516)
-------- -------- --------- -------- ---------
Net cash used in financing
activities........................ 12,572 25,444 (51,716) (40,609) (20,935)
-------- -------- --------- -------- ---------
Net increase (decrease) in cash and cash
equivalents................................ (1,308) 6,117 61 (418) (5,448)
Cash and cash equivalents at beginning of
year....................................... 1,481 1,420 1,420 1,838 7,286
-------- -------- --------- -------- ---------
Cash and cash equivalents at end of year..... $ 173 $ 7,537 $ 1,481 $ 1,420 $ 1,838
======== ======== ========= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 247
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
1. THE COMPANY
Thermadyne Holdings Corporation ("Thermadyne" or "the Company"), a Delaware
corporation, is a global manufacturer of cutting and welding products and
accessories. Thermadyne's year end is December 31.
2. RECENT EVENTS
MERGER WITH MERCURY ACQUISITION CORPORATION
On January 20, 1998, the Company and Mercury Acquisition Corporation
("Mercury"), an affiliate of DLJ Merchant Banking Partners II, L.P. ("DLJ"),
entered into a definitive merger agreement (the "Merger Agreement"). Under the
terms of the Merger Agreement, Mercury will merge with and into the Company,
and, subject to the following sentence, the holders of each share of the
Company's common stock can elect to receive $34.50 in cash for such share or to
retain such share in the merged Company. In any event, holders will be required
to retain 485,010 shares, or 4.3%, of the Company's common stock outstanding
immediately prior to the merger. In addition, DLJ has entered into voting
agreements with Magten Asset Management (on behalf of itself and certain of its
clients) and Fidelity Capital and Income Fund, pursuant to which these current
shareholders, subject to certain conditions, have agreed to vote in favor of the
merger 5,942,708 shares of the Company's common stock owned by them. These
shares represent approximately 53% of the Company's common stock outstanding on
December 31, 1997.
The proposed merger, which will be recorded as a recapitalization for
accounting purposes, is subject to a number of conditions, including regulatory
approvals and approval by Company stockholders. The transaction is estimated to
have an aggregate value of approximately $790 million, including refinancing of
the Company's existing revolving credit facility and senior and subordinated
notes. The Company expects the merger to close by June 30, 1998.
As a result of the proposed merger, the Company and Mercury will incur
various costs, currently estimated to range between $50 million and $60 million,
on a pretax basis, in connection with consummating the transaction. These costs
consist primarily of professional fees, registration costs, compensation costs
and other expenses. Although the exact timing, nature and amount of these merger
transaction costs are subject to change, the Company expects that a one-time
charge for these costs will be recorded in the quarter during which the merger
is consummated.
ACQUISITIONS
On November 25, 1997, the Company acquired substantially all of the assets
of Woodland Cryogenics, Incorporated, a manufacturer of cryogenic pumps, ambient
and electric vaporizers and automatic cylinder filling systems located in
Philadelphia, Pennsylvania. The aggregate consideration paid was approximately
$2,500 and was financed through bank facilities. The transaction was accounted
for as a purchase.
On September 26, 1997, the Company acquired substantially all of the assets
of the welding division of Prestolite Power Corporation, a manufacturer of arc
welders, plasma welders and wire feeders, located in Troy, Ohio. The aggregate
consideration paid was approximately $7,500 and was financed through bank
facilities. The transaction was accounted for as a purchase.
On January 31, 1997, the Company acquired all of the issued and outstanding
capital stock of GenSet S.p.A., a leading manufacturer of engine-driven welders
and generators in Italy. The aggregate consideration paid was approximately
$28,000 and was financed through bank facilities. The transaction was accounted
for as a purchase.
F-7
<PAGE> 248
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
On January 18, 1996, the Company acquired all of the issued and outstanding
capital stock of Duxtech Pty. Ltd., an Australian holding company that operates
Cigweld, the leading manufacturer of welding products in Australia and New
Zealand. The aggregate consideration paid was approximately $74,000 of which
approximately $21,500 was the assumption of existing debt. The remaining balance
was paid in cash which was financed through cash on hand and borrowing under the
Company's existing credit agreement. This transaction was accounted for as a
purchase.
<TABLE>
<S> <C>
Net working capital......................................... $21,220
Excess of cost over fair value of net assets acquired....... 31,002
Property, plant and equipment, at cost, net................. 29,083
Other long-term liabilities, net............................ (7,294)
-------
$74,011
=======
</TABLE>
The operating results of the acquired companies have been included in the
Consolidated Statements of Operations from their respective dates of
acquisition. The pro forma unaudited results of operations for the twelve months
ended December 31, 1997 and 1996, respectively, assuming consummation of the
purchases as of the beginning of each period, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996
---------- ----------
<S> <C> <C>
Net sales................................................... $544,140 $484,005
Income (loss) from from continuing operations............... 14,569 (63,804)
Net income (loss)........................................... 33,857 (64,502)
Basic per share amounts:
Income (loss) from continuing operations.................. 1.32 (5.91)
Net income (loss)......................................... 3.06 (5.97)
Diluted per share amounts:
Income (loss) from continuing operations.................. 1.28 (5.91)
Net income (loss)......................................... 2.97 (5.97)
</TABLE>
Such pro forma amounts are not necessarily indicative of what the actual
consolidated results of operations might have been if the acquisitions had been
effective at the beginning of each period above.
SALE OF DISCONTINUED OPERATIONS
On September 30, 1997, the Company completed the sale of its Wear
Resistance business for $96,000 which consisted of $88,500 in cash and $7,500 in
the assumption of long-term liabilities. The net proceeds were used to reduce
debt. The net assets of the Wear Resistance operations were classified as a
current asset on the Consolidated Balance Sheets at December 31, 1996, and their
financial results were reported separately as discontinued operations in the
Consolidated Statements of Operations. The Company realized a net gain of
$16,015 on this transaction, net of income taxes of $12,623.
F-8
<PAGE> 249
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
The components of net assets of discontinued operations included in the
Consolidated Balance Sheet at December 31, 1996 are as follows:
<TABLE>
<S> <C>
Accounts receivable, net.................................... $17,819
Inventories................................................. 16,660
Prepaid expenses and other.................................. 327
Property, plant and equipment, at cost, net................. 14,323
Other noncurrent assets..................................... 2,732
Accounts payable and accrued liabilities.................... (13,235)
Long-term obligations....................................... (8,518)
Other long-term liabilities................................. (653)
-------
$29,455
=======
</TABLE>
On April 26, 1996, the Company completed the sale of substantially all of
the assets of Coyne Cylinder Company ("Coyne"), and on June 27, 1996, the
Company completed the sale of its Floor Maintenance business. Consideration
received from these two transactions totaled $137,000 and consisted of $112,359
in cash and $24,641 in the assumption or elimination of certain liabilities. The
Company realized a net gain of $8,480 on these two transactions, net of income
taxes of $14,732. The net proceeds were used to reduce debt. The financial
results of the Coyne and Floor Maintenance operations were reported separately
as discontinued operations in the Consolidated Statements of Operations.
Sales from the discontinued businesses totaled $76,163, $183,440 and
$259,772 for the years ended December 31, 1997, 1996 and 1995, respectively.
Certain expenses have been allocated to discontinued operations including
interest expense, which was allocated on a ratio of earnings before interest,
taxes, depreciation and amortization for the years presented. Interest expense
allocated to discontinued operations was $2,048, $7,630 and $11,413 for the
years ended December 31, 1997, 1996 and 1995, respectively. Income (loss) from
discontinued operations included in the accompanying Consolidated Statements of
Operations include immaterial amounts of income taxes (see Note 11).
3. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Thermadyne
and its wholly owned subsidiaries. All material intercompany balances and
transactions have been eliminated in consolidation. Certain amounts from prior
years have been reclassified to conform to current year presentation.
Preparation of financial statements in conformity with generally accepted
accounting principles requires certain estimates and assumptions be made that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Inventories -- Inventories are valued at the lower of cost or market. Cost
is determined using the last-in, first-out ("LIFO") method for domestic
subsidiaries and the first-in, first-out ("FIFO") method for foreign
subsidiaries. Inventories at foreign subsidiaries amounted to approximately
$46,798 and $33,567 at December 31, 1997 and 1996, respectively.
Property, Plant and Equipment -- Property, plant and equipment is carried
at cost and is depreciated using the straight-line method. The average estimated
lives utilized in calculating depreciation are as follows: buildings -25 years;
and machinery and equipment -two to ten years.
F-9
<PAGE> 250
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
Deferred Financing Costs -- The Company capitalizes loan origination fees
and other costs incurred arranging long-term financing. These costs are
amortized over the respective lives of the obligations using the effective
interest method.
Intangibles -- The excess of costs over the net tangible assets of
businesses acquired consists of assembled work forces, customer and distributor
relationships, patented and unpatented technology, and goodwill. In conjunction
with the 1993 financial reorganization of the Company, assets and liabilities
were revalued as of February 1, 1994. The assets were stated at their
reorganization value which is defined as the fair value of the reorganized
company (see Note 7). The portion of the reorganization value not attributable
to specific assets was amortized over a three-year period. Identified intangible
assets are amortized on a straight-line basis over the various estimated useful
lives of such assets, which generally range from three to 25 years. Goodwill
related to acquisitions subsequent to the financial reorganization is amortized
over 40 years.
Income Taxes -- The Company accounts for income taxes using the liability
method required by Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Under the liability method, deferred tax assets
and liabilities are recognized for the estimated future tax consequences
attributable to temporary differences between the carrying value of assets and
liabilities for financial reporting purposes and their tax bases and
carryforward items. The measurement of current and deferred tax assets and
liabilities is based on provisions of the enacted tax law; the effects of future
changes in tax laws or rates are not anticipated. The measurement of deferred
tax assets is reduced, if necessary, by the amount of any tax benefits that,
based on available evidence, are not expected to be realized.
Revenue Recognition -- Revenue from the sale of cutting and welding
products is recognized upon shipment to the customer. Costs and related expenses
to manufacture cutting and welding products are recorded as cost of sales when
the related revenue is recognized.
Earnings Per Share -- In 1997, the Financial Accounting Standards Board
issued Statement No. 128, "Earnings per Share" ("FASB 128"). FASB 128 replaced
the calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented to conform to the Statement 128 requirements.
The effects of options, warrants and convertible securities have not been
considered for the years ended December 31, 1996 and 1995
F-10
<PAGE> 251
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
because the result would be antidilutive. All exchange arrangements contemplated
by the Company's 1994 financial restructuring are assumed to have been
completed.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31,
----------------------------- ---------------------------------------
1998 1997 1997 1996 1995
------------- ------------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
AMOUNTS:
Income (loss) from
continuing operations
before extraordinary
item...................... $ 0.52 $ 0.36 $ 1.36 $ (5.83) $ (12.97)
Discontinued operations..... -- 0.09 1.73 0.28 (2.84)
----------- ----------- ----------- ----------- -----------
Income (loss) before
extraordinary item........ 0.52 0.45 3.09 (5.55) (15.81)
Extraordinary item -- loss
on early extinguishment of
long-term debt............ -- -- -- (0.34) --
----------- ----------- ----------- ----------- -----------
Net income (loss)........... $ 0.52 $ 0.45 $ 3.09 $ (5.89) $ (15.81)
=========== =========== =========== =========== ===========
DILUTED EARNINGS PER SHARE
AMOUNTS:
Income (loss) from
continuing operations
before extraordinary
item...................... $ 0.50 $ 0.35 $ 1.33 $ (5.83) $ (12.97)
Discontinued operations..... -- 0.09 1.68 0.28 (2.84)
----------- ----------- ----------- ----------- -----------
Income (loss) before
extraordinary item........ 0.50 0.44 3.01 (5.55) (15.81)
Extraordinary item -- loss
on early extinguishment of
long-term debt............ -- -- -- (0.34) --
----------- ----------- ----------- ----------- -----------
Net income (loss)........... $ 0.50 $ 0.44 $ 3.01 $ (5.89) $ (15.81)
=========== =========== =========== =========== ===========
Weighted average shares --
basic earnings per
share..................... 11,208,536 11,028,126 11,072,088 10,797,261 10,168,817
EFFECT OF DILUTIVE
SECURITIES:
Employee stock options...... 328,064 287,571 296,109 -- --
----------- ----------- ----------- ----------- -----------
Weighted average shares --
diluted earnings per
share..................... 11,536,600 11,315,697 11,368,197 10,797,261 10,168,817
=========== =========== =========== =========== ===========
</TABLE>
Stock Based Compensation -- The Company grants stock options for a fixed
number of shares to employees with an exercise price equal to the fair value of
the shares at the date of grant, and also through its Employee Stock Purchase
Plan enables substantially all employees to purchase shares of common stock at a
purchase price of 85% of the fair market value at specified dates. The Company
accounts for these stock option grants in accordance with Accounting Principles
Board Opinion No. 25 -- "Accounting for Stock Issued to Employees' ("APB 25"),
and, accordingly, recognizes no compensation expense for the stock option
grants.
F-11
<PAGE> 252
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
Statement of Cash Flows -- For purposes of the statement of cash flows,
Thermadyne considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents. The carrying value of cash and cash
equivalents approximates fair value because of the short maturity of these
investments.
The following table shows the interest and taxes paid during the periods
presented in the accompanying Consolidated Statements of Cash Flows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 1998 MARCH 31, 1997 DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
------------------ ------------------ ----------------- ----------------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest............. $3,538 $4,561 $48,683 $48,581 $46,148
Taxes................ (624) 3,801 12,276 11,409 8,527
</TABLE>
Foreign Currency Translation -- Local currencies have been designated as
the functional currencies for all subsidiaries. Accordingly, assets and
liabilities of foreign subsidiaries are translated at the rates of exchange at
the balance sheet date. Income and expense items of these subsidiaries are
translated at average monthly rates of exchange. The resultant translation gains
or losses are included in the component of shareholders' equity designated
"Foreign currency translation." The Company's foreign operations are discussed
in Note 13.
Recent Accounting Pronouncements -- As of January 1, 1998, the Company
adopted Statement 130, Reporting Comprehensive Income. Statement 130 establishes
new rules for the reporting and display of comprehensive income and its
components; however, the adoption of this Statement had no impact on the
Company's net income or shareholder's equity. Statement 130 requires foreign
currency translation adjustments, which prior to adoption were reported
separately in shareholder's equity, to be included in other comprehensive
income. Prior year financial statements have been reclassified to conform to the
requirements of Statement 130.
In June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("FASB 131"), which requires
publicly-held companies to report financial and descriptive information about
its operating segments in financial statements issued to shareholders for
interim and annual periods. The statement also requires additional disclosures
with respect to products and services, geographical areas of operations, and
major customers. FASB 131 is effective for fiscal years beginning after December
15, 1997 and requires restatement of earlier periods presented.
4. ACCOUNTS RECEIVABLE
The Company has entered into a trade accounts receivable securitization
agreement whereby it will sell on an ongoing basis, through December 28, 1999,
participation interests in up to $50,000 of designated accounts receivable. The
amount of participation interests sold under this financing arrangement is
subject to change based on the level of eligible receivables and restrictions on
concentrations of receivables, and was approximately $28,305 and $22,629 at
December 31, 1997 and 1996, respectively. The sold accounts receivable are
reflected as a reduction of accounts receivable on the Consolidated Balance
Sheets. Interest expense is incurred on participation interests at the rate of
one-month LIBOR plus 50 basis points, per annum (approximately 6.48% at December
31, 1997). The fair value of accounts receivable approximates the carrying
value.
During the year ended December 31, 1997, the Company adopted FASB Statement
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("FASB 125"). FASB 125 is required to be applied
to transfers of assets occurring after January 1, 1997. The effect of adopting
FASB 125 was immaterial.
F-12
<PAGE> 253
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
5. INVENTORIES
The composition of inventories is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ------------------
1998 1997 1996
----------- -------- -------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials........................................ $ 20,612 $ 19,903 $14,128
Work-in-process...................................... 25,874 30,743 21,248
Finished goods....................................... 73,240 56,087 46,519
LIFO reserve......................................... (760) (1,598) (2,353)
-------- -------- -------
$118,966 $105,135 $79,542
======== ======== =======
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT
The composition of property, plant and equipment at December 31 is as
follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Land........................................................ $ 14,071 $ 16,320
Building.................................................... 33,748 22,048
Machinery and equipment..................................... 68,008 59,749
Less: accumulated depreciation.............................. (30,570) (22,493)
-------- --------
$ 85,257 $ 75,624
======== ========
</TABLE>
Assets recorded under capitalized leases were $17,663 ($14,432 net of
accumulated depreciation) and $17,688 ($15,145 net of accumulated depreciation)
at December 31, 1997 and 1996, respectively.
7. INTANGIBLES
The composition of intangibles at December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996
------- --------
<S> <C> <C>
Goodwill.................................................... $39,532 $ 36,322
Patented and unpatented technology.......................... 279 17,311
Customer and distributor relationships...................... -- 18,182
Other....................................................... 2,759 9,958
------- --------
42,570 81,773
Less: accumulated amortization.............................. (8,600) (19,128)
------- --------
$33,970 $ 62,645
======= ========
</TABLE>
Prior to 1995, the Company assessed the recoverability of its identifiable
intangible assets primarily based on its current and anticipated future
undiscounted cash flows, which included disbursements for interest expense. In
the fourth quarter of 1995, the Company early adopted Financial Accounting
Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," ("FASB 121") and
consequently revalued amounts capitalized for customer and distributor
relationships and for patented and unpatented technology given recent
fundamental changes in its core businesses. Based on this revaluation, the
Company determined that assets with a carrying amount of $67,923 were impaired
and wrote them down by $32,972 to their estimated fair value. Fair value was
based on the estimated future cash flows to be generated by these assets,
discounted at a market rate of interest. The writedown is included in the
amortization of other intangibles line item on the Consolidated Statements of
F-13
<PAGE> 254
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
Operations. In the fourth quarter of 1996, the carrying value of intangible
assets recorded in connection with the Company's financial reorganization was
reduced by approximately $2,400 resulting from the initial recognition of the
Company's net deferred tax asset. The carrying value of these intangibles was
further reduced during 1997 by approximately $26,000 upon the recognition of net
operating loss carryforward benefits and the sale of the Wear Resistance
business.
8. LONG-TERM OBLIGATIONS
The composition of long-term obligations at December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Domestic credit agreement................................... $ 41,500 $101,000
Australian credit agreement................................. 18,057 22,666
Senior notes, due May 1, 2002, 10.25% interest payable
semiannually on May 1 and November 1...................... 99,288 99,288
Subordinated notes, due November 1, 2003, 10.75% interest
payable semiannually on May 1 and November 1.............. 179,321 179,321
Capital leases.............................................. 17,630 17,405
Other....................................................... 2,291 1,660
-------- --------
358,087 421,340
Less: Current maturities.................................... (4,912) (4,205)
-------- --------
$353,175 $417,135
======== ========
</TABLE>
At December 31, 1997, the schedule of principal payments on long-term debt,
excluding capital lease obligations, is as follows:
<TABLE>
<S> <C>
1998...................................................... $ 4,708
1999...................................................... 2,705
2000...................................................... 2,685
2001...................................................... 41,544
2002...................................................... 99,300
Thereafter................................................ 189,515
</TABLE>
On June 25, 1996 the Company amended and restated its domestic credit
agreement (the "Domestic Facility") to a $250,000 revolving credit and letters
of credit facility with a consortium of 22 banks. The term is five years and the
banks' commitment reduces by $25,000 at the end of year three and by an
additional $75,000 at the end of year four. At the Company's option, interest
accrues at (i) the prime rate plus an applicable margin in the range of
0.5% - 1.25% or, (ii) LIBOR plus an applicable margin in the range of
1.5% - 2.25%. The applicable margin percentage is dependent upon the Company
meeting certain financial conditions. At December 31, 1997 the prime rate was
8.5%. The facility contains financial covenants which, among other things,
require the Company to maintain certain financial ratios and restrict the
Company's ability to incur indebtedness, make capital expenditures, and pay
dividends. The facility is secured by the capital stock, personal and real
property of the Company and a significant portion of its subsidiaries' capital
stock and personal and real property. At December 31, 1997 the Company had
$10,349 of standby letters of credit outstanding under its Domestic Facility.
Unused borrowing capacity under the Domestic Facility was $198,151.
The Australian credit agreement (the "Australian Facility") is denominated
in Australian dollars ("A$") and expires on December 31, 2000. The Australian
Facility consists of an A$15,000 term
F-14
<PAGE> 255
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
commitment and an A$22,000 revolving credit commitment. The Australian Facility
bears interest at the Bank Bill Rate (as defined) plus a margin of 1.5% for the
term commitment and 0.75% for the revolving credit commitment. At December 31,
1997 the Company's average applicable Bank Bill Rate (as defined) was 4.987%.
Interest payment dates vary depending on the funding period selected by the
Company. Total mandatory principal reductions under the term commitment for the
remainder of its term are as follows: 1998 -- A$3,000; 1999 -- A$4,000; and
2000 -- A$4,000. The facility requires the Company's Australian subsidiary to
comply with various financial covenants. The facility is secured by personal and
real property of the Company's Australian subsidiary. At December 31, 1997 the
Company had A$383 of letters of credit outstanding under the Australian
Facility. Unused borrowing capacity under the Australian Facility was A$1,500.
The indentures governing the senior notes and the subordinated notes
restrict, subject to certain exceptions, the Company and its subsidiaries from
incurring additional debt, paying dividends or making other distributions on or
redeeming or repurchasing capital stock, making investments, loans or advances,
disposing of assets, creating liens on assets and engaging in transactions with
affiliates.
The estimated fair value amounts of the Company's long-term obligations
have been determined by the Company using available market information and
appropriate valuation methodologies. Considerable judgment is required to
develop the estimates of fair value; thus, the estimates provided herein are not
necessarily indicative of the amounts that could be realized in a current market
exchange. The use of different market assumptions or valuation methodologies may
have a material effect on the estimated fair value amounts. The fair value of
the senior notes and the subordinated notes was based on the most recent market
information available, and is estimated to be 104.25% and 107.0% of their
current carrying values at December 31, 1997, or $103,508 and $191,873,
respectively. The fair values of the credit agreement and the Company's other
long-term obligations are estimated at their current carrying values since these
obligations are fully secured and have varying interest charges based on current
market rates.
9. STOCK OPTIONS
The Company has elected to follow APB 25 and related Interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under Financial Accounting
Standards Board Statement No. 123, "Accounting for Stock-Based Compensation"
("FASB 123"), requires use of option valuation models that were not developed
for use in valuing employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by FASB 123, which also requires that the information be determined as
if the Company has accounted for its employee stock options granted subsequent
to December 31, 1994 under the fair value method of that statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1997,
1996 and 1995, respectively: risk-free interest rates of 6.1%, 5.5% and 6.4%; a
dividend yield of 0.0% for each year presented; volatility factors of the
expected market price of the Company's common stock of 0.38, 0.39 and 0.42; and
a weighted-average expected life of the options of six years for each year
presented.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
F-15
<PAGE> 256
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Pro forma net income (loss)..................... $32,239 $(64,574) $(161,588)
Pro forma net income (loss) per share:
Basic......................................... 2.91 (5.98) (15.89)
Diluted....................................... 2.84 (5.98) (15.89)
</TABLE>
Because FASB 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until future
periods.
The Company has three option plans for the grant of options to its
employees and directors. The 1993 Management Option Plan (the "1993 Management
Plan") provides for the grant of options to acquire up to 1,428,570 shares of
common stock to key officers and employees of the Company or its affiliates.
Grants under the 1993 Management Plan are exercisable in installments ranging
from immediately on the date of grant to not later than five years from the date
of grant. The Non-Employee Directors Plan (the "1995 Directors Plan") provides
for the grant of options to acquire up to 50,000 shares of common stock to
non-employee directors of the Company. Grants under the 1995 Directors Plan vest
immediately on the date of grant. The 1996 Employee Stock Option Plan (the "1996
Employee Plan") initially provided for the grant of options to acquire up to
300,000 shares of common stock to employees of the Company. This plan was
amended in 1996 to provide for the grant of options to acquire up to an
additional 500,000 shares of common stock. Grants under the 1996 Employee Plan
vest ratably over five years. All options granted under the three plans
described above are non-qualified stock options granted at 100% of the fair
market value on the grant dates.
Information regarding stock options is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------- --------------------------- ----------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- ---------------- -------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding -- beginning
of year................. 963,055 $14.27 913,000 $12.30 1,275,142 $12.00
Granted................... 217,200 27.00 340,000 17.85 203,000 13.39
Exercised................. (87,255) 12.38 (169,054) 12.01 (452,840) 12.00
Forfeited................. (31,783) 18.32 (120,891) 12.62 (112,302) 12.10
--------- -------- ---------
Outstanding -- end of
year.................... 1,061,217 16.91 963,055 14.27 913,000 12.30
========= ======== =========
Exercisable at end of
year:
1993 Management Plan.... 430,399 359,329 262,666
1995 Directors Plan..... 23,000 24,000 --
1996 Employee Plan...... 39,355 -- --
Reserved for future
grants:
1993 Management Plan.... 15,704 70,621 82,730
1995 Directors Plan..... 22,000 26,000 30,000
1996 Employee Plan...... 470,500 97,000 300,000
Weighted-average fair
value of options granted
during the year......... $ 13.14 $ 8.49 $ 6.88
</TABLE>
F-16
<PAGE> 257
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
10. LEASES
Future minimum lease payments related to continuing operations under leases
with initial or remaining noncancelable lease terms in excess of one year at
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
1998...................................................... $ 3,470 $ 8,855
1999...................................................... 3,644 8,209
2000...................................................... 3,627 7,131
2001...................................................... 3,614 5,955
2002...................................................... 3,608 4,725
Thereafter................................................ 49,735 31,111
--------
Total minimum lease payments................................ 67,698
Less: amount representing interest.......................... (50,068)
--------
Present value of net minimum lease payments, including
current obligations of $204............................... $ 17,630
========
</TABLE>
Rent expense under operating leases from continuing operations amounted to
$9,358, $7,562 and $6,559 for the years ended December 31, 1997, 1996 and 1995,
respectively.
11. INCOME TAXES
Pre-tax income (losses) from continuing operations were taxed under the
following jurisdictions:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Domestic........................................ $31,104 $(69,694) $(123,954)
Foreign......................................... (2,560) 6,221 624
------- -------- ---------
Income (loss) before income taxes..... $28,544 $(63,473) $(123,330)
======= ======== =========
</TABLE>
The provision (benefit) for income taxes charged to continuing operations
is as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Current:
Federal....................................... $11,014 $ 8,091 $6,010
Foreign....................................... 1,064 1,785 1,147
State and local............................... 927 1,050 1,361
------- -------- ------
Total current......................... 13,005 10,926 8,518
------- -------- ------
Deferred........................................ 470 (11,460) --
------- -------- ------
$13,475 $ (534) $8,518
======= ======== ======
</TABLE>
F-17
<PAGE> 258
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
The composition of deferred tax assets and liabilities attributable to
continuing operations at December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Deferred tax assets:
Post-employment benefits.................................. $ 9,214 $ 8,915
Accrued liabilities....................................... 3,316 5,054
Intangibles............................................... 14,408 6,025
Other..................................................... -- 476
Fixed assets.............................................. 6,992 --
Net operating loss carryforwards.......................... 29,761 31,504
-------- --------
Total deferred tax assets......................... 63,691 51,974
Valuation allowance for deferred tax assets............... (22,731) (24,474)
-------- --------
Net deferred tax assets........................... 40,960 27,500
-------- --------
Deferred tax liabilities:
Inventories............................................... 4,562 4,923
Other..................................................... 846 --
Property, plant and equipment............................. -- 695
-------- --------
Total deferred tax liabilities.................... 5,408 5,618
-------- --------
Net deferred tax asset............................ $ 35,552 $ 21,882
======== ========
</TABLE>
The provision (benefit) for income taxes differs from the amount of income
tax determined by applying the applicable U.S. statutory federal income tax rate
to pretax income from continuing operations as a result of the following
differences:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Tax at U.S. statutory rates................... $ 9,991 $(22,216) $(43,166)
Nondeductible goodwill amortization and other
nondeductible expenses...................... 2,048 28,877 37,500
Change in valuation allowance, recognition of
net operating loss carryforward benefits and
other....................................... -- 6,318 12,370
Foreign tax rate differences and recognition
of foreign tax loss benefits................ 833 (393) 929
State income taxes, net of federal tax
benefit..................................... 603 683 885
Initial recognition of net deferred tax
asset....................................... -- (13,803) --
------- -------- --------
$13,475 $ (534) $ 8,518
======= ======== ========
</TABLE>
In the fourth quarter of 1996, the Company re-evaluated the realizability
of the net deferred tax asset. As a result, a net deferred tax asset of
approximately $22,000 was recorded on December 31, 1996. Of the total amount
recorded, approximately $8,000 was reported as an adjustment to the carrying
value of goodwill and other intangible assets. The balance was reported as a
reduction to income tax expense. A portion of the net adjustment for deferred
taxes has been allocated to discontinued operations. The valuation allowance
relates to net operating loss carryforwards existing on February 1, 1994, the
effective date of the Company's financial reorganization.
F-18
<PAGE> 259
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
At December 31, 1997, the Company had net operating loss carryforwards of
approximately $85,000 for U.S. income tax purposes that begin to expire in the
year 2001. The consummation of the financial reorganization resulted in an
ownership change under Section 382 of the Internal Revenue Code. As a result,
the Company's utilization of these losses to offset future U.S. taxable income
is limited to approximately $7,000 per year. Pursuant to the requirements of the
American Institute of Certified Public Accountants Statement of Position No.
90-7, entitled "Financial Entities in Reorganization Under the Bankruptcy Code",
to the extent net operating losses that existed on the effective date of the
Company's financial reorganization are recognized, the resulting tax benefit
will be reported as a direct addition to paid-in capital.
The Company's foreign subsidiaries have undistributed earnings at December
31, 1997. Those earnings are considered to be indefinitely reinvested and,
accordingly, no provision for U.S. federal and state income taxes has been
provided thereon. Upon distribution of those earnings in the form of dividends
or otherwise, the Company would be subject to both U.S. income taxes (subject to
an adjustment for foreign tax credits) and withholding taxes payable to the
various foreign countries. Determination of the amount of unrecognized deferred
U.S. income tax liability is not practicable because of the complexities
associated with its hypothetical calculation.
12. EMPLOYEE BENEFIT PLANS
401(k) Retirement Plan -- The 401(k) Retirement Plan covers the majority of
the Company's domestic employees. The Company, at its discretion, can make a
base contribution of 1% of each employee's compensation and an additional
contribution equal to as much as 4% of the employee's compensation. At the
employee's discretion, an additional 1% to 15% voluntary employee contribution
can be made. The plan requires the Company to make a matching contribution of
50% of the first 6% of the voluntary employee contribution. Total expense for
this plan related to continuing operations was approximately $2,628, $2,585, and
$1,897 for the years ended December 31, 1997, 1996 and 1995, respectively.
Employee Stock Purchase Plan -- The Employee Stock Purchase Plan enables
substantially all employees of the Company to purchase shares of common stock at
a purchase price of 85% of the fair market value at specified dates. For plan
year 1997, the plan was amended to change the plan year to a calendar year
basis. For the plan year ended December 31, 1997, 1,098 employee participants
purchased 82,085 shares at an aggregate purchase price of $1,989. For the plan
year ended October 31, 1996, 1,090 employee participants purchased 145,584
shares at an aggregate purchase price of $2,119. In the initial plan year ended
October 31, 1995, 1,502 employee participants purchased 252,925 shares at an
aggregate purchase price of $2,327. A maximum of 1,000,000 shares is authorized
for purchase under the plan.
Other Postretirement Benefits -- The Company has several retirement plans
covering both salaried and nonsalaried retired employees, which provide
postretirement health care benefits (medical and dental) and life insurance
benefits. The postretirement health care plan is contributory, with retiree
contributions adjusted annually as determined by the Company based on claim
costs. The postretirement life insurance plan is noncontributory. The Company
recognizes the cost of postretirement benefits on the accrual basis as employees
render service to earn the benefit. The Company continues to fund the cost of
health care and life insurance benefits in the year incurred.
F-19
<PAGE> 260
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
The postretirement benefit plans' combined benefit obligations related to
continuing operations at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Accumulated postretirement benefit obligations:
Retirees and surviving beneficiaries...................... $ 3,838 $ 5,156
Active employees eligible to retire....................... 720 1,420
Active employees not yet eligible to retire............... 7,452 9,411
Unrecognized gain......................................... 9,428 6,237
Unrecognized prior service cost........................... 1,927 64
------- -------
Unfunded accumulated postretirement benefit obligation and
accrued postretirement benefit cost.................... $23,365 $22,288
======= =======
</TABLE>
Net periodic postretirement benefit cost from continuing operations
included the following components:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1997 DECEMBER 31, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Service cost-benefits attributed to
service during the period......... $1,255 $1,365 $1,161
Interest cost on accumulated
postretirement benefit
obligation........................ 1,496 1,564 1,094
Loss (gain) from past experience
different from that assumed and
changes in assumptions............ (1) (198) (131)
------ ------ ------
Net periodic postretirement benefit
cost.............................. $2,750 $2,731 $2,124
====== ====== ======
</TABLE>
In addition, for actuarial measurements purposes, the following assumptions
and methods were used: annual discount rate of 7% (7% at January 1, 1997),
medical claim cost trends with annual increases starting at 10.5% in 1996 and
decreasing incrementally to 6% in 2011 and thereafter. The medical cost trend
rate assumption has a significant effect on the amounts reported. To illustrate,
increasing the medical cost trend rate by 1% in each year would increase the
accumulated postretirement benefit obligation as of December 31, 1997 by
approximately $1,900 and the aggregate of the service and interest cost
components of net periodic postretirement benefit cost for the year ended
December 31, 1997, by approximately $307. The Company uses the amortization
method for recording gains or losses resulting from past experience different
from that assumed and changes in assumptions.
Pension Plans -- The Company's subsidiaries have had various
noncontributory defined benefit pension plans which covered substantially all
U.S. employees. The Company froze its three noncontributory defined benefit
pension plans through amendments to such plans effective December 31, 1989. All
former participants of these plans became eligible to participate in the 401(k)
Retirement Plan effective January 1, 1990. The
F-20
<PAGE> 261
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
following table sets forth the funded status of the defined benefit plans and
the amounts recognized in the Company's consolidated financial statements:
Actuarial present value of benefit obligations at December 31:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Vested benefit obligation................................... $13,911 $13,476
Accumulated benefit obligation.............................. 14,356 13,975
Projected benefit obligation................................ 14,356 13,975
Plan assets at fair value................................... 12,126 11,667
------- -------
Projected benefit obligation in excess of plan assets....... (2,230) (2,308)
Unrecognized net loss....................................... (54) 358
Unrecognized prior service cost............................. 122 145
Unrecognized net obligation at transition................... 2 5
Adjustment required to recognize minimum liability.......... -- (508)
------- -------
Accrued pension cost.............................. $(2,160) $(2,308)
======= =======
</TABLE>
Pension cost related to the defined benefit plans included the following
components:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1997 DECEMBER 31, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Service cost-benefits earned during
the period........................ $ -- $ -- $ --
Interest cost on projected benefit
obligation........................ 954 930 930
Actual return on plan assets........ (977) (1,135) (1,025)
Net amortization and deferral....... 93 369 313
----- ------- -------
Net pension expense................. $ 70 $ 164 $ 218
===== ======= =======
</TABLE>
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligations ranged from 7% to 8%. The
assumed rate of increase in future compensation levels used in determining the
actuarial present value of the projected benefit obligations was 0%. The
expected long-term rate of return on assets ranged from 7% to 8%. Plan assets
consist principally of marketable equity securities and restricted and
unrestricted debt securities. The Company's funding policy is to contribute
annually an amount equal to meet the minimum funding standards of the Employee
Retirement Income Security Act of 1974 as determined by the plans' actuary.
F-21
<PAGE> 262
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
13. FOREIGN OPERATIONS
The Company's continuing operations are primarily in the United States,
Australia/Asia, Canada and Europe. Sales among geographic areas have been
eliminated in consolidation. Financial data by geographic area is as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net sales:
United States............................. $333,871 $293,549 $273,106
Australia/Asia............................ 109,984 105,337 4,989
Other foreign operations.................. 76,585 40,858 38,683
-------- -------- --------
$520,440 $439,744 $316,778
======== ======== ========
Sales from United States to foreign
operations................................ $ 35,576 $ 30,932 $ 22,518
======== ======== ========
Export sales from United States............. $ 33,668 $ 25,402 $ 23,782
======== ======== ========
Operating income (loss):
United States............................. $ 71,639 $(22,899) $(80,103)
Australia/Asia............................ 2,304 5,689 143
Other foreign operations.................. 4,564 3,071 2,656
-------- -------- --------
$ 78,507 $(14,139) $(77,304)
======== ======== ========
Identifiable assets:
United States............................. $194,216 $189,153 $280,146
Australia/Asia............................ 102,342 113,588 4,314
Other foreign operations.................. 57,969 21,209 59,077
Discontinued operations................... -- 29,455 72,829
-------- -------- --------
$354,527 $353,405 $416,366
======== ======== ========
</TABLE>
14. CONTINGENCIES
Thermadyne and certain of its wholly owned subsidiaries are defendants in
various legal actions, primarily in the products liability area. While there is
uncertainty relating to any litigation, management is of the opinion that the
outcome of such litigation will not have a material adverse effect on the
Company's financial condition or results of operations.
The Company is party to an agreement with a financial institution to sell
at face value up to a total of $25,000 of its long-term receivables. The product
line that generated these long-term receivables has been divested, and
consequently, no further sales will occur. Under the terms of this agreement,
the Company is liable for a total of 20% of the aggregate receivables sold and
this liability approximates $4,000. The Company has further retained collection
and administrative responsibilities on behalf of the financial institution. The
Company has a secured interest in the inventory sold under these long-term
receivables which has been assigned to the financial institution. At December
31, 1997, approximately $3,666 in contracts subject to this agreement are
outstanding. Management believes the allowance for doubtful accounts at December
31, 1997 will be adequate for all uncollectible receivables.
15. GUARANTOR SUBSIDIARIES
In connection with the proposed merger of the Company and Mercury,
Thermadyne Mfg. LLC and Thermadyne Capital Corp., both wholly-owned subsidiaries
of the Company, expect to raise approximately $205,400 through the issuance of
9 7/8% Senior Subordinated Notes due 2008 (the "Notes"). The Company
F-22
<PAGE> 263
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
will receive all of the net proceeds from the issuance of the Notes and
Thermadyne Mfg. LLC and Thermadyne Capital Corp. will be jointly and severally
liable for all payments under the Notes. Additionally, the Notes are fully and
unconditionally (as well as jointly and severally) guaranteed on an unsecured
senior subordinated basis by certain existing domestic subsidiaries of the
Company (the "Guarantor Subsidiaries"). Each of the Guarantor Subsidiaries is
wholly-owned by the Company.
The following condensed consolidating financial information of the Company
includes the accounts of the Company, the combined accounts of the Guarantor
Subsidiaries and the combined accounts of the non-Guarantor subsidiaries for the
periods indicated. Separate financial statements of each of the Guarantor
Subsidiaries are not presented because management has determined that such
information is not material in assessing the Guarantor Subsidiaries.
CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
TOTAL TOTAL
COMPANY GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
--------- ---------- -------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents...................... $ -- $ (1,555) $ 1,728 $ -- $ 173
Restricted cash................................ -- -- 21,797 (21,797) --
Accounts receivable............................ -- 9,222 98,314 (25,365) 82,171
Inventories.................................... -- 73,245 45,721 -- 118,966
Prepaid expenses and other..................... -- 871 7,790 (345) 8,316
Net assets of discontinued operations.......... -- -- -- -- --
--------- --------- -------- --------- ---------
Total current assets..................... -- 81,783 175,350 (47,507) 209,626
Property, plant and equipment, at cost, net.... -- 47,912 38,113 -- 86,025
Deferred financing costs, net.................. 4,736 151 663 -- 5,550
Intangibles, at cost, net...................... -- 5,249 28,548 -- 33,797
Deferred income tax............................ -- 35,551 -- -- 35,551
Investment in and advances to/from
subsidiaries................................. 192,114 10,707 -- (202,821) --
Other assets................................... -- 89 1,804 -- 1,893
--------- --------- -------- --------- ---------
Total assets............................. $ 196,850 $ 181,442 $244,478 $(250,328) $ 372,442
========= ========= ======== ========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities:
Accounts payable............................... $ -- $ 26,877 $ 23,029 -- $ 49,906
Accrued and other liabilities.................. -- 19,025 7,453 -- 26,478
Accrued interest............................... 12,670 7 299 -- 12,976
Income taxes payable........................... -- 12,532 (2,807) -- 9,725
Deferred income taxes.......................... -- -- -- -- --
Current maturities of long-term obligations...... -- 2 6,254 -- 6,256
--------- --------- -------- --------- ---------
Total current liabilities................ 12,670 58,443 34,228 -- 105,341
Long-term obligations, less current maturities... 328,109 16,382 69,669 (50,000) 364,160
Other long-term liabilities...................... -- 52,870 6,848 -- 59,718
Shareholders' equity (deficit):
Common stock................................... 112 -- -- -- 112
Additional paid-in-capital..................... 149,358 -- -- -- 149,358
Retained earnings (accumulated deficit)........ (293,399) (246,961) (4,636) 251,597 (293,399)
Accumulated other comprehensive income......... -- 1,934 (14,782) -- (12,848)
--------- --------- -------- --------- ---------
Total shareholders' equity (deficit)..... (143,929) (245,027) (19,418) 251,597 (156,777)
Net equity and advances to/from subsidiaries..... -- 298,774 153,151 (451,925) --
--------- --------- -------- --------- ---------
Total liabilities and shareholders'
equity (deficit)....................... $ 196,850 $ 181,442 $244,478 $(250,328) $ 372,442
========= ========= ======== ========= =========
</TABLE>
F-23
<PAGE> 264
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
TOTAL TOTAL
COMPANY GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
-------- ---------- -------------- ------------ --------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............... $ -- $ 308 $ 1,173 $ -- $ 1,481
Restricted cash......................... -- -- 21,634 (21,634) --
Accounts receivable..................... -- 6,595 99,281 (29,029) 76,847
Inventories............................. -- 62,329 42,806 -- 105,135
Prepaid expenses and other.............. -- 4,601 4,152 (219) 8,534
Net assets of discontinued
operations............................ -- -- -- -- --
-------- -------- -------- --------- --------
Total current assets............. -- 73,833 169,046 (50,882) 191,997
Property, plant and equipment, at cost,
net................................... -- 48,367 36,890 -- 85,257
Deferred financing costs, net........... 5,052 1 701 -- 5,754
Intangibles, at cost, net............... -- 5,376 28,594 -- 33,970
Deferred income taxes................... -- 35,552 -- -- 35,552
Investment in and advances to/from
subsidiaries.......................... 170,414 10,783 -- (181,197) --
Other assets............................ -- 130 1,867 -- 1,997
-------- -------- -------- --------- --------
Total assets..................... $175,466 $174,042 $237,098 $(232,079) $354,527
======== ======== ======== ========= ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities:
Accounts payable........................ $ -- $ 30,697 $ 24,693 $ -- $ 55,390
Accrued and other liabilities........... -- 25,079 7,618 -- 32,697
Accrued interest........................ 5,430 10 240 -- 5,680
Income taxes payable.................... -- 8,106 (3,337) -- 4,769
Deferred income taxes................... -- -- -- -- --
Current maturities of long-term
obligations........................... -- 1 4,911 -- 4,912
-------- -------- -------- --------- --------
Total current liabilities........ 5,430 63,893 34,125 -- 103,448
Long-term obligations, less current
maturities.............................. 320,109 16,320 66,746 (50,000) 353,175
Other long-term liabilities............... -- 53,421 7,330 -- 60,751
Shareholders' equity (deficit):
Common stock............................ 112 -- -- -- 112
Additional paid-in-capital.............. 149,023 -- -- -- 149,023
Retained earnings (accumulated
deficit).............................. (299,208) (254,562) (3,668) 258,230 (299,208)
Accumulated other comprehensive
income................................ -- 2,406 (15,180) -- (12,774)
-------- -------- -------- --------- --------
Total shareholders' equity
(deficit)...................... (150,073) (252,156) (18,848) 258,230 (162,847)
Net equity and advances to/from
subsidiaries............................ -- 292,564 147,745 (440,309) --
-------- -------- -------- --------- --------
Total liabilities and
shareholders' equity
(deficit)...................... $175,466 $174,042 $237,098 $(232,079) $354,527
======== ======== ======== ========= ========
</TABLE>
F-24
<PAGE> 265
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
TOTAL TOTAL
COMPANY GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
-------- ---------- -------------- ------------ --------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............... $ -- $ 690 $ 730 $ -- $ 1,420
Restricted cash......................... -- -- 25,461 (25,461) --
Accounts receivable..................... -- 3,498 74,769 (23,981) 54,286
Inventories............................. -- 46,375 33,167 -- 79,542
Prepaid expenses and other.............. -- 7,361 2,858 (456) 9,763
Net assets of discontinued
operations............................ 29,455 -- 3,947 (3,947) 29,455
-------- -------- -------- --------- --------
Total current assets............. 29,455 57,924 140,932 (53,845) 174,466
Property, plant and equipment, at cost,
net................................... -- 42,850 32,774 -- 75,624
Deferred financing costs, net........... 6,395 -- 1,113 -- 7,508
Intangibles, at cost, net............... -- 33,972 28,673 -- 62,645
Deferred income taxes................... -- 23,206 -- -- 23,206
Investment in and advances to/from
subsidiaries.......................... 159,944 11,138 -- (171,082) --
Other assets............................ -- 6,327 3,629 -- 9,956
-------- -------- -------- --------- --------
Total assets..................... $195,794 $175,417 $207,121 $(224,927) $353,405
======== ======== ======== ========= ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities:
Accounts payable........................ $ -- $ 17,953 $ 10,313 $ -- $ 28,266
Accrued and other liabilities........... -- 22,726 6,531 -- 29,257
Accrued interest........................ 6,303 5 153 -- 6,461
Income taxes payable.................... -- 8,264 (316) -- 7,948
Deferred income taxes................... -- 1,324 -- -- 1,324
Current maturities of long-term
obligations........................... -- -- 4,205 -- 4,205
-------- -------- -------- --------- --------
Total current liabilities........ 6,303 50,272 20,886 -- 77,461
Long-term obligations, less current
maturities.............................. 379,609 15,898 71,628 (50,000) 417,135
Other long-term liabilities............... -- 38,349 5,729 -- 44,078
Shareholders' equity (deficit):
Common stock............................ 110 -- -- -- 110
Additional paid-in-capital.............. 143,237 -- -- -- 143,237
Retained earnings (accumulated
deficit).............................. (333,465) (275,048) (891) 275,939 (333,465)
Accumulated other comprehensive
income................................ -- 5,589 (740) -- 4,849
-------- -------- -------- --------- --------
Total shareholders' equity
(deficit)...................... (190,118) (269,459) (1,631) 275,939 (185,269)
Net equity and advances to/from
subsidiaries............................ -- 340,357 110,509 (450,866) --
-------- -------- -------- --------- --------
Total liabilities and
shareholders' equity
(deficit)...................... $195,794 $175,417 $207,121 $(224,927) $353,405
======== ======== ======== ========= ========
</TABLE>
F-25
<PAGE> 266
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
TOTAL TOTAL
COMPANY GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
------- ---------- -------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Net Sales.............................. $ -- $111,511 $47,825 $(27,507)(a) $131,829
Operating Expenses:
Cost of goods sold................... -- 69,710 39,170 (27,096)(a) 81,784
Selling, general and administrative
expenses........................... -- 19,720 7,344 -- 27,064
Amortization of goodwill............. -- 21 361 -- 382
Amortization of other intangibles.... -- 339 179 -- 518
Net periodic postretirement
benefits........................... -- 650 -- -- 650
------ -------- ------- -------- --------
Operating income (loss)................ -- 21,071 771 (411) 21,431
Other income (expense):
Interest expense..................... -- (9,534) (2,376) 1,076 (10,834)
Amortization of deferred financing
costs.............................. -- (316) (54) -- (370)
Equity in net loss of subsidiaries... 5,809 -- -- (5,809) --
Other................................ -- 349 1,306 (1,489) 166
------ -------- ------- -------- --------
Income (loss) from continuing
operations before income tax
provision............................ 5,809 11,570 (353) (6,633) 10,393
Income tax provision................... -- 3,969 615 -- 4,584
------ -------- ------- -------- --------
Net income (loss)...................... $5,809 $ 7,601 $ (968) $ (6,633) $ 5,809
====== ======== ======= ======== ========
</TABLE>
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
TOTAL TOTAL
COMPANY GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
------- ---------- -------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Net Sales............................. $ -- $ 93,332 $44,395 $(19,976)(a) $117,751
Operating Expenses:
Cost of goods sold.................. -- 56,698 33,677 (20,033)(a) 70,342
Selling, general and administrative
expenses.......................... -- 17,998 8,272 -- 26,270
Amortization of goodwill............ -- 22 335 -- 357
Amortization of other intangibles... -- 1,677 15 -- 1,692
Net periodic postretirement
benefits.......................... -- 585 -- -- 585
------ -------- ------- -------- --------
Operating income...................... -- 16,352 2,096 57 18,505
Other income (expense):
Interest expense.................... -- (10,084) (2,706) 1,252 (11,538)
Amortization of deferred financing
costs............................. -- (397) (63) -- (460)
Equity in net loss of
subsidiaries...................... 3,932 -- -- (3,932) --
Other............................... -- 1,216 822 (1,632) 406
------ -------- ------- -------- --------
Income (loss) from continuing
operations before income tax
provision........................... 3,932 7,087 149 (4,255) 6,913
Income tax provision.................. -- 2,424 557 -- 2,981
------ -------- ------- -------- --------
Income (loss) from continuing operations... 3,932 4,663 (408) (4,255) 3,932
Discontinued operations:
Income from discontinued operations,
net of income taxes............... 1,036 -- -- -- 1,036
------ -------- ------- -------- --------
Net income (loss)..................... $4,968 $ 4,663 $ (408) $ (4,255) $ 4,968
====== ======== ======= ======== ========
</TABLE>
- ---------------
(a) Reflects the elimination of intercompany sales among all of the Company's
subsidiaries.
F-26
<PAGE> 267
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
TOTAL TOTAL
COMPANY GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
------- ---------- -------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Net Sales............................. $ -- $405,039 $210,462 $(95,061)(a) $520,440
Operating Expenses:
Cost of goods sold.................. -- 246,794 167,430 (94,104)(a) 320,120
Selling, general and administrative
expenses.......................... -- 76,676 34,020 -- 110,696
Amortization of goodwill............ -- 86 1,505 -- 1,591
Amortization of other intangibles... -- 6,137 639 -- 6,776
Net periodic postretirement
benefits.......................... -- 2,750 -- -- 2,750
------- -------- -------- -------- --------
Operating income (loss)............... -- 72,596 6,868 (957) 78,507
Other income (expense):
Interest expense.................... -- (39,641) (10,823) 5,139 (45,325)
Amortization of deferred financing
costs............................. -- (1,346) (241) -- (1,587)
Equity in net loss of
subsidiaries...................... 15,069 -- -- (15,069) --
Other............................... -- 1,889 1,882 (6,822) (3,051)
------- -------- -------- -------- --------
Income (loss) from continuing
operations before income tax
provision........................... 15,069 33,498 (2,314) (17,709) 28,544
Income tax provision.................. -- 13,012 463 -- 13,475
------- -------- -------- -------- --------
Income (loss) from continuing
operations.......................... 15,069 20,486 (2,777) (17,709) 15,069
Discontinued operations:
Gain on sale of discontinued
operations, net of income taxes of
$12,623........................... 16,015 -- -- -- 16,015
Income from discontinued operations,
net of income taxes............... 3,173 -- -- -- 3,173
------- -------- -------- -------- --------
Net income (loss)..................... $34,257 $ 20,486 $ (2,777) $(17,709) $ 34,257
======= ======== ======== ======== ========
</TABLE>
- ---------------
(a) Reflects the elimination of intercompany sales among all of the Company's
subsidiaries.
F-27
<PAGE> 268
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
TOTAL TOTAL
COMPANY GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
-------- ---------- -------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Net Sales............................ $ -- $352,244 $152,322 $(64,822)(a) $439,744
Operating Expenses:
Cost of goods sold................. -- 210,585 114,066 (64,816)(a) 259,835
Selling, general and administrative
expenses......................... -- 69,989 25,918 -- 95,907
Amortization of goodwill........... -- 82,276 757 -- 83,033
Amortization of other
intangibles...................... -- 9,562 2,815 -- 12,377
Net periodic postretirement
benefits......................... -- 2,731 -- -- 2,731
-------- -------- -------- -------- --------
Operating income (loss).............. -- (22,899) 8,766 (6) (14,139)
Other income (expense):
Interest expense................... -- (40,215) (9,579) 4,139 (45,655)
Amortization of deferred financing
costs............................ -- (2,540) (171) -- (2,711)
Equity in net loss of
subsidiaries..................... (62,939) -- -- 62,939 --
Other.............................. -- (1,872) 7,267 (6,363) (968)
-------- -------- -------- -------- --------
Income (loss) from continuing
operations before income tax
provision and extraordinary item... (62,939) (67,526) 6,283 60,709 (63,473)
Income tax provision (benefit)....... -- (1,751) 1,217 -- (534)
-------- -------- -------- -------- --------
Income (loss) from continuing
operations before extraordinary
item............................... (62,939) (65,775) 5,066 60,709 (62,939)
Discontinued operations:
Gain on sale of discontinued
operations, net of income taxes
of $14,732....................... 8,480 -- -- -- 8,480
Loss from discontinued operations,
net of income taxes.............. (5,463) -- -- -- (5,463)
-------- -------- -------- -------- --------
Income (loss) before extraordinary
item............................... (59,922) (65,775) 5,066 60,709 (59,922)
Extraordinary item -- loss on early
extinguishment of long-term debt,
net of tax benefit of $2,001....... (3,715) -- -- -- (3,715)
-------- -------- -------- -------- --------
Net income (loss).................... $(63,637) $(65,775) $ 5,066 $ 60,709 $(63,637)
======== ======== ======== ======== ========
</TABLE>
- ---------------
(a) Reflects the elimination of intercompany sales among all of the Company's
subsidiaries.
F-28
<PAGE> 269
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
TOTAL TOTAL
COMPANY GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
--------- ---------- -------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Net Sales.......................... $ -- $ 327,543 $46,760 $(57,525)(a) $ 316,778
Operating Expenses:
Cost of goods sold............... -- 198,278 34,375 (56,708)(a) 175,945
Selling, general and
administrative expenses........ -- 65,176 9,505 -- 74,681
Amortization of goodwill......... -- 92,931 -- -- 92,931
Amortization of other
intangibles.................... -- 48,323 78 -- 48,401
Net periodic postretirement
benefits....................... -- 2,124 -- -- 2,124
--------- --------- ------- -------- ---------
Operating income (loss)............ -- (79,289) 2,802 (817) (77,304)
Other income (expense):
Interest expense................. -- (37,084) (5,723) 1,538 (41,269)
Amortization of deferred
financing costs................ -- (4,860) -- -- (4,860)
Equity in net loss of
subsidiaries................... (131,848) -- -- 131,848 --
Other............................ -- 536 3,006 (3,439) 103
--------- --------- ------- -------- ---------
Income (loss) from continuing
operations before income tax
provision........................ (131,848) (120,697) 85 129,130 (123,330)
Income tax provision............... -- 7,506 1,012 -- 8,518
--------- --------- ------- -------- ---------
Income (loss) from continuing
operations....................... (131,848) (128,203) (927) 129,130 (131,848)
Discontinued operations:
Loss from discontinued
operations, net of income
taxes.......................... (28,952) -- -- -- (28,952)
--------- --------- ------- -------- ---------
Net income (loss)................ $(160,800) $(128,203) $ (927) $129,130 $(160,800)
========= ========= ======= ======== =========
</TABLE>
- ---------------
(a) Reflects the elimination of intercompany sales among all of the Company's
subsidiaries.
F-29
<PAGE> 270
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
TOTAL TOTAL
COMPANY GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
-------- ---------- -------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities...................................... $(8,335) $ 219 $ (1,019) $ -- $ (9,135)
Cash flows provided by (used in) investing
activities:
Capital expenditures, net....................... -- (1,689) (2,067) -- (3,756)
Change in other assets.......................... -- (192) (157) -- (349)
Investing activities of discontinued
operations.................................... -- -- -- -- --
Acquisitions, net of cash....................... -- (640) -- -- (640)
Proceeds from sale of discontinued operations... -- -- -- -- --
-------- ------- -------- ---- --------
Net cash provided by (used in) investing
activities...................................... -- (2,521) (2,224) -- (4,745)
Cash flows provided by (used in) financing
activities:
Change in long-term receivables................. -- -- 263 -- 263
Repayment of long-term obligations.............. (26,000) -- 15,408 -- (10,592)
Borrowing of long-term obligations.............. 34,000 63 (11,693) -- 22,370
Change in accounts receivable securitization.... -- 376 -- -- 376
Issuance of common stock........................ 335 -- -- -- 335
Financing fees.................................. -- -- -- -- --
Financing activities of discontinued
operations.................................... -- -- -- -- --
Other........................................... -- -- (180) -- (180)
-------- ------- -------- ---- --------
Net cash provided by (used in) financing
activities...................................... 8,335 439 3,798 -- 12,572
Net increase (decrease) in cash and cash
equivalents..................................... -- (1,863) 555 -- (1,308)
Cash and cash equivalents at beginning of
period.......................................... -- 308 1,173 -- 1,481
-------- ------- -------- ---- --------
Cash and cash equivalents at end of period........ $ -- $(1,555) $ 1,728 $ -- $ 173
======== ======= ======== ==== ========
</TABLE>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
TOTAL TOTAL
COMPANY GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
-------- ---------- -------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities...................................... $(19,007) $(4,430) $ 26,318 $ -- $ 2,881
Cash flows provided by (used in) investing
activities:
Capital expenditures, net....................... -- (1,199) (1,196) -- (2,395)
Change in other assets.......................... -- 5,922 2,590 -- 8,512
Investing activities of discontinued
operations.................................... -- -- (570) -- (570)
Acquisitions, net of cash....................... -- -- (27,755) -- (27,755)
Proceeds from sale of discontinued operations... -- -- -- -- --
-------- ------- -------- ---- --------
Net cash provided by (used in) investing
activities...................................... -- 4,723 (26,931) -- (22,208)
Cash flows provided by (used in) financing
activities:
Change in long-term receivables................. -- 17 -- -- 17
Repayment of long-term obligations.............. (9,928) -- -- -- (9,928)
Borrowing of long-term obligations.............. 29,926 475 3,282 -- 33,683
Change in accounts receivable securitization.... -- 4,631 -- -- 4,631
Issuance of common stock........................ 436 -- -- -- 436
Financing fees.................................. -- -- -- -- --
Financing activities of discontinued
operations.................................... -- -- (1,227) -- (1,227)
Other........................................... (1,427) (444) (297) -- (2,168)
-------- ------- -------- ---- --------
Net cash provided by (used in) financing
activities...................................... 19,007 4,679 1,758 -- 25,444
Net increase (decrease) in cash and cash
equivalents..................................... -- 4,972 1,145 -- 6,117
Cash and cash equivalents at beginning of
period.......................................... -- 690 730 -- 1,420
-------- ------- -------- ---- --------
Cash and cash equivalents at end of period........ $ -- $ 5,662 $ 1,875 $ -- $ 7,537
======== ======= ======== ==== ========
</TABLE>
F-30
<PAGE> 271
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
TOTAL TOTAL
COMPANY GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
--------- ---------- -------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities..................................... $ (32,452) $ 8,215 $ 39,223 $ -- $ 14,986
Cash flows provided by (used in) investing
activities:
Capital expenditures, net...................... -- (9,084) (7,255) -- (16,339)
Change in other assets......................... -- 2,722 1,440 -- 4,162
Investing activities of discontinued
operations................................... -- -- (1,680) -- (1,680)
Acquisitions, net of cash...................... -- (10,140) (27,755) -- (37,895)
Proceeds from sale of discontinued
operations................................... 88,543 -- -- -- 88,543
--------- -------- -------- ---- ---------
Net cash provided by (used in) investing
activities..................................... 88,543 (16,502) (35,250) -- 36,791
Cash flows provided by (used in) financing
activities:
Change in long-term receivables................ -- 170 -- -- 170
Repayment of long-term obligations............. (123,450) -- (8,036) -- (131,486)
Borrowing of long-term obligations............. 63,950 301 8,604 -- 72,855
Change in accounts receivable securitization... -- 5,676 -- -- 5,676
Issuance of common stock....................... 3,069 -- -- -- 3,069
Financing fees................................. -- -- -- -- --
Financing activities of discontinued
operations................................... -- -- (2,808) -- (2,808)
Other.......................................... 340 1,758 (1,290) -- 808
--------- -------- -------- ---- ---------
Net cash provided by (used in) financing
activities..................................... (56,091) 7,905 (3,530) -- (51,716)
Net increase (decrease) in cash and cash
equivalents.................................... -- (382) 443 -- 61
Cash and cash equivalents at beginning of
period......................................... -- 690 730 -- 1,420
--------- -------- -------- ---- ---------
Cash and cash equivalents at end of period....... $ -- $ 308 $ 1,173 $ -- $ 1,481
========= ======== ======== ==== =========
</TABLE>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
TOTAL TOTAL
COMPANY GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
--------- ---------- -------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities..................................... $ (66,632) $ 24,569 $ 63,518 $ -- $ 21,455
Cash flows provided by (used in) investing
activities:
Capital expenditures, net...................... -- (6,554) (4,893) -- (11,447)
Change in other assets......................... -- (2,581) (1,818) -- (4,399)
Investing activities of discontinued
operations................................... -- -- (3,766) -- (3,766)
Acquisitions, net of cash...................... -- -- (74,011) -- (74,011)
Proceeds from sale of discontinued
operations................................... 112,359 -- -- -- 112,359
--------- -------- -------- ---- ---------
Net cash provided by (used in) investing
activities..................................... 112,359 (9,135) (84,488) -- 18,736
Cash flows provided by (used in) financing
activities:
Change in long-term receivables................ -- (283) -- -- (283)
Repayment of long-term obligations............. (150,384) -- -- -- (150,384)
Borrowing of long-term obligations............. 100,000 (188) 20,042 -- 119,854
Change in accounts receivable securitization... -- (9,994) -- -- (9,994)
Issuance of common stock....................... 4,146 -- -- -- 4,146
Financing fees................................. -- (3,855) -- -- (3,855)
Financing activities of discontinued
operations................................... -- -- (1,732) -- (1,732)
Other.......................................... 511 (1,291) 2,419 -- 1,639
--------- -------- -------- ---- ---------
Net cash provided by (used in) financing
activities..................................... (45,727) (15,611) 20,729 -- (40,609)
Net increase (decrease) in cash and cash
equivalents.................................... -- (177) (241) -- (418)
Cash and cash equivalents at beginning of
period......................................... -- 867 971 -- 1,838
--------- -------- -------- ---- ---------
Cash and cash equivalents at end of period....... $ -- $ 690 $ 730 $ -- $ 1,420
========= ======== ======== ==== =========
</TABLE>
F-31
<PAGE> 272
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
TOTAL TOTAL
COMPANY GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
-------- ---------- -------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities...................................... $17,419 $ 3,755 $10,034 $ -- $ 31,208
Cash flows provided by (used in) investing
activities:
Capital expenditures, net....................... -- (7,154) -- -- (7,154)
Change in other assets.......................... -- (944) 907 -- (37)
Investing activities of discontinued
operations.................................... -- -- (5,133) -- (5,133)
Acquisitions, net of cash....................... -- (3,370) -- -- (3,370)
Proceeds from sale of discontinued operations... -- -- -- -- --
-------- -------- ------- ---- --------
Net cash provided by (used in) investing
activities...................................... -- (11,468) (4,226) -- (15,694)
Cash flows provided by (used in) financing
activities:
Change in long-term receivables................. -- 1,090 (1,070) -- 20
Repayment of long-term obligations.............. (26,109) (154) -- -- (26,263)
Borrowing of long-term obligations.............. -- 358 147 -- 505
Change in accounts receivable securitization.... -- 731 -- -- 731
Issuance of common stock........................ 7,761 -- -- -- 7,761
Financing fees.................................. -- (189) -- -- (189)
Financing activities of discontinued
operations.................................... -- -- (11) -- (11)
Other........................................... 929 (1,152) (3,293) -- (3,516)
-------- -------- ------- ---- --------
Net cash provided by (used in) financing
activities...................................... (17,419) 684 (4,227) -- (20,962)
Net increase (decrease) in cash and cash
equivalents..................................... -- (7,029) 1,581 -- (5,448)
Cash and cash equivalents at beginning of
period.......................................... -- 7,896 (610) -- 7,286
-------- -------- ------- ---- --------
Cash and cash equivalents at end of period........ $ -- $ 867 $ 971 $ -- $ 1,838
======== ======== ======= ==== ========
</TABLE>
16. SUPPLEMENTARY UNAUDITED QUARTERLY DATA
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997:
Net sales................................................ $117,751 $135,175 $131,902 $135,612 $520,440
Gross profit............................................. 47,409 52,630 51,007 49,274 200,320
Income from continuing operations........................ 3,932 5,581 4,045 1,511 15,069
Net income (loss)........................................ 4,968 6,783 22,995 (489) 34,257
Basic per share amounts:
Income from continuing operations...................... 0.36 0.50 0.36 0.14 1.36
Net income (loss)...................................... 0.45 0.61 2.07 (0.04) 3.09
Diluted per share amounts:
Income from continuing operations...................... 0.35 0.49 0.35 0.13 1.33
Net income (loss)...................................... 0.44 0.60 2.02 (0.04) 3.01
Year ended December 31, 1996:
Net sales................................................ $102,233 $116,120 $110,820 $110,571 $439,744
Gross profit............................................. 42,604 47,236 45,478 44,591 179,909
Loss from continuing operations.......................... (20,667) (20,657) (17,152) (4,463) (62,939)
Net loss................................................. (21,867) (16,386) (19,616) (5,768)(1) (63,637)
Basic per share amounts:
Loss from continuing operations........................ (1.93) (1.92) (1.59) (0.41) (5.83)
Net loss............................................... (2.04) (1.53) (1.82) (0.53) (5.89)
Diluted per share amounts:
Loss from continuing operations........................ (1.93) (1.92) (1.59) (0.41) (5.83)
Net loss............................................... (2.04) (1.53) (1.82) (0.53) (5.89)
</TABLE>
- ---------------
(1) Reflects recognition of net deferred tax assets (see Note 11).
F-32
<PAGE> 273
- ------------------------------------------------------------
- ------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN
THE SECURITIES TO WHICH IT RELATES OR ANY OFFER TO SELL OR THE SOLICITATION OF
AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER
OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
---------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Available Information...................... 2
Summary.................................... 3
Risk Factors............................... 12
Use of Proceeds............................ 18
Capitalization............................. 19
Selected Financial Data.................... 20
Management's Discussion and Analysis of
Financial Condition and Results
of Operations............................ 22
Business................................... 29
The Merger and Merger Financing............ 39
Management................................. 41
Executive Compensation..................... 44
Security Ownership of Certain Beneficial
Owners and Management of Holdings........ 48
Certain Relationships and Related
Transactions............................. 50
Limited Liability Company Agreement........ 52
Description of the New Credit Facility..... 53
Description of New Senior Subordinated
Notes.................................... 55
Plan of Distribution....................... 86
Legal Matters.............................. 86
Experts.................................... 86
Unaudited Condensed Consolidated Pro Forma
Financial Data........................... P-1
Index to Financial Statements.............. F-1
</TABLE>
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
9 7/8% SENIOR SUBORDINATED NOTES
DUE 2008
THERMADYNE MFG. LLC
THERMADYNE CAPITAL CORP.
--------------------
PROSPECTUS
--------------------
AUGUST 4, 1998
- ------------------------------------------------------------
- ------------------------------------------------------------
